Reports and Financial Statements for the year ended 31 July 2018

FINANCIAL REVIEW

Scope of the financial statements

The consolidated financial statements provide an overview of the finances and operations of the University Group (the 'Group') covering:

•the teaching and research activities of the University and its subsidiary companies that undertake activities which, for legal or commercial reasons, are more appropriately carried out by limited companies;

•Cambridge Assessment (CA) and its subsidiary undertakings (including associates and joint ventures);

•Cambridge University Press (CUP) and its subsidiary companies and joint ventures; and

•Gates Cambridge Trust and certain other Trusts (the ‘Associated Trusts’).

It should be read in conjunction with the Annual Report of the Council and the Annual Report of the General Board to the Council for the 2017–18 academic year, which are published alongside these financial statements. References to the University reflect the teaching and research activities of the University (excluding subsidiary companies and Associated Trusts), together with CA and CUP (but excluding their subsidiary companies, joint ventures, and associates). References to the Group reflect the teaching and research activities of the University together with CA and CUP, including all subsidiary companies, Associated Trusts, joint ventures, and associates.

The financial position of the core teaching and research activities of the University (the ‘Academic University’) may be seen more clearly in the Financial Management Information published in the Cambridge University Reporter. Further detailed information about the finances and operations of CA and CUP is given in the published annual reports of those entities. CA and CUP are constituent parts of the corporation known as the Chancellor, Masters, and Scholars of the University of Cambridge. CA’s primary work is the conduct and administration of examinations in schools and for persons who are not members of the University. CUP is the University’s publishing house, dedicated to publishing for the advancement of learning, knowledge, and research worldwide.

The Associated Trusts are separately constituted charities. They are deemed to be subsidiary undertakings of the University since the University appoints the majority of the trustees for each Trust. The purpose of these Trusts is to support the University by enabling persons from both within and outside the United Kingdom to benefit from education at the University through the provision of scholarships and grants.

Financial results for the year

The results for the Group for the year ended 31 July 2018 are summarized in Table 1:

Table 1	2017–18	2016–17	Change
	£m	£m	%
Income	1,965	1,870	+5%
Expenditure	(1,911)	(1,807)	+6%
Surplus before other gains and losses	54	63	(14)%
Gain on investments	219	407
Taxation	(3)	(4)
Surplus for the year	270	466	(42)%
Actuarial gain	122	26
Profit on acquisition of Foundation	2	–
Loss on foreign currency translation	(3)	–
Total comprehensive income for the year	391	492	(21)%

The Group’s financial position remains strong but, at a time of rising costs and declining public investment, careful control of costs, improving efficiencies and identifying new revenue streams remain key priorities. Major challenges include: the lack of affordable housing in Cambridge making it increasingly difficult to recruit and retain the best staff and students, the risks arising from Brexit-related uncertainty, the likely increases to pay and pension costs, and the potential for changes to government policy impacting student fees.

The 2017–18 financial operating performance was satisfactory with a surplus before other gains and losses of £53.7m on total income of £1,964.8m. For the same financial period, the Group generated a total comprehensive income of £390.8m (2016–17: £492.3m) and managed total net assets of £5.2bn.

Total income reflects continuing growth year on year with an increase of 5% compared to 2016–17 levels. At the same time, total donations raised by the Dear World, Yours Cambridge campaign reached £1.2bn. The Cambridge University Endowment Fund (CUEF) has also delivered another year of stable performance achieving a return of 8.8% for the year ended 30 June 2018. Investment by the University in its capital infrastructure continued during 2017–18 with £317.9m invested in fixed assets, software and investment property over the period.

