As higher education finance leads and chairs of audit prepare for their upcoming audit planning meetings, the agenda is understandably demanding. These planning sessions are taking place against a highly complex financial backdrop for the UK higher education sector.
Sector deficits and the accelerating regulatory timeline
The latest Office for Students (OfS) report on the financial health of the sector confirms what many leadership teams have been managing on the ground: the industry continues to face significant headwinds. With more than a third of institutions reporting an operating deficit, and that figure forecast to rise past 40% across the sector above previously expected, a reliance on external funding has become a structural reality. To maintain liquidity and fund vital capital projects, a substantial number of providers rely heavily on external bank loans and commercial debt facilities.
Concurrently, a major regulatory transition is approaching. The updated Further and Higher Education Statement of Recommended Practice (HE SORP), driven by revisions to FRS 102, will take effect for financial years beginning on or after 1st January 2026. This means full implementation will be required for the financial year ending 31st July 2027.
Because the formal reporting deadline sits in 2027, it is tempting for audit committees and finance teams to categorise these SORP changes as a future focus. However, focusing solely on the 2027 deadline obscures a pressing consideration for this year’s cycle. While the primary financial statements won’t reflect the new rules until 2027, the impact on your 31st July 2026 going concern assessments and financial forecasting will be felt this year.
How accounting presentation shifts impact debt agreements
The primary complication rests in how the new HE SORP alters the presentation of lease accounting and revenue recognition. Crucially, these technical changes do not impact an institution’s actual cash flow, but they can modify the balance sheet and income statement metrics that lenders monitor. Most historic banking agreements were drafted using definitions tied to older accounting frameworks. If your institution has debt covenants tied to liquidity ratios, gearing ratios, interest cover, or historical surplus thresholds, the new SORP formatting rules could inadvertently shift those metrics.
Under the new rules, almost all operating leases, including equipment, vehicle fleets, and long-term student accommodation partnerships, must be brought onto the balance sheet as right-of-use assets and corresponding liabilities. This presentation naturally increases short term liabilities and impacts liquidity ratios. Furthermore, the way these lease costs are recognised over time will front-load finance expenses on the income statement, which can temporarily lower reported surpluses and compress interest cover ratios.
The guidelines for “exchange transactions” are also becoming more granular. While non-transactional government grants are largely unaffected, commercial income streams require closer evaluation. Areas such as tuition fees, short-term summer courses, accommodation fees, commercial retail, and international student deposits will face tighter cut-off testing.
If the updated logic requires delaying the recognition of certain upfront fees or summer tuition deposits, the timing of reported revenue could shift between quarters or financial years. This could impact debt service coverage by reducing operating income.
When the board signs off on the 2026 accounts this autumn, auditors are required to assess a going concern horizon of at least 12 months from the date of approval, stretching deep into late 2027. Consequently, institutions must demonstrate now that their 2027 forecasts, when modelled under the new SORP definitions, remain fully compliant with existing bank loan covenants.
If an institution inadvertently breaches a covenant definition, lenders may technically gain the right to renegotiate terms or reclassify debt as current or in extreme circumstance recall the loan. For finance teams currently fully extended with day-to-day operational management and year-end preparations, finding the additional capacity to perform this detailed contract review can be a significant challenge.
Key questions for the upcoming planning cycle
As a chair of audit or a CFO entering planning meetings over the next month, a key question to introduce to the table is: “Are we clear on how the upcoming SORP changes interact with our current loan covenants, and does our finance team have the capacity to model these impacts before our autumn forecasting cycle?”
To provide robust assurance to your board and your statutory auditors, a structured operational plan should be put in place early in the audit cycle rather than during a compressed year-end close. Chairs of audit may want to challenge management on whether they have a plan in place and what does it look like?
Navigating auditor independence
It is worth noting that your current external auditors cannot perform this preparatory modelling for you. Due to strict ethical and independence standards, your statutory audit firm can review and critique your methodology, but they cannot independently design your lease models, determine corporate discount rates, or draft the initial implementation papers. The university must own and present a well-documented, independent evaluation for the audit team to sign off on.
How HW Fisher can support
We offer an independent centre of excellence in higher education finance drawing from our experience in external audit, internal audit and tax in the sector. We can therefore provide the specific technical support and delivery capacity that overstretched internal teams often need during transition periods. We provide free webinar and CPD accredited training, but we can also work directly alongside your finance director to manage the heavy lifting of lease and revenue reviews, build compliant financial models, and prepare the clear, structured documentation that your external auditors will expect to review this autumn.
Our next HE SORP webinars are as follows:
16 June 2026 | 9:00am – 10:00am
8 July 2026 | 9:00am – 10:00am
16 September 2026 | 9:00am – 10:00am
We’d love to hear from you. To book an appointment or to find out more about our services:
