Income recognition

Exchange/Non-Exchange Transactions Income received or due to the University will either be part of an Exchange Transaction or a Non-Exchange Transaction (NET)

Exchange Transactions Definition: A transaction with commercial substance i.e. goods or services delivered in exchange for resources of equivalent value. Examples: Sale of goods or provision of services including education, accommodation and commercial research contracts. Accounting treatment: No change. Continue to recognise the income in the same way as we now. For example in line with the expenditure or in line with the delivery of the service (e.g. milestones).

Non-Exchange Transactions Definition: A transaction whereby an entity receives value from another entity without directly giving approximately equal value in exchange (and vice versa). (FRS 102) Examples: Donations, legacies, government and research grants. Accounting treatment: This will vary and requires a review of the supporting documentation to decide whether there are Performance Related Conditions or Restrictions attached to the income.

Performance related conditions Definition: A condition that requires the performance of a particular level of service or units of output to be delivered, with payment of, or entitlement to, the resources conditional on that performance. (FRS 102) In other words, for the University to be entitled to the income it must perform a particular level of service or units of output. Only then can the income be recognised. Accounting treatment: Recognise the income in line with the each performance-related condition being met. Where these have yet to be met, the income should be deferred until met.

Performance related conditions Considerations: Is there a series of conditions to be met or a single test to be performed at the end? Procedural conditions such as submitting a grant claim are not performance-related conditions. Payment in instalments does not necessarily indicate that PRC’s exist. Performance Related Conditions are likely to be attached to funding if: The funder can request unspent funds to be returned; or The funder can request funding to be returned for not complying with the terms and conditions or delivering the required performance.

Performance related conditions E.g. 1 – Income matched to expenditure – Typical Research Grant Detailed proposal would have been prepared setting out the expected hours and other expenditure required (including capital requirements). Grant document may not specify the detailed costing, but it was awarded on the basis of the proposal. Thus, there is an expectation that the institution will deliver the resources listed within the proposal, equating to the “level of service” to be provided and therefore income should be recognised in line with the ‘delivery’ of these costs. If income is received in advance, it should be deferred and matched to future expenditure. Funds awarded for capital expenditure should be deferred until commissioned and then recognised in full.

Performance related conditions E.g. 2 – Income matched to delivery of service over specific time period HEFCE Recurrent grant - This is PRC as in return for the grant the University is required to teach a number of students over a specific academic year. This is a ‘level of service’. Thus recognise income in line with delivery of teaching over the year. NHS education contract – This is PRC as the funding relates to the education of NHS professionals over a period of time. Thus, recognise the income in line with the delivery of teaching to students. Cash received in advance of delivery of the courses / teaching will be shown in deferred income, and released to tuition fees and education contracts as the courses are delivered.

Performance related conditions E.g. 3 – Income recognised in line with delivery of milestones A consultancy contract makes it clear that the institution is not entitled to the income unless it achieved various milestones and a final deliverable. Thus the income has performance related conditions attached. Income should be recognised as each milestone is met (say in proportion to the % of work completed to that date). This could result in a mismatch between income and expenditure and therefore result in greater volatility in annual results. Remember - Procedural conditions such as submitting progress reports or funding claims are not PRC’s.

Donations and PRC’s It is rare for donations to have performance related conditions attached, as the receipt of the donation is deemed to be the point at which the University is entitled to the income. Hence donation income will be recognised immediately upon receipt. Exception: If the donor specifies a time condition on the gift (or part of the gift), then this part will be deferred until the University is entitled to spend it. (E.g. If the donor specifies that 50% of a £100k gift cannot be spent until 2017/18, then defer £50k until 2017/18 and recognise then.) A condition on a gift only becomes a PRC if it is probable that the donor would ask for the gift to be returned if a condition is not met. (Unlikely)

Is income Restricted or Unrestricted?

Restricted Income Definition: A restriction is ‘a requirement that limits or directs the purposes for which a resource may be used that does not meet the definition of a performance-related condition’. (FRS 102) Agreed UoM Interpretation: Whilst many income streams have requirements attached, a requirement only becomes a restriction if it is so specific that it limits the University’s ability to spend the money received and/or it does not align with the University’s own chosen purpose and strategy. Also, a requirement would become a restriction if the income was to fund an activity that the University would not normally do. Further details can be found in the Donations and Endowments De Minimis Threshold Paper. (Policy approved by Finance Sub-Committee).

Restricted Income Accounting treatment: Recognise income when entitled to it and hold in the restricted reserve on the balance sheet. (If there are PRC’s attached, defer income until met.) NB – All non exchange transactions under £50k will be treated as unrestricted. Reserves transfers required as the restrictions are met, to move the income from restricted reserves to unrestricted reserves. These are likely to be manual adjustments at year end and hence we want to keep restricted income to a minimum. Separate guidance will be issued later for reserve transfers procedures.

E.g. of Restricted Income Donation of £100k to fund a doctoral scholarship in a broad research area. Donor has specified strict requirements with regard to the type of student: Satisfy the University’s criteria for the a Presidential Doctoral Award Preference for student to be from a particular country Student to be committed to knowledge exchange in the area specific research area between the UK and their country of origin The requirements are strict enough to limit the likelihood the University being able to spend the money, as such they are restrictions. Hence the income is recognised immediately as restricted income and held in the restricted reserve until the conditions are met. At this point the income will be moved to the unrestricted reserves.

Unrestricted Income All income which is not restricted will be treated as unrestricted income. It is expected that the majority of income will fall into this category. This income will be held in the unrestricted reserves on the balance sheet. There is no change to the treatment of unrestricted income and no reserve transfers are required.