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Contents > 1. Overview of Sector > 1.5 Prudential assurance
1.5 Prudential assurance
The Commonwealth monitors the financial situation of higher education institutions by assessing their audited financial statements. Universities receiving Commonwealth grants are required to lodge their annual calendar-year financial statements with the Commonwealth by 30 June of the following year.
Guidelines for the preparation of annual financial statements are issued to universities each year. The 2000 guidelines were prepared following a detailed review conducted by the Department with advisory assistance from Deloitte Touche Tohmatsu and in consultation with the higher education sector and Commonwealth, State and Territory finance and audit officials. The guidelines were based on Australian Accounting Standards, and had the effect of aligning universities’ financial reporting to financial reports prepared by the commercial sector. The 2001 guidelines are similar to the 2000 guidelines.
The Commonwealth’s, States’ and Territories’ Auditors-General audit the annual financial statements of the universities within their jurisdictions.
The audited financial statements are used to monitor the financial performance and position of each university, to provide statistical information and to acquit Commonwealth grants. Included in the assessment of universities’ financial performance and position is the monitoring of commercial activities for any effect on the operations of a university. The annual Educational Profile discussions are used to discuss each university’s overall financial position.
In 2001, an analysis of universities’ published financial statements for 2000 was undertaken. The sector-wide analysis presented in this report is based on the aggregate financial data extracted from the published financial statements of 40 publicly funded institutions. It covered all higher education institutions except Avondale College and Marcus Oldham College of Farm Management, and included for the first time the University of Notre Dame. In the case of some dual-sector institutions that do not report financial information on higher education activities separately, the data provided to the Department as part of their finance submission has been used.
Consistent with the approach adopted in previous years, the analysis used key financial indicators to broadly assess each institution’s financial position. The analysis encompassed two main aspects:
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liquidity and financial stability; and
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revenue and expenditure activity.
Liquidity and financial stability measures
The general financial position of the higher education sector as a whole, as reflected in their 2000 audited financial statements, remains sound.
Table 1.11: Principal ratios and financial measures used
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Operating margin |
It measures the ability of management to contain expenditure within the constraints of available funding and other revenue. A positive percentage for any given year indicates that total revenue exceeded total expenditure for that year. |
Surplus/(Deficit) before Abnormal Items |
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Current Ratio |
The current ratio is a liquidity ratio. It measures the ability of the institution to meet its short term obligations. A current ratio of less than 1.0 is used as a flag indicating potential liquidity risk. |
Current Assets |
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Borrowings |
Information on external borrowings of institutions |
Borrowings classified under current and non-current liabilities. |
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Cash and Investments |
Cash and mostly near liquid investments, although some are restricted investments. |
Cash and investments are reported in the balance sheet under current and non-current assets. |
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Net Assets |
Highlights institution’s total net value |
Total assets less |
Operating margin
The sector-wide operating margin has remained positive for the 1996–2000 period (figure 1.14) and has improved to 3.4 per cent in 2000, reversing the trend of the previous years. Higher education institutions continue to earn additional revenue from non-government sources and the majority have contained expenditure within the limits of available funds.
Ten institutions recorded negative operating margins in 2000, attributable to a combination of limited revenue growth and a general increase in costs. In the case of two institutions, Edith Cowan University and Murdoch University, the deficits were a result of a change in accounting treatment of the grants-in-advance payment that masked an underlying surplus for 2000. In 1999, five institutions recorded a negative operating margin, while in 1998 there were six.
Current ratio
The sector-wide current ratio continues to be significantly higher than the threshold of 1.0. A current ratio of less than 1.0 flags a potential liquidity risk. In 2000, current assets were 1.5 times current liabilities (figure 1.15).
While the majority of institutions continue to perform strongly and maintain sufficient levels of liquid assets to meet current liabilities, there were five institutions with a current ratio of less than 1.0 at the end of 2000. This compares with five in 1999, six in 1998 and ten in 1997. However, a number of institutions have classified most of their investments, including those financial instruments that are readily convertible, as non-current assets resulting in a reduction of their current ratio as measured by convention. The effect of this practice is to understate the strength of liquidity. In addition, accounting policy changes at some institutions have led to grants made in advance being classified as current liabilities when they weren’t before, with a consequent reduction of their current ratios.
Two universities, Edith Cowan and La Trobe, reported both a negative operating margin and a current ratio of less than 1.0 in 2000. Edith Cowan University’s negative operating margin is attributed to changes in its accounting treatment of grants-in-advance. La Trobe University undertook major capital expenditure projects in 1999 that reduced its cash reserves in that year and this is reflected in its current ratio for 2000.
Borrowings, cash and investments, capital expenditure and net assets
Compared to large private enterprises, universities continue to have low levels of borrowings even though the level of borrowings has been increasing in recent years (figure 1.16). In 2000, the borrowings for the sector were $426 million. This was $62 million (17 per cent) higher than the previous year. Much of this increase is attributable to increased borrowings by the University of Melbourne ($50 million) and Deakin University ($13 million), and the inclusion for the first time of financial information from the University of Notre Dame.
Figure 1.16: External borrowing
The sector’s net assets increased from $18.8 billion in 1999 to almost $20.0 billion at the end of 2000, an increase of 6 per cent. The debt to equity ratio, which measures the proportion of net assets committed to the repayment of borrowings, has remained at around 2 per cent for the past few years including in 2000. This is very low in comparison to the private sector as would be expected given the level of universities’ capital assets. In 2000, the sector had almost $11 billion in buildings and a further $2 billion in library assets.