Reported surplus for the year

The statement of comprehensive income reflects a surplus for the year of £269.6m (2016–17: £466.4m), including donations received for permanent endowment and capital purposes, as well as contributions from both CA’s and CUP’s trading activities. Whilst overall the surplus is £196.8m lower than last year, this is predominantly driven by lower investment gains. In 2017–18 gains on investment were £219.0m which compares to £407.1m in 2016–17. The value of invested assets particularly within the CUEF is inherently volatile, and this figure is likely to fluctuate year on year. In addition, during 2017–18 the University also recognized significant revaluation gains and losses in respect of certain investment properties (most notably West and North West Cambridge – see Note 21 to the Accounts). This resulted in a net devaluation of £31.1m being recognized which reduced the overall gains on investment accordingly.

Other key factors that contributed to the surplus for the year include:

•Growth in revenue generating activities partially offset by increased staff costs

•Improved levels of cost recovery on certain categories of externally-funded research

•New endowments received for funding key posts and scholarships.

The consolidated position comprises three main segments: (i) core academic activities, Trusts, and subsidiary activities of the University; (ii) the assessment activities carried out by CA; and (iii) the publishing activities carried out by CUP. Within the Group there are a number of intra-group transactions, principally the financial and other support from CA and CUP for the University’s academic activities. Table 2 gives segmental information, which is considered in further detail in Note 17 to the accounts:

Table 2		Total income 2018 £m	Expenditure 2018 £m	Investment gains 2018 £m	Tax 2018 £m	Surplus for the year 2018 £m
HEI, Trusts, and others		1,259	(1,245)	194	(1)	207
Cambridge Assessment		442	(411)	21	(1)	51
Cambridge University Press		319	(309)	4	(1)	13
		2,020	(1,965)	219	(3)	271

Financial support to the University from Cambridge Assessment		(26)	26	–	–	–
Transfer of assets from Cambridge Assessment to the University		(24)	24	–	–	–
Financial support to the University from Cambridge University Press		(5)	4	–	–	(1)
As per the reported financial statements		1,965	(1,911)	219	(3)	270

Adjustment to reflect the element of Cambridge University Endowment Fund distributions funded out of long-term capital growth
	HEI, Trusts, and others	71	–	(71)	–	–
	Cambridge Assessment	7	–	(7)	–	–
	Cambridge University Press	1	–	(1)	–	–
To restate onto a distribution basis		79	–	(79)	–	–
Adjusted distribution basis		2,044	(1,911)	140	(3)	270

		Total income 2017 £m	Expenditure 2017 £m	Investment gains 2017 £m	Tax 2017 £m	Surplus for the year 2017 £m
HEI, Trusts, and others		1,166	(1,159)	371	–	378
Cambridge Assessment		413	(365)	33	–	81
Cambridge University Press		318	(310)	3	(4)	7
		1,897	(1,834)	407	(4)	466

Financial support to the University from Cambridge Assessment		(24)	24	–	–	–
Financial support to the University from Cambridge University Press		(3)	3	–	–	–
As per the reported financial statements		1,870	(1,807)	407	(4)	466

Adjustment to reflect the element of Cambridge University Endowment Fund distributions funded out of long-term capital growth
	HEI, Trusts, and others	70	–	(70)	–	–
	Cambridge Assessment	7	–	(7)	–	–
	Cambridge University Press	1	–	(1)	–	–
To restate onto a distribution basis		78	–	(78)	–	–
Adjusted distribution basis		1,948	(1,807)	329	(4)	466

Total comprehensive income for the year is £390.8m (2016–17: £492.3m) benefitting from an actuarial gain on pension scheme liabilities of £122.5m (2016–17: £26.3m) and profit on acquisition of the PHG (Genomics and Population Health) Foundation of £1.6m partly offset by losses on foreign currency translation of overseas subsidiary undertakings of £(2.9)m. On 1 April 2018, the University became Trustee of the PHG Foundation and subsequently has consolidated its net assets in these financial statements. As nil consideration was paid for these net assets the resultant profit has been recognized through the statement of total comprehensive income.

