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Doubts raised over the British Council’s future despite rescue funding

Author: ICAEW Insights

Published: 12 Mar 2021

The British Council’s 2019-20 accounts disclose a material uncertainty over going concern beyond March 2022, despite an expected rescue package of at least £271m.

The British Council recently published its delayed annual report and accounts for 2019-20, featuring a material uncertainty disclosure over its ability to continue as a going concern beyond March 2022 when current funding assurances expire. 

The British Council is both a non-departmental public body sponsored by the Foreign, Commonwealth & Development Office (FCDO) and a registered charity that prepares its financial statements in accordance with FRS 102 and the Charities: Statement of Recommended Practices (the Charities SoRP). It reported a small deficit in 2019-20 from income and expenditure each in the order of £1.2bn, while net assets at 31 March 2020 were just under £405m.

The trustees disclosed a material uncertainty over going concern in note 26 to the financial statements. Gareth Davies, the Comptroller and Auditor General (C&AG) and head of the National Audit Office (NAO), drew attention to the material uncertainty in his audit report without modifying his audit opinion.

The economic impact of the COVID-19 pandemic and lockdown restrictions have made going concern an area of focus for both auditors and accounts preparers but going concern issues remain relatively rare in the public sector. This is primarily because the UK Government Financial Reporting Manual (FReM) presumes that ‘anticipated continuation of the provision of service in the future … is normally sufficient evidence of going concern’ when preparing financial statements for central government bodies.

This presumption does not apply to the British Council in preparing its accounts under FRS 102 and the Charities SoRP. It is the only major central government organisation to disclose material uncertainties over going concern as a direct result of COVID-19 in 2019-20. Other government-funded charities such as museums and cultural institutions have also had their income and operations adversely impacted by the pandemic, but they are established by statute or carry out statutory functions. This creates an obligation on central government to provide funding on an ongoing basis and thus ensure they continue as going concerns. There is no such obligation for the government to fund the British Council, as its activities are not underpinned by legislation. 

The going concern status of several other non-statutory government bodies is secure because their sponsor departments have provided letters of comfort or funding commitments for the foreseeable future. It is notable that the funding assurances provided to the Council by the FCDO currently only last until the end of March 2022. 

The British Council generated over £0.7bn of its £1.2bn annual income in 2019-20 from its global teaching and exams business. This is a reduction of only £3.3m compared to 2019-20 but this income stream is believed to have fallen significantly during the current financial year because of the COVID-19 pandemic. Lockdown measures in many countries have prevented classes taking place and caused the cancellation of exams. 

Although the British Council has since taken measures to reduce expenditure, it has relied on financial support from the FCDO to continue to operate and pay its bills as they fall due. In addition to extra grant-in-aid of £26m in 2019-20, the FCDO provided a loan of £60m in June 2020, which it subsequently increased to £145m in February 2021. The loan is due to be repaid in December 2021 but the FCDO has confirmed that it will restructure the loan, recognising that the British Council is unlikely to be in a position to repay it by then. 

The FCDO has also issued a letter of comfort stating that it will provide further loans as necessary to allow the British Council to settle obligations incurred up until March 2022. The time-limited nature of the letter restricts the financial exposure to the FCDO but raises concerns over the ability of the British Council to continue to operate beyond the end of the next financial year. 

It is unclear when, or even if, the Council could generate sufficient income to repay the funding being provided by the FCDO. Recognising that their business model will need to change as teaching and exams move online and societies adapt to different ways of working, the FCDO has agreed in principle to provide a further £100m in loan finance to enable restructuring in the hope that the Council can return to generating a surplus once the pandemic is over. This puts even more taxpayer’s money at risk in an organisation where there are material uncertainties about its ability to continue.

Oliver Simms, Manager, Public Sector Audit & Assurance for ICAEW, commented: “COVID-19 has severely impacted income generation of many organisations and threatened their viability. Even in this challenging environment, the statutory nature of public sector bodies and their financial reporting framework have meant few have had to disclose material uncertainties over their ability to continue. As a registered charity without statutory underpinning, the British Council stands out as an exception. Its financial statements make clear the financial uncertainty it faces and its dependence on continued emergency support.

“The FCDO has already agreed funding of at least £271m of taxpayer’s money to allow the Council to pay its immediate debts and begin the process of restructuring. It will be aware that recovery of its investment is not assured, and it will need to decide soon how much further funding it is willing to provide to ensure the survival of the British Council.”

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