FINANCIAL MANAGEMENT FRAMEWORK

PURPOSE

This document is designed to provide an overview of financial management arrangements applying to Flinders University.

BACKGROUND

Corporate Information

Flinders University is a body corporate established by an Act of the South Australian Parliament in 1966 Flinders is an income tax exempt deductible gift recipient. It has no shareholders and pays no dividends. It is a not for profit entity. Any surpluses earned are reinvested back into the University.

Financial Year

The University operates on a calendar year to match the academic teaching cycle.

Profit

Although the University is not for profit, it aims to make a cash surplus from operating activities annually, in order to fund future capital works. It also aims to make an annual profit so that the University is seen as financially stable and operates with a safety margin.

Tax

In Australia, the University is income tax exempt and capital gains tax exempt. It is registered for GST and pays FBT. It is not a Public Benevolent Institution so receives no special FBT concessions. The University pays SA and other state payroll taxes and must comply with Super Guarantee Charge requirements.

The University operates internationally and must comply with the tax requirements of the countries within which it operates.

Policy

The University has a comprehensive suite of polices. Finance policies, including procurement are managed by the CFO

Other policies are at The more important ones for financial management are under Governance & Risk Management and include ones on contracts, fraud, controlled entities and whistleblower.

Governance

The University is governed by the University Council. The Council may delegate certain of its powers to staff eg expenditure authorisation.

Council has a number of subordinate committees. The most important ones for financial management are the:

  • Finance & Investment Committee (annual budget and 5 Year Financial Plan, quarterly finance reports and investment reporting/strategy)
  • Audit Committee (internal and external audit reviews, annual financial statements)

FINANCIAL STRUCTURE

The University’s financial structure generally reflects the organisational structure, with certain central accounts kept for accruals and budget management purposes. The main organisational units are the Colleges and Portfolios.

Other high level financial groups are:

  • Uniwide. This covers certain costs that affect the whole University but are not controlled by any one area. For example electricity costs are driven by users across the University but B&P are responsible for managing this cost. Rather than including it in their operating budget it is separated into Uniwide, as they can’t control the cost in the same way that they control their salary and other operational expenditure.
  • Corporate. Used for University wide accruals.
  • Reserves. Used as a means of holding back funds from budgeted revenue as a risk management tool in case actual revenue is less than budget. Funds can be allocated if actual revenue meets or exceeds budget.
  • University Strategic Fund. Provides discretionary funding for the VC to allocate for strategic purposes
  • Capital. Used to manage funds provided for Building and IT infrastructure projects.

The main structural item is a split of the University’s finances into Tied and Untied components. Tied generally represents those funds that are tied to very specific uses by an external body eg external research grants and bequests/donations with conditions over their application. Untied covers the rest, where the University has more flexibility in how it uses the funds.

The University groups natural accounts into summary items so as to provide one page Income Statements. These are known as FFS levels in the finance system and are used for monthly/quarterly reporting (internal). For annual financial statements a separate summation is provided in order to meet external reporting requirements.

Other Entities

The University has a number of controlled and related entities. The main controlled entities are Flinders Partners and Flinders Campus Community Services. They operate their own financial systems and process. They have separate Boards to govern their activities.

Chart of Accounts (COA)

The University uses a 4 component chart as follows:

nn.nnn.nnnnn.nnnn

entitycode.costcentre.project.natural account.

The COA has been set up in order to meet external and internal reporting requirements. Cost centres are normally used to match organisational unit segments, whilst projects are either used for specific finite life activities (eg research grants/capital projects) or as a further breakdown of organisational units.

COA elements have attributes that enable more sophisticated reporting eg projects have an attribute of project manager, so that reports can be delivered to that manager. Source codes are another project attribute that identifies the prime funding source of a project.

The Natural account captures the type of revenue/expense/asset/liability/equity, enabling balances to be rolled up into higher level categories for monthly, quarterly and annual reporting.

FINANCIAL REPORTING

External Financial Reporting

The University is required to provide audited annual financial statements to the Commonwealth government (currently Dept of Education & Training) and to the SA Parliament. The financial statements are prepared on an accruals basis, in compliance with Australian Accounting Standards, Dept of Education & Training Guidelines and SA Government reporting requirements. The statements are reviewed by the University Audit Committee before being submitted to Council for approval.

The University is audited by the SA Auditor-General, as required under the Public Finance and Audit Act. There is no choice as to the auditor.