Income

The Group’s income increased by £94.9m (up 5%) from £1,869.9m to £1,964.8m. The Group has growing, diversified sources of revenue providing operational stability and resilience with a compound growth of 6.8% since 2012. Apart from funding body grants and income from donations and endowments, each category of income grew in 2017–18:

•Sponsors of research projects continue to be the single largest source of income for the University. Research grants and contracts activity increased revenues by some 13% to £524.9m compared to 2016–17 levels. The areas of most growth include funding from Research Councils which increased by 19% to £174.9m, UK-based charity funded research income which increased by 7% to £152.7m, and funding from other bodies (including private donors such as the estate of Ray Dolby) which increased by 36% to £71.3m. The mix of other categories of sponsors remained broadly similar.

•Revenues from CA and CUP represent the next largest sources of Group income and in aggregate totalled £745.5m (2016–17: £722.3m) which amounts to 38% of total revenues for the year.

•Tuition fees and education contracts totalled £295.1m, up by 7%, principally due to an increase in student numbers and increases in non-regulated fee rates.

•Funding body grants from the Higher Education Funding Council for England (HEFCE) and latterly from the Office for Students (OfS) reduced by 3% to £173.6m. An increase in museum funding of £2.1m was partly offset by a reduction in the recurrent research grant of £0.2m and further reductions in capital grants of £7.4m. Funding from teaching grants was broadly held at 2016–17 levels.

•Other income of £142.1m increased by 9%, including improved property rental income.

•Donations and endowments received were £63.8m, (2016–17: £79.1m).

•Investment income is an important component of the University’s funding mix. Provided by the Group’s financial investments, in particular the CUEF, investment income grew from £17.9m to £19.8m. The CUEF’s distribution (available for spending on operations) exceeded the income received in the year from its underlying investments by £79.1m. On a ‘distribution basis’, investment income was £98.9m.

Examination and assessment services are carried out by CA through its three exam boards: Cambridge Assessment English, Cambridge Assessment International Education, and Oxford Cambridge and RSA Examinations (OCR). CA’s international businesses now account for over 60% of CA’s income. Total examination and assessment income in the year to 31 July 2018 increased by 5% to £432.5m.

Overall Publishing income from publishing services in the period rose by 1% to £313.0m. Publishing service revenue incorporates CUP’s income from the sales of educational and scholarly books, e-books, journals, applications, and related services through its three publishing groups: Academic (research books, advanced learning materials, and reference content as well as journals); Cambridge English Language Teaching (materials for both adults and students); and Education (teaching materials for schools and advice on educational reform). Around 90% of CUP sales arise outside the United Kingdom.

Research

The Group’s 2017–18 research income increased to £524.9m from £466.0m in the previous year, with the single largest contribution being received through Research Councils’ grants of £174.9m. Research income from sources other than UK Research Councils was £350.0m. Of this, £152.7m came from UK-based charities, £126.2m from overseas and EU sources, and £71.1m from other UK sources. These figures recognize the initial tranche of a major research donation from the estate of Ray Dolby, representing the largest single donation in the University’s history. The donation is earmarked for the new Cavendish III facilities, now under construction.

The University receives recurrent funding from the UK government in the form of grants for teaching, research, and other activities. Prior to 1 April 2018, the Higher Education Funding Council for England (HEFCE) was responsible for calculating such funding for research in different subjects and then allocating the total for each subject between institutions. With effect from 1 April 2018, this function has been undertaken by UK Research and Innovation (UKRI). In 2017–18, the University was also allocated £124.9m of Quality-Related (QR) funding, representing 7.8% of the overall grant award for England.

Donations

The University receives benefactions and donations from a variety of sources including trusts and foundations, corporations, and individuals (both alumni and non-alumni). Donations and endowment income recognizes all new endowments, donations for capital in respect of heritage assets, and other restricted and unrestricted donations available for current spend. In aggregate over the period ended 31 July 2018, donations and endowment income totalled £63.8m (2016–17: £79.1m) of which approximately £10m (2016–17: £12m) was of a capital nature (i.e. donations for fixed assets and heritage assets).

