As the coronavirus (COVID-19) reaches a critical phase globally, it is important to understand the impact on your school. We recognise that the situation is evolving on a daily basis and causing many challenges that are essential to consider in order to ensure business continuity in a rapidly changing economic
This note seeks to describe the threat of COVID-19, its possible effects on schools and the measures schools could use to estimate, forecast and adjust to continue ‘Going Concern’ status within the fundamentally changed trading environment.
The infection rate and speed of transmission of this disease is yet to stabilise in the UK. Countries which are further into the crisis have seen the rate of infection and the recovery rate mirrored conforming to a standard ’bell’ curve. In the UK, growth in infection has been slower than in some countries so we can expect a slow decline and that matters because it extends the effects, and therefore the restrictions on business caused by the crisis.
The ’fast up, fast down’ country is China, which has taken three months to get to the point where they have a day with no new victims. Therefore, applying that experience to the UK, the earliest that the sector can be approaching normal is mid-June, three months from now. Assessing how slow the spread has been in the UK is difficult but if a further month is added to the three-month assumption then mid-July becomes the ’back to normal’ date. The other unknown factors that may further extend this period are re-infection or mutation; both are possible but have not been reported anywhere else. Should they emerge as realities, the timescale will alter.
This means schools will be preparing for the Summer term 2020 to be one of remote learning and for Easter and Summer holiday facility rents to be cancelled. With some good fortune a return of pupils to schools in September will be a safe, sensible and achievable plan. Schools should review costs and consider where savings can be made while remote learning is in place such as for catering or cleaning - options for schools will depend on the details of how provision is structured and contracted.
With the speed and severity of the onset of the COVID-19 pandemic the economic background against which schools trade is very uncertain. A second uncertainty is the duration of ‘social isolation’ as a measure against the disease. In addition, the value of, and activity in, the world and UK economies is dropping with the consequences those changes have for existing jobs and job creation. This will fundamentally affect the market from which pupils are drawn. Exchange rates are suffering currently and that will affect overseas earnings in either franchised schools or recruitment to UK schools of overseas pupils. These uncertainties will manifest themselves in three ways:
There are two elements to the treatment of fees. Treating the issue strictly contractually, Parents’ Contracts require parents to give one term’s notice to leave, and fees are payable by particular dates - there is little or no leeway if the contract is strictly interpreted. In addition, some Parents’ Contracts have force majeure clauses which specifically refer to pandemics and protect the school from breach of contract if the education has to be delivered in an alternative way. While these are legally enforceable it does not mean parents will pay which brings us to the second strand - the moral question. As parents are not getting a full service, they will expect to pay less. However, the fees are annual and divided by three irrespective of the length of the terms. The education delivered is continuous throughout the year and, with no exams, ‘exam leave’ will not be justified this coming term.
In order to keep them supportive of the school for the future this moral component needs to be explored. For schools with day and boarding elements, it will be hard to defend the full fee increment for boarding while all pupils receive the same remote educations service, and no one is accommodated. Underlying structural costs will remain, however.
The day fee needs a more nuanced view taken of it. If schools get to the point where a claim for business interruption is possible (the work is in hand to progress this) then for a school to have ‘voluntarily’ reduced fees will reduce or negate the value of any possible claim.
However, to recognise the changes to the delivery of education driven by COVID-19, schools could potentially consider rebating their fee for the Summer term however, each school will need to consider its own financial position.
This could happen at the beginning of the summer term and be applied to the fee as it is produced. Alternatively, it could be done at the end of the summer term when actual costs will be known and any debate on insurance cover will be progressing, or complete.
It is reasonable to assume that there will be a significant number of parents who can’t pay the fees due to disruption to their income from changed work arrangements.
There will also be an impact on the September 2020 pupil intake. All offers of places will have been made by schools and outline acceptances confirmed BUT it is reasonable to assume there will be some reduction or deferment in the September intake.
There is therefore a need to analyse different scenarios concerning fee income in Summer and Autumn 2020. There is no trend or form of historical data which would be useful as a source of guidance, these are properly unprecedented times. It may be worth making an estimate now, and then re-forecasting as soon as the due date for summer term’s fees has passed. This will provide an early indicator of what the position might be. Comparing this to the position last year will help highlight the key variances.
All these concerns have a direct impact on the future financial viability of schools. While every school will be affected by COVID-19 the impact on each school will vary. All schools need to be reviewing, perhaps weekly, certainly monthly, their assumptions for their cashflow forecasts.
Governing bodies of schools which are finalising their 2019 financial statements at this time will need to re-consider the disclosures made in the accounts in light of COVID-19 and be prepared for robust challenge from their auditors of their assessment of going concern.
As a minimum, there should be disclosure explaining the threat of COVID-19 on the business as well as any further disclosure which might be needed in respect of Going Concern. It is important to remember that it is the responsibility of the school management and the governing body to assess whether it is appropriate for the school’s accounts to be prepared on a Going Concern basis. It is the auditor’s responsibility to consider whether they agree with this assumption. The school will need to be able to justify the assumptions being used to enable these to be audited.
This is particularly difficult at this uncertain time and it may be prudent to consider delaying the finalisation of the accounts until things become a little clearer. For July and August year ends the Companies House nine month deadlines are 30 April and 31 May respectively. For June year ends they would normally file by 31 March however, if necessary, Companies House filing deadlines may be extended by two months if an application is made before the normal filing deadline passes.
Therefore, for a school with a June year end they need to make an application to Companies House before 31 March to extend their deadline. At present there have been no indications that the ten month filing deadline with the Charity Commission is going to alter, however, for a school struggling to meet the deadline they have been advised to contact the Commission to discuss the position. So for a school with a June year end it would still need to file its accounts by 30 April. There will be value for many schools in gaining this additional time.
Finally, schools which have already signed their accounts but are awaiting the auditor to sign them will face the same challenges. The auditors need to consider the position of the business up to and including the point of signing so schools need to be prepared to consider changes to these accounts.
This was first published on through ISBA on March 2020.