Internal Financial Reporting

The University generally applies modified cash accounting for internal cost centre management. The main features are:

  • Equipment is treated as an expense when purchased, within the organisational unit’s cost centre and project. At the central University level, equipment purchases that meet capitalisation thresholds are capitalised.
  • Depreciation is not included in organisational unit’s financial report. This is charged to source 000 which is a source code used for certain accrual entries
  • Leave (annual and long service) are treated as an emerging cost at the organisational unit level. At the central University level leave is accrued in order to meet external and management reporting requirements
  • Revenue is credited when debtor invoices are raised
  • Expenses are charged when payable invoices are loaded into the finance system
  • Accruals for revenue and expenses are generally applied corporately rather than in College/Portfolio operating accounts

Internal financial reports are prepared for the following:

  1. Council and the Finance & Investment Committee on a quarterly basis. This includes an Income Statement (untied and tied and whole of University), Statement of Financial Position, Statement of Cash flows and supplementary information including the Capital plan. This is a whole of University reporting level ie no breakdown into organisational units
  2. Colleges – prepared for College Boards and Vice-Presidents & Executive Deans
  3. Projects – on a monthly basis project income statements are sent to all project managers
  4. The finance system also provides dashboards that have been set up for cost centre managers, project managers, etc, which group relevant information and allow extensive drill down.

FINANCIAL STRATEGY

The University prepares rolling 5 year financial plans.

Current Council approved financial targets (Council Scorecard) are:

  • Underlying Operating Margin by 2020 as a % of revenue5%
  • Underlying Staff expenses as a % of Revenue by 202056.5%

In addition there is an expectation the current ratio will be between 1.0 and 1.5

Colleges receive a share of the revenue that they generate and are generally expected to budget to have a surplus. In addition to overheads levied on revenue, Colleges may also make a post surplus contribution to strategic priorities and to help fund other Colleges.

Portfolios are expected to at least break even.

BUDGETING AND FORECASTING

Budgeting

The University prepares budgets for untied and tied items. An Income Statement (for both untied and tied), a Statement of Financial Position and a Statement of Cash flows is produced.A Capital Infrastructure Planforms part of the budget process.

For untied, the following allocation hierarchy is applied:

  • Allocation to meet strategic goals
  • Funds growth/cost pressures, largely as a result of increases in student load
  • funding for the prior year expenditure base plus salary and non-salary indexation, but potentially adjusted in the light of the most recent forecast eg savings in the current year, if seen as permanent, may result in a reduction to the budget base
  • Applies an efficiency dividend if required to achieve the University surplus target

All of the above in the context of achieving the Council Scorecard targets for operating surplus of 5% and underlying salaries/revenue to 56.5%, both by 2020.

The University has a revenue allocation model for untied revenue:

  • Funds for strategic purposes are top sliced from revenue – University strategic fund
  • Colleges are funded on a performance basis - student teaching revenue is allocated to Colleges based on their share of student load and the associated revenue, and Research Block Grants are allocated to Colleges based on relative research performance
  • Portfolios receive funding for approved costs –normally the prior year budget as the base for the next year, with indexation, less any savings plus any approved increases by the VC
  • A portion of funds are kept aside in reserves to help mitigate the risk that not all budgeted revenue will be received

For untied funds, the requirement is that budgets are set at College/divisional level. In practice this is normally done also for subgroups of source codes eg one for general untied and one for consulting (source 005). Budgets are set at the FFS2roll up level. In the system, budgets are set at a project level and natural account as these are the COA elements. But generally only one natural account is used per FFS2level per source subgroup.

The University permits areas to budget down to a lower level if they find this appropriate eg budget down to a number of natural accounts within a FFS2roll up group. They may do this so they can track costs against budget better.

For tied funds, a total University budget is calculated based on trend data. Actual revenue and expenditure is dependent on grants actually won, and the timing of associated expenditure. As such no revenue allocation model exists. Where eligibility criteria are met, an infrastructure levy is applied to external tied revenue to help cover overhead costs.

Forecast

At each quarter, the University prepares a forecast for the end of year, based on the latest estimates of student load, research block grants and other revenue, and expenditure.

The forecast for expenses is based on the actual YTD results and initially the budget for the remainder of the year, then the previous forecast. This is then modified as required.

Funds Carried Forward

The University permits unspent funds to be carried forward for future expenditure.

For tied funds, this is appropriate as research grants are normally funded for a specific purpose rather than a specific time period. In these cases funds are carried forward at the project level. In some cases approval from funding bodies are required, otherwise unspent funds are returned.