The Academic University now benefits from a dedicated professional team of over 120 development professionals, working in alignment with the University’s priorities in raising endowment and investing in cutting-edge research, scholarships, and facilities. The run rate for philanthropic donations to the collegiate University is fast approaching £100m p.a. and our £2bn Dear World, YoursCambridge campaign has already surpassed the previous campaign’s £1.2bn commitments. Looking at international competitors’ philanthropy programmes, there is further potential to grow donations significantly.

The Group receives and generates significant other income including: property rentals, contributions from health and hospital authorities, residences and catering, and income from intellectual property managed primarily through Cambridge Enterprise Limited. Total other income increased by 9% to £142.1m.

Investment income

The Cambridge University Endowment Fund is an investment vehicle which enables the University to pool assets held on trust and invest them for the very long term, gaining from scale, diversification, and professional management. The CUEF is managed by Cambridge Investment Management Limited under investment and distribution policies set by the Council on the advice of its Investment Board. The CUEF is open to the University and to the Colleges and charitable trusts associated with the University. At 31 July 2018, there were 16 College investors. The CUEF aims to preserve and grow the value of the perpetuity capital of its investors, while providing a sustainable income stream. Its long-term investment objective is to generate an average 5.25% return over the Retail Price Index (RPI), while judiciously managing the risk taken by utilising diversification in investment strategies, asset classes, and managers. The distribution policy is based on underlying capital values, ensuring the distribution is directly linked to the performance of the Fund without depleting capital originally invested. At 31 July 2018, the net asset value of the CUEF was £3,253m. On a ‘distribution basis’, investment income to the University was £98.9m.

The CUEF reports its performance to 30 June 2018. During the year ended 30 June 2018, the CUEF had an investment return of 8.8% (2016–17: 18.8%). The Fund has returned an annualized 11.64% return over a rolling five-year period. This exceeds the long-term investment objective over this period of 7.68% annualized. The value of the CUEF at 30 June 2018 was £3,193m (2016–17: £2,959m) of which £2,786m (2016–17: £2,690m) is attributable to the University.

Public equities comprise 59% of the CUEF as at 30 June 2018 and have been the main driver of returns in both the long and short term. Investments in private equity have also begun to make a significant impact. Credit exposure has evolved over time and will continue to do so as opportunities arise.

The asset allocation and investment selection in the Fund is aimed at optimizing the expected long-run total return, bearing in mind expected future volatility. The CUEF’s asset allocation at 30 June 2018 is shown below. Over the course of 2017–18, allocations to these broad asset classes did not change significantly.

Public equity	59%
Private investment	9%
Credit strategies	6%
Absolute returns	10%
Real assets	11%
Fixed interests / Cash	5%

Other investment assets generated investment income of £1.9m during 2017–18. Some long-term investments are held outside the CUEF. These include certain investment properties in Cambridge, other securities, and equity investments in spin-out companies overseen by the University’s technology transfer company Cambridge Enterprise Limited and through its holding in Cambridge Innovation Capital.

The majority of the University and Group’s current asset investments are invested in the deposit pool. This pool is managed by the Finance Division according to guidelines on diversification, exposure, and credit quality as agreed by the Finance Committee. The investments are principally short-term deposits with banks and similar institutions.

Expenditure

The Group’s total expenditure in 2017–18 of £1,911.1m was £104.6m (6%) higher than in the prior year, primarily reflecting increased staff costs across both research and other activities. Expenditure comprises: staff costs (including research) at 44%; other operating expenses at 49%; depreciation at 5%; and interest and other finance costs at 2%. The main changes compared to 2016–17 levels reflect:

•Higher staff costs increasing by 6% to £849.6m. The average number of staff rose by 5% to 16,736, with increases in both pay and University Superannuation Scheme (USS) pension contributions. The pay costs in part reflect the phased integration into the University of staff formally associated with the Medical Research Council (MRC).

•Other operating expenses increased by 5% to £933.5m, including higher grant-funded research costs.

•Depreciation increased from £89.9m in 2016–17 to £94.4m as a result of significant fixed asset additions during the year.

