• Effective colleges and universities
• Financial memorandum
• Institutional governance
• Quality assurance and enhancement
• e-Learning
• Sustainable development
• Efficient Government
• Transparent Approach to Costing
• Case studies
• External links

Mandatory requirements

1 Paragraph 16(x) of the Financial memorandum between the Council and the colleges and universities it funds (see circular letters FE/35/05 and HE/30/05, both available from the SFC archive) includes the following requirement:

"Respecting the primacy of the institution's own statutory and constitutional obligations, the governing body will ensure that it and the institution adheres to the Council's mandatory requirements (as notified to the institution in circular letters)."

2 There are various requirements which colleges and universities are expected to comply with.  Examples include conditions attached to specific grant streams and provision of statistical data and financial information.  However, the documents described below contain the ‘mandatory requirements’ referred to in the Financial memorandum. These are listed under the following headings:

• specific financial conditions of grant relating to capital finance, repayment of grant and insurance;
• estates;
• audit and accounting arrangements; and
• mandatory requirements contained in our annual main grant letter.

3 In addition to mandatory requirements, we occasionally publish good practice guidance in specific areas, usually in partnership with one or both sectors.  Interpretation and use of good practice guidance needs to take appropriate account of each institution’s unique circumstances and as such are not part of our mandatory requirements.

Specific financial conditions of grant relating to capital finance, repayment of grant and insurance

Capital finance

4 As a condition of the Council’s financial memorandum with the Scottish Government¹, the Council is required to "make provision for the monitoring and control of borrowing by institutions to protect the public investment in institutions and to maintain accountability for the use of exchequer funds". In furtherance of this responsibility, the institution is required to meet all of the conditions on capital finance set out in paragraph 5 below.

Conditions to be met in relation to all capital finance arrangements

5 The conditions which should be met regarding the institution’s ability to enter into capital finance arrangements are:

(i) the institution can demonstrate its ability to repay the finance, and to pay interest thereon, without recourse to requesting additional grant from the Council;

(ii) the institution can demonstrate that its ability to maintain financial and academic viability will not be impaired as a result;

(iii) the institution can demonstrate the value to be generated by the transaction, whether it involves refinancing, or purchase of any new investment or assets, the acquisition of which is to be financed by the borrowing; and

(iv) the institution can demonstrate that any such new investment or asset acquisition is in accordance with the institution’s strategic plan and, where appropriate, its estate strategy.

6 For the purposes of this document, ‘capital finance’ includes borrowing, finance and operating leases, and other schemes, such as private finance initiative projects, where borrowing is the substance of the transaction, in line with the principles of Financial Reporting Standard (FRS) 5 – ‘Reporting the Substance of Transactions’.

When the Council’s formal consent is required in respect of capital finance arrangements

7 The Institution shall obtain prior written consent from the Council before it undertakes a level of capital finance where:

• the annualised costs of all capital finance (being the sum of the servicing and capital repayment costs of each loan or other arrangements spread evenly over the period of the relevant loan or arrangement) would exceed four per cent of: total income as reported in the latest audited financial statements; or of the estimated amount of total income for the current year if that is lower.

8 In assessing total capital finance commitments, the institution shall ignore low-value financial commitments, provided that the combined annualised servicing costs of such financial commitments do not exceed 0.5% of total income.

9 The institution shall also seek consent from the Council before raising capital finance on the security of assets in which Scottish Ministers have an interest. For the purposes of this document, such an interest exists where:

• the institution has used funds provided by Scottish Ministers to acquire an interest in or to develop any land, building or other asset; and
• where those funds were provided subject to a condition which has the effect of requiring the institution to obtain Scottish Ministers’ consent before raising capital finance on the security of those assets.

10 Scottish Ministers have directed that the Council will exercise their functions in relation to any such interests.

11 In seeking the Council’s approval as required under paragraphs 7 and 9, the institution should demonstrate to the Council, in writing, its compliance with the conditions set out in paragraph 5.

Granting of security

12 As a result of a condition in the Council’s financial memorandum with the Scottish Government, the institution is required to seek the Council’s written consent if it intends to offer as security for a loan any land or property which has been provided, improved or maintained with the aid of grant.

Contingent commitments

13 As a result of a condition in the Council’s financial memorandum with the Scottish Government, the institution is required to seek the Council’s written consent if it intends to lend or give a guarantee, indemnity or letter of comfort.

14 However, the Council’s written consent is not required for such arrangements if:

• an actual or effective value can be calculated for the arrangement; and
  
• that actual or effective value is less than: four per cent of total income as reported in the latest audited financial statements; or of the estimated amount of total income for the current year if that is lower.

Repayment of grant

15 If the institution fails to comply with any terms and conditions attached to funds from the Council, it may be required:

• to repay to the Council any sums received from it; and
  
• to pay interest to the Council in respect of any period during which a sum due to the Council in accordance with this or any other condition remains unpaid.

16 If, in the opinion of the Council, any provision set out in this document is not observed by the institution, the Council will be entitled, in respect of funds from the Council:

• in the case of funding by way of grant: to demand immediate repayment of any and all grants or any part or parts of any grants at any time after the Council becomes aware of such failure to observe (without prejudice to further demands until the whole of all sums made available by way of grant shall have been repaid in full); and
  
• in the case of funding by way of loan (notwithstanding the terms of any agreement attached to the same): to demand immediate repayment of the whole or part of each such loan at any time after the Council becomes aware of such failure to observe (without prejudice to further demands until the whole of all sums made available by way of loan shall have been repaid in full).

17 In relation to paragraphs 15 and 16, interest will be levied upon any sum demanded from the date of demand until the date of payment at the rate of four per cent per annum above the base lending rate of the Bank of England.

Insurance

18 The institution is responsible for taking out and paying for adequate insurances in respect of its assets and activities.

Estates

19 FE capital procedure notes (applies to colleges only) - Go to Circular FE/48/00 in SFC archive

20 Procedure notes for capital projects (applies to higher education institutions only) - Procedure notes for the disposal of exchequer funded assets and the retention of proceeds

21 Estates strategy guidance - Go to Circular FE/48/00 in SFC archive

22 Sustainable Development Guidance

23 Capital projects: post-occupancy evaluation guidance

External audit reporting requirements for higher education institutions

38 HE institutions are required to ensure that their contracts for external audit make provision for an opinion on whether the institution has applied income, where appropriate, in accordance with the Financial Memorandum, and whether Funding Council grants have been used for the purposes for which they were received. Guidance on wording is set out below.

39 The external auditors shall report whether in all material respects:

a. The financial statements give a true and fair view, in accordance with UK Generally Accepted Accounting Practice, of the state of the institution's affairs, and of its income and expenditure, recognised gains and losses, and statement of cash flow for the year. They should take into account relevant statutory and other mandatory disclosure and accounting requirements, and Funding Council requirements.

b. The financial statements have been properly prepared in accordance with the Statement of Recommended Practice (SORP) on Accounting in Further and Higher Education, and the Companies Acts where relevant, and/or other legislative or regulatory requirements.

c. Funds from whatever source administered by the institution for specific purposes have been properly applied to those purposes and, if relevant, managed in accordance with relevant legislation, and any other terms and conditions attached to them.

d. Funds provided by the Funding Council have been applied in accordance with the Financial Memorandum and the mandatory requirements attached to the Financial Memorandum.