For untied funds a two tier approach is used:

  • In general, funds are carried forward at the College or Portfolio levelie unspent project balances roll up to a central College or Portfolio account at year end
  • In certain cases such as USF funded projects, unspent funds are carried forward at the project level.

The University uses source codes, a project attribute, to determine which carry forward treatment applies. The FUST Office runs a routine in the finance system to apply the above rules as part of year end processing.

The University permits untied general funds to be carried forward so that:

  • Areas are encouraged to manage their allocations with a longer term perspective than 1 year
  • To reward areas for not spending their whole annual allocation
  • University cash flow is increased as a result of the above
  • Areas can “save” up funds and apply these for strategic purposes
  • Areas can use funds carried forward to cover emerging leave costs and equipment replacement

By carrying forward general untied funds at the College or Portfolio level, this encourages more strategic use of the funds rather than having them scattered amongst a myriad of smaller projects.

For the untied budget any actual expenditure has to be approved each year as part of the annual Budget. Currently a total cap of $2.5m is applied.

SPECIAL CENTRAL FUNDS

The University operates a number of central funds for specific purposes:

LSL

The University accrues for LSL corporately but in each area LSL is treated as an emerging cost.

However, when the SA Government reduced the payroll tax rate (from 5.5% to 4.95%), the University decided to leave the overall salary oncost rate unchanged, and divert the 0.55% saving into an LSL levy. The rationale was to build up a central cash reserve, which in time would fully fund the existing LSL liability. At that time it would then be easier to put in place an accrual scheme for LSL at area leave, by increasing the salary oncost rate to include the full cost of LSL. This will mean that areas are charged for an LSL contribution fortnightly and when LSL is taken it would come from the central pool. No date has been set for this change to occur, and it will take more than 10 years for the current levy to get close to the existing liability.

The LSL fund has been approved to be used to cover the cost of LSL paid on cessation for research grant funded staff. This is because the underlying research grants they have been employed on do not have the capacity to fund LSL.

For 2018 it is proposed that a 2% on cost be applied to continuing and contract salaries. This will be aggregated into the central fund and be used to pay for all LSL.

Workers Compensation Levy

The University is a self-insured employer under ReturnToWorkSA. The University includes a workers’ compensation on cost of 1.35% in the salary oncosts. These funds come to a central account which is used to fund workers’ compensation costs including admin and medical, the liability and fund the WH&S unit.

State Super

University staff previously employed by the former College of Advanced Education at the Sturt Campus were/are members of the SA government superannuation scheme. This scheme is funded on an emerging cost basis. Under an arrangement between the SA and Commonwealth governments, the SA government administers the schemes, seek reimbursement from Flinders and then Flinders is largely reimbursed by the Commonwealth. Flinders makes a contribution for the 3% productivity component of employer superannuation for current staff, otherwise the Commonwealth picks up the cost.

In the University’s annual financial statements, the University shows its share of the SA super fund liability, under provisions, with a current and non-current component. As the Commonwealth fully funds this liability, an offsetting receivable, Deferred government contribution for superannuation is included under current and non-current receivables. Under instruction from the Commonwealth, there is no revenue or expense included in the University’s Income Statement, with any changes to the liability being offset each year by an opposite change in the receivable.

See the AFS working paper for further details.

HECS Remissions

When students are unable to complete the requirements of their course due to special circumstances, the Dept. of Education has authorised the University to grant remission of their HECS debt if certain criteria are met. Remissions can be granted several years after a HECS debt was incurred, and are deducted from payments received from the Dept. of Education.

Calculation of CGS and HECS revenue includes an allowance for remissions, which is accrued to the balance sheet as a liability. When deductions for prior year HECS remissions are received they are offset against the liability in the balance sheet.

University Strategic Fund

This is a strategic fund managed by the VC. This is funded by overheads and provides a pool of funds that the VC has discretion to use to support the University strategic plan. For 2018 funding of $27.8m has been provided. The VC seeks bids from Senior Executive Team members and allocates funding based on the outcomes of a strategic retreat. This is undertaken separate to the Budget process and for 2018 is expected to occur early in the New Year.

OTHER SPECIAL FINANCIAL ARRANGEMENTS

Leave loading

Leave loading of 17.5% of annual holiday pay is paid yearly in December (and upon cessation). Although 1.45% is includedin the published salary oncost rates for leave loading, areas are not charged this on a fortnightly basis. Instead they are charged when the leave loading is paid. It does appear in the salary commitments until it is paid. Leave loading does not apply to casual positions and is subject to a maximum payment. The maximum will be in accordance with criteria published by the ABS.