•Interest payments rose from £31.4m in 2016–17 to £33.6m (up 7%). The financing costs of pension and retirement benefits account for £18.8m of the total (up 5%) and the balance relates to interest on the University’s bond liabilities. The main driver of the increased costs relates to one-off financing costs associated with the issue of the new bonds in June 2018 of £0.9m.

•The ongoing annual interest charges associated with all of the University’s bond liabilities is estimated at £21m p.a., although this will be impacted by changes in the Consumer Price Index (see Note 15 to the Accounts).

Cash flow and financing

After adjusting for non-cash charges such as depreciation and amortization, the underlying net cash inflows from operating activities of £78.7m increased ahead of the associated surplus reflected in the Statement of Comprehensive Income.

Against this must be set the demands of capital expenditure on the operational estate and equipment and IT, which in 2017–18 totalled £269.6m. The activities of Cambridge Assessment (CA) and Cambridge University Press (CUP) further the mission of the University in important ways and (to a lesser extent in the case of CUP) are also important sources of funds for the Academic University. In the financial year to 31 July 2018, examination and assessment services produced a surplus before investment gains of £88.1m, while publishing services produced a £15.0m surplus in the same period. Some 30% of these surpluses are transferred to the University and typically used towards funding capital expenditure.

The overall net cash inflow for the Group was £574.0m for the year, reflecting the proceeds from the Bonds issue partly offset by the continued progression of the University’s strategic capital investment programme.

As at 31 July 2018, the Group had bank overdrafts of £14.0m and outstanding bond liabilities totalling £937.1m.

Net assets

The following table shows the movement in net assets of the Group analysed into its three main segments:

Table 3	HEI, Trusts, and others	Assessment	Press	Eliminations	Group
	£m	£m	£m	£m	£m
Net assets at 31 July 2017	4,182	595	86	(16)	4,847
Surplus for the year before tax	208	52	14	(1)	273
Taxation	(1)	(1)	(1)	–	(3)
Surplus for the year (Table 2)	207	51	13	(1)	270
Actuarial gain	99	–	23	–	122
Loss on currency translation	–	–	(3)	–	(3)
Profit on acquisition of Foundation	2	–	–	–	2
Net assets at 31 July 2018	4,490	646	119	(17)	5,238

The Group’s net assets totalled £5,238m (2016–17: £4,847m) as at 31 July 2018. The increase in net assets largely relates to increases in the value of investments, reduced pension liabilities resulting from a significant actuarial gain on the University’s contributory pension schemes and expenditure on fixed assets.

Fixed assets

The University continued to deliver against its prioritized capital investment programme, focusing on maintaining and enhancing its world-class facilities and infrastructure in order to safeguard its position as a global leader in education and research. However, cash generated from the University’s own activities continues to be insufficient to deliver significant elements of programme. For this reason, philanthropy and other sources of capital funding are likely to become increasingly important to the future programme’s success.

In the year 2017–18, fixed asset additions were £269.6m, with capital expenditure on land and buildings of £191.8m, and further expenditure of £57.2m on equipment, and £20.6m on software projects. The University projects a reduction of annual capital spend to sustainable levels as it completes the extensive capital programme of the last few years.

Investment of £234.2m was made in the academic estate across a wide range of building projects, with significant expenditure on major laboratory facilities on the Cambridge Biomedical Campus and completion of the new off-site storage facilities for the University Library. CA has now substantially completed a major investment in its technical infrastructure and its new office building alongside CUP’s existing headquarters. The building accommodates all Cambridge-based staff in a single location, with additional space for planned growth.

The University has an ambitious, academically-prioritized programme of capital investment stretching forward into the coming years. Capital investments include the Cambridge Biomedical Campus, the New Museums site, the Old Addenbrooke’s site, and at the West Cambridge site (including the new Cavendish III Laboratory now in development and the phased relocation of the Department of Engineering).

