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School Audit Focus Areas

The financial year end for schools in Victoria is typically 31 December which means that the audit season for 2015 is coming to a close. While the following audit areas arose specifically in relation to our school clients, they do have a wider application across all industry sectors.

Recoverability of debtors

School fees vary considerably depending on the type of school your child attends, with the cost of putting your child through school, from pre-school to year 12 being $50k - $70k for Government Schools, $150k - $240k for Catholic Schools and $300k - $500k for Independent Schools. School fees have also increased in excess of 5% per annum over the last three years which exceeds wage and wider inflation.

The result is that school fees continue to become a higher proportion of a parent’s disposable income and therefore parents are under increasing financial pressures to pay their children’s school fees.

From the schools perspective this increases the risk of recoverability of fee/parent debtors and we are seeing a worsening ageing profile of parent debtors on school balance sheets. Management should be able to demonstrate an understanding of the financial position of each of their aged debtors to conclude on whether the debt is likely to be received or a provision for doubtful debts needs to be recognised.

Impairment of assets

The “Building the Education Revolution” delivered approximately 3,000 projects valued at $2.5bn to Government schools in Victoria. Catholic and Iindependent schools, while not included in this program, have also been investing in capital infrastructure. This investment has increased the value of fixed assets on school balance sheets which leads to a greater downside risk if these assets suffer a future impairment.

These assets do not need to be tested for impairment annually, rather management must assess whether there are any impairment indicators present. If management does identify an impairment indicator then this will trigger an impairment test. Conversely, if there are no impairment indicators present then there is no need to perform an impairment test.

Debt classification and working capital requirements

An expansive capital expenditure program is typically funded through existing cash reserves, surplus operating cash flows and external borrowings.

With any loan from a third party lender, there are likely to be certain covenants that must be met by the borrower. If any of these covenants are breached during the financial year, the entire debt could become due and payable immediately.

This outcome would result in the entire debt being classified as a current liability at the balance date and could result in the entity being in a net working capital deficiency position (where current liabilities are greater than current assets).

For financial reporting purposes this would result in a working capital deficiency note being required in the financial statements and could even lead to an emphasis of matter paragraph in the audit report. It is therefore important that management is able to demonstrate compliance with any covenants throughout the financial year and not just at the year end.

James Ridley
Partner
Audit