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The financial statements presented on pages 18 to 39 comprise the consolidated results of the University and its subsidiary company, ������Ƶ Enterprises Limited. ������Ƶ Enterprises Limited undertakes commercial consultancy work, utilising the expertise of the University’s academic and technical staff, and also deals with vacation letting of the University’s student accommodation.

The financial statements have been prepared on a going concern basis in accordance with Financial Reporting Standard 102 (FRS 102) and the Statement of Recommended Practice – Accounting for Further and Higher Education 2015 (SORP 2015), with the Accounts Direction issued by the Scottish Funding Council (SFC) and with the United Kingdom Companies Acts.

In December 2015 the University Court approved the new strategic plan, which had been developed in accordance with the QM150 strategy, details of which are accessible on the University’s website. The QM150 strategy is based around the University’s vision to be a University of ideas and influence. The strategy sets out the mission for the development of the University over a ten year period, culminating in the 150th anniversary of the founding of the institution in 2025.The strategic plan sets out nine overarching goals which the University wishes to achieve in order to allow the delivery of the strategy by 2025.A key element of the plan is the inclusion of key performance indicators which the University Court uses to monitor progress towards the achievement of the goals set out in the plan (both financial and non-financial).The plan also sets out the processes employed to manage the risks which might inhibit this achievement.

The main changes in the underlying outturn position compared to 2015/16 were:-

• An increase of £0.1 million in income from tuition fees and education contracts and an increase of £0.4 million in grant income from the Scottish Funding Council;
• An increase of £2.2 million in other operating income, of which £1.8 million relates to a non-recurrent receipt in respect of an outstanding claim;
• An increase of £1.5 million in staff costs, including increases of £0.9 million in salary costs, £0.3 million in National Insurance costs (including the Apprenticeship Levy) and £0.3 million in pension costs;
• A reduction of £0.3 million in other operating expenses;
• An increase in interest payable of £0.1 million reflecting move to a fixed-rate during the year.

������Ƶ Enterprises Ltd generated a profit of £181,000 (2015/16: £229,000), which was passed to the University under deed of covenant.

The result for the year, adjusted for the effect of non-cash items and interest, resulted in a net cash inflow of £4.5 million on operating activities (2015/16, £3.3 million inflow). Overall cash balances increased by £0.4 million (2015/16; reduction of £1.2 million). Cash balances at 31 July 2017 of £8.4 million (2016: £7.9 million) represented 85 days’ expenditure (2016: 87 days).

Key performance indicators

In accordance with the recommendations from the Higher Education Financial Sustainability Strategy Group (FSSG), the University Court undertakes a formal annual assessment of the University’s financial sustainability. This process involves reviewing a common set of financial indicators, which have been applied to the University’s historical results and to the financial forecasts measured over a rolling five-year period, so as to reduce the impact of any one-off exceptional items arising in any year. The two key indicators which the University Court has agreed to focus upon to inform its considerations around financial sustainability are:-

1. Earnings before interest, taxation, depreciation and amortisation (EBITDA); and

2. Net cash flow from operating activities less interest payable as a percentage of turnover.

The second indicator has been adapted from the basket of financial indicators recommended by the FSSG as it is a more appropriate measure for the University, given its relatively high level of borrowings as a proportion of its turnover. The targets are also set at a level which will allow compliance with banking covenants. The results of the annual review undertaken in December 2017, based on a rolling five-year period, were as follows:-

Management of principal risks and uncertainties

In common with other universities, Queen ������Ƶt University has to manage its activities whilst facing significant pressures

on its funding as well as on its cost base. Significant risks facing the University include:-

• Funding from government through the Scottish Funding Council (SFC), the University’s main source of income, is likely to suffer from further real-terms reductions over the next few years as a consequence of spending cuts throughout the public sector.
• Recruitment of international students continues to be challenging as a result of difficulties faced by international students in obtaining visas to study in the UK.
• Underlying assumptions contained in the future financial forecasts include an assumption that income from tuition fees and education contracts will increase significantly over the next four years.A review of the University’s academic portfolio has taken place during 2017, which provides an indication that there is scope for the University to increase its income in this area, and progress will continue to be monitored carefully, with possible mitigating actions being planned for in the event that the increase in income is not achieved. 
• Pressure on staff costs continues to build, both in terms of pay awards (where the University continues to participate in the UK-wide national negotiating framework) and also in terms of the cost of employers’ National Insurance contributions and the costs of pension provision.
• The full implications of the decision for the UK to leave the European Union are still unclear. However, it is likely that this will have an adverse impact on engagement with both students and staff from EU member states, and will introduce additional hurdles in accessing EU funding for research and other activities.

The Court has also made an assessment of a particular risk around the financial sustainability of the University, in light of an anticipated breach of a bank loan covenant over the next two years. University management is engaged in discussions with the lender, Barclays Bank plc, with a view to agreeing a waiver of the banking covenant. At the date of approval of the financial statements these discussions are continuing. In concluding that the accounts should be prepared on a going concern basis, the Court has taken the view that these discussions will result in an agreement being reached with Barclays Bank plc which will allow the University to continue its operations.

The identification and management of risks is firmly embedded within the University’s structure and processes. The institutional corporate risk register, which includes a description of actions undertaken to mitigate risks, is formally reviewed by the Executive Board and the Audit & Risk Committee as well as being discussed by the University Court. The Court also undertakes, from time to time, an exercise to agree its appetite for risk, and to ensure that residual risks, after the application of mitigating actions, sit within the agreed tolerance.

Borrowings

Borrowings at 31 July 2017 amounted to £33.6 million, (31 July 2016, £35.1 million) relating entirely to a secured loan facility with Barclays Bank plc taken out to fund the campus development at Musselburgh.

Pension arrangements

The University is involved in three pension schemes, as follows:-

The Lothian Pension Fund, which is part of the Local Government Pension Scheme (LGPS), is a multi-employer defined benefit scheme. The scheme had a deficit at 31 July 2017. The Fund trustees have, in recent years, applied increases to the level of employers’ and employees’ contributions to the scheme in order to recover this deficit position. The University’s share of the fund deficit, as calculated by the scheme actuary, has been shown as a liability at 31 July 2017.

The most recent actuarial review of the Scottish Teachers’ Superannuation Scheme (STSS) was undertaken as at 31 March 2012. As a result of this review, the level of employers’ contribution to this scheme was set at 17.2% with effect from 1 September 2015.As the scheme is unfunded, there can be no surplus or shortfall. Pension contribution rates are set by the scheme actuary to meet the cost of pensions as they accrue.

The Universities Superannuation Scheme (USS) is a defined benefit scheme which is contracted out of the State Second Pension (S2P).The assets of the scheme are held in a separate trustee administered fund. Because of the mutual nature of the scheme, the scheme’s assets are not hypothecated to individual institutions and a scheme wide contribution rate is set. The institution is therefore exposed to actuarial risks associated with other institutions’ employees and is unable to identify its share of the underlying assets and liabilities of the scheme on a consistent and reasonable basis and therefore accounts for the scheme as if it were a defined contribution scheme. As a result, the amount charged to the income and expenditure account represents the contributions payable to the scheme in respect of the accounting period. The University has a liability in respect of its commitment to the USS deficit recovery plan, shown in note 17. The revised plan, along with the changes to scheme benefits, are expected to eliminate the deficit by 2031.