On the wider front, the University’s estates strategy is reshaping the City. Focused on the major campus areas of West and North West Cambridge, the Biomedical Campus, and the City Centre, the estates strategy is supporting both continued academic excellence and the development of housing, transport, and childcare facilities for staff and their families. The University continues to develop its site at North West Cambridge, now called Eddington, contributing affordable and high-quality housing for postdoctoral research staff and others at the beginning of their careers with the University. Phase 1 is now substantially complete and provides University housing for letting to staff, market housing for sale and let, a primary school, supermarket, retail units, and further sites for research. Phase 1 involved a peak cumulative investment by the University approaching £380m in 2017–18, as the bulk of rental income streams began.

Work is now well under way to optimize the plans for a second phase of development at North West Cambridge. The majority of the completed Phase 1 North West Cambridge development (including infrastructure, community facilities, and public realm to support future expansion) has now been reclassified to Investment Property on the balance sheet as at 31 July 2018. This reclassification has required a formal valuation, reviewed with our external auditors. As noted earlier, the primary objective of the development was the strategically important provision of attractive yet affordable housing solutions for key workers and postdoctoral staff. The rental model agreed with Cambridge City Council provides a level of subsidy from market rates. The University has consciously made development decisions that ensure high-quality design and materials specification and also meet the University’s ambitious environmental and sustainability objectives. These decisions result in a relatively high-cost solution. It is important to state that the Phase 1 development was never designed to maximize commercial returns. The high-quality and environmentally-sustainable build specification, combined with a deliberately sub-market rental model, has resulted in a net revaluation of £(50.4)m below the book value. This devaluation adjustment is a measure of the University’s strategic investment in the future success and ultimate value of this exciting new quarter of the City of Cambridge.

Pension schemes

The costs and risks of the pension schemes to which the Group is exposed remain of concern, in particular in relation to the Universities Superannuation Scheme (USS). The USS is a multi-employer scheme (Note 28 in the Accounts describes how the scheme is reflected in these statements). The USS triennial actuarial valuation as at 31 March 2017 indicated a material increase in the scheme deficit, with the cost of future service benefits higher than in the previous valuation. Changes to scheme contributions and/or benefits are likely to be required. At the date of publishing this Report, work continues between the scheme trustees and the employers through Universities UK (UUK) towards a satisfactory and equitable resolution. Meanwhile, a process of staff consultation on the scheme’s default ’cost-sharing’ mechanism is in progress in parallel with a consideration of the outputs of the Joint Expert Panel’s review, as all parties seek an optimal long-term solution.

The Group has three other major schemes: the Cambridge University Assistants’ Contributory Pension Scheme (CPS) for assistant staff and two defined benefit schemes for staff of Cambridge University Press. The CPS is a hybrid-defined benefit scheme with a defined contribution component. The scheme remains open to new joiners and future accrual. The Group is making deficit-recovery contributions to the scheme of £14.6m per annum until 2019. The most recent triennial valuation of the CPS was at 31 July 2015 and is currently under review.

The Cambridge University Press defined benefit schemes are closed to new joiners and, following the triennial valuation of the two UK schemes as at 1 January 2016, are subject to a recovery plan projecting an aggregate deficit contribution of £25.3m to be funded by 31 July 2022.

Included in the balance sheet as a liability is the present value of future contributions payable to the USS, to the extent that they represent recovery payments towards covering the deficit in the USS. The liability recognized with this treatment was £118.9m as at 31 July 2018 (2016–17: £120.1m). The CPS and the University Press schemes (being single-employer schemes) are included in the financial statements following FRS102 and the total net pension liability is £516.2m (2016–17: £619.0m), of which £73.4m relates to the University Press schemes. Pensions are discussed further in Note 34 to the Accounts.

The Group’s current service costs and deficit-recovery contributions as reflected through staff costs in the year 2017–18 were £141.8m. It is recognized that forward employer contributions are likely to increase in the medium term. While the University faces pressure on its pension schemes’ costs and risks (in particular, on the USS) and on staff costs more generally given the pay restraint of recent years, it is relatively well positioned in the sector to handle these potential challenges in the short term through the reprioritisation of funds.

Long-term borrowings

In 2012, the University issued £350m of 3.75% unsecured bonds due in October 2052. The bonds are listed on the London Stock Exchange. The net proceeds of the issue (£342m) were applied in the University’s investment in the North West Cambridge Phase 1 development.

During 2017–18, the decision was made to capture a market opportunity of securing additional external finance at historically low interest rates, providing the University with options to further develop its non-operational estate (i.e. projects outside those directly enabling core academic teaching and research activities). The University successfully raised £600m in external finance through two tranches:

•£300m 60-year (2078) bullet repayment fixed-rate Bond at coupon 2.35% p.a.

•£300m 50-year (2068) CPI-linked Bond at coupon 0.25% p.a., amortizing from year 10 and capped at 3% and floored at 0%.

This very low-cost funding for the University was secured through the largest ever Consumer Price Index (CPI)-linked tranche and the lowest ever coupons on UK Higher Education sector deals for both fixed-rate and CPI-linked tranches. The order book was notable in terms of the high number and quality of investors.

Proceeds from the new bonds will provide added flexibility in the continuing support of our academic mission and student interest through the development of income-generating projects in the non-operational estate, including further strategic housing. Such income-generating projects are of high strategic importance. They deliver significant indirect benefits essential to the University’s primary mission while also addressing the critically important housing challenge, providing alterative income streams at a time of significant financial volatility, and adding significant long-term value to the University’s academic mission and student interest.

Financial outlook

The University is confident in its long-term financial sustainability. The University seeks to manage its sources of revenue effectively and its costs efficiently, in order to generate the long-term cash flow needed to ensure it maintains a pre‑eminent position amongst the world’s leading universities.

The University’s single largest source of funding – income from research grants and contracts – is projected to continue in steady growth, despite the uncertainties surrounding future European research funding following Brexit and the restructuring of UK Research Councils. Fee income is expected to increase in line with a long-term upward trend in postgraduate student numbers, although this is somewhat offset by a freeze in Home/EU undergraduate fees and the awaited outcome of the government’s post-18 review of education and funding.

In a highly competitive marketplace, Cambridge Assessment’s international activities and income are expected to continue to grow over the next five years, given continued investment in research, technology, product development, and staff. Cambridge University Press also anticipates steady revenue growth in the face of global economic and competitive challenges and evolving customer needs. Increasing strategic alignment, greater joint investment between CA and CUP, and closer working with the Academic University are already starting to yield benefits.

While the long-term growth objective for the CUEF remains unaltered, elevated asset valuations as at 31 July 2018 mean that medium-term investment returns from this point are unlikely to reach the long-term target levels.

Principal risks and uncertainties

These are uncertain times for both the Higher Education sector and the global economy. As the University’s principal executive body, the University Council takes primary responsibility for ensuring the University has an effective and balanced enterprise risk-management framework in place. Business risk-management is at the core of the University’s overall system of internal controls and is designed to focus on and mitigate, to every extent possible, the most significant risk events that might adversely or beneficially affect the University’s ability to achieve its policies, aims, and objectives.

The University follows good practice in considering risk appetite in the context of the University’s academic mission, seeking to ensure an appropriate balance between risk aversion and opportunity capture. The business risk-management approach identifies and appraises risks and opportunities in a systematic manner and is integrated and embedded with the University’s planning, investment decision-making, and operational management processes. Accountability and responsibility for risk mitigation is assigned to management across the devolved organization. Management are encouraged to implement good risk-management practice across the University. The University makes conservative and prudent recognition and disclosure of the financial and non-financial implications of risks.

The Risk Management Strategy is implemented through a Risk Management Policy, communicated throughout the University. The Risk Steering Committee (see the section on Corporate Governance on p. 210) advises the Council, oversees operational risk management across the University and maintains the University’s Key Risk Register, identifying and quantifying fundamental risks, and ensuring arrangements to manage those risks are put in place and their effectiveness reviewed at least annually. Additionally, the Audit Committee receives an annual opinion from the internal auditors on the adequacy and effectiveness of the University’s arrangements for risk management, control, governance, and Value For Money and provides assurance to Council on the adequacy and effectiveness of the University’s arrangements for risk management.