In addition to the substantial capital assets, the sector also has substantial liquid assets as measured by cash and investments. The cash and investments of the sector totalled $4.4 billion at the end of 2000. This was more than 10 times the size of external borrowings.
Cash and investments increased substantially by $800 million between 1996 and 1998 and have remained at the same level during the past three years (figure 1.17). The net assets of the sector have increased substantially during the past two years, by $900 million in 1999 and $1.2 billion in 2000. This reflects the continued high levels of investment by the sector in capital assets.
Figure 1.17: Cash and investments
Net capital expenditure (calculated as capital expenditure less capital asset sales) measures the investment in capital assets financed from operating surpluses, internal reserves and external sources, for example borrowings, and has been substantial during the past five years totalling $4.4 billion. Net capital expenditure was large in both 1999 and 2000 when it was close to a billion dollars a year (figure 1.18).
Figure 1.18: Net capital expenditure
Revenue and expenditure analysis
The aim of the revenue and expenditure analysis is to identify emerging trends, changes in the sources of total revenue and patterns of expenditure.
The main sources of revenue for universities are Commonwealth operating grants, HECS payments, domestic and overseas fee-paying students, research contracts and consultancies, investment income and other business type activities. The major portion of expenditure for universities is salaries and related costs.
Consistent with the approach adopted last year, the revenue and expenditure figures in figure 1.19 exclude ‘deferred government superannuation income’ from revenue and ‘deferred employee benefits’ from expenditure reported by institutions in their financial statements. These revenue and expenditure items offset each other, so excluding them has no effect on the overall result. Although they are not meaningful in this context, these items are recorded in institutions’ operating statements to reflect any increases or decreases in their unfunded superannuation liabilities.
Figure 1.19: Revenue and expenditure
Sector revenue in 2000 continued its upward trend reaching $9.3 billion, an increase of 5.6 per cent from 1999. Sector expenditure in 2000 was $9.0 billion, an increase of 5.4 per cent from 1999. Thus in 2000, the growth in revenue was marginally higher than the growth in expenditure, reversing the trend of the previous three years.
Over the period 1996–2000, sector revenue increased by $1.4 billion while expenditure increased by $1.6 billion. Hence, the operating result for the sector declined from around $470 million in 1996 to $320 million in 2000 (before abnormals).
Sources of revenue
Commonwealth grants (including HECS) increased by $75 million in 2000. The proportion of institutions’ revenue consisting of Commonwealth funds (including HECS) varied considerably across the sector from about 26 per cent for the University of Notre Dame to around 96 per cent for Batchelor Institute of Indigenous Tertiary Education.
Figure 1.20: Sources of revenue – trend analysis(a)
Revenue from fees and charges continues to grow with $1.7 billion (18 per cent of total revenue) being earned from this source in 2000. The major components of fees and charges were overseas student income ($945 million or 10 per cent of revenue), and domestic postgraduate fees ($192 million or 2 per cent of revenue).
Revenue from domestic undergraduate fees has also been growing as a revenue source with 18 institutions offering undergraduate fee-paying courses generating total revenue of $35 million in 2000, compared to 10 institutions generating $10 million in 1998. Investment income accounted for a further $322 million (or 3 per cent) of sector revenue in 2000.
Figure 1.21: Sources of revenue, 2000 – contribution analysis
The majority of institutions continued to increase their revenue derived from overseas students. Overseas student revenue increased by $153 million (or 19 per cent) in 2000 (figure 1.22). Revenue from overseas student fees has increased by more than 75 per cent since 1996 and now represents 10 per cent of sector revenue.
Figure 1.22: Revenue from full-fee-paying overseas students
Three institutions, the Royal Melbourne Institute of Technology, Central Queensland University and Curtin University of Technology, derived more than 20 per cent of their total revenue from overseas students. A further 15 institutions derived more than 10 per cent of their total revenue from fee-paying overseas students in 2000.
Expenditure analysis
Staff salary and related costs declined marginally as a proportion of total expenditure in 2000. They accounted for just under 59 per cent of operating expenses in 2000 compared to 62 per cent in 1996 (figure 1.23).
Figure 1.23: Expenditure analysis
A number of universities have invested in the development of more sophisticated systems and models to better enable them to measure the costs associated with their activities for both strategic planning and budgeting purposes.
Financial projections
The analysis of institutions’ financial statements provides a broad assessment of past performance and a guide to future performance. As part of its prudential assurance responsibilities, the Commonwealth Government has used a resource analysis and projection model to assist in examining trends in key financial indicators.
The financial projections based on the 2000 financial statements suggest that universities will need to continue to focus on several key issues:
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developing and managing strategies for raising revenue and containing expenditure within the limits of the revenue raised;
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improving financial and management systems to increase understanding of costs and to improve the reporting of financial information;
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managing financial and quality risks associated with expansion and diversification of revenue sources;
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managing financial and quality risks associated with expansion of fee paying students, particularly by smaller institutions, and the increase in franchising arrangements for servicing these students;
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managing infrastructure asset maintenance and capital expenditure programmes; and
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managing effectively the commercialisation of intellectual property.