The principal financial risks and uncertainties of the University are broadly consistent year-on-year: its long-term ability to maintain and develop its research funding, attract the best staff and students, and maintain, refresh, and renew its physical facilities. The activities of Cambridge Assessment and Cambridge University Press are subject to the pressures of international competition. CA and CUP balance the need to generate sufficient net income to thrive with the need to support the University’s core academic activities wherever possible.

The University remains comparatively well positioned in the sector to deal with financial risks. Revenue streams are well diversified, both in terms of revenue line and geographically. The fact that the University does not seek to ‘profit maximize’ means that there are additional sources of revenue open that it has chosen not to maximize. These sources of revenue provide significant resilience, as does the strong and liquid balance sheet that guards against short-term shocks and would allow time to make the necessary operating adjustments.

Key strategic risk areas identified include:

Risk area

Responses and actions

Reputational and financial impact through failure to meet OfS and other stakeholder expectations for widening student access; student dissatisfaction in the quality of their educational experience; failure to recruit the very best undergraduate and postgraduate students; failure to ensure that educational facilities are of an acceptable standard for a world-class educational institution.

– Engagement with Colleges which are responsible for undergraduate admissions.

– Fundamental review of widening participation expenditure and development of new initiatives.

– Launch of the Student Support Initiative.

– Student Recruitment Strategy.

– Review of curricula and methods of teaching and examination.

– Preparation and launch of the Education Strategy.

Changes to government policy lead to further cuts in financial support and provision for education. Negative outcomes from the ongoing government review of post-18 education and funding in relation to student tuition fees. Negative impact or delays to funding through the formation of UK Research and Innovation, which will bring together the current Research Councils, and the increasing emphasis on national research institutes which might affect restructuring of Research Councils.

– The University continues to engage with government directly and through the HE sector to influence policy in support of its education and research mission. The University also continues to diversify its income sources.

– The College dimension of education provision is distinctive and successful, but it is costly to deliver. The University continues to review ways of controlling costs, seeking value for money gains, and opportunities to develop the mix of students over time, while maintaining the highest quality of education and without compromising on admission standards.

– The University will continue to develop strategic relationships with research funders, including Research Councils and industrial partners.

Brexit outcomes restrict access to movement and funding of EU students and staff. Reduced access to current levels of EU Research income. Wider economic downturn impacts future sources of revenue and availability of indirect labour and materials, disrupting the capital expenditure programme.

Areas of high risk are: EU Research Funding, Immigration Costs, Staff Counselling, EU Student Recruitment, Student Funding, and Communications.

– The ongoing uncertainties and likely direct and indirect human and financial consequences of the UK’s imminent exit from the EU are of significant concern. The University and the HE sector continues to engage with Government on all Brexit issues.

– The University has established strategic and operational-level working groups to review and develop plans to ensure that the University maintains and enhances its position as the external environment changes. The University has agreed interim measures to support meeting immigration costs for existing EEA staff.

– Loss of European Research Council (ERC) funding would likely impact on the University’s ability to engage leading researchers. HM Treasury has committed to guarantee existing ERC funding commitments.

Increasingly competitive landscape for all forms of research funding.

– The University is investing significant resources in preparation for the upcoming REF21 funding round and continues to enhance the capabilities and capacity of its Research Office in support of the ongoing processes for grant application and management.

– The University has a growing focus on industrial research collaboration with international partners, focusing on finding solutions to the major global challenges.

Both CUP and CA operate in challenging international markets where global economic conditions may adversely impact their financial performance, reducing the funds available for reinvestment in the University’s core academic mission.

The University has an increasing international footprint of activities. International tax laws are narrowing the distinction between supporting activities and permanent establishments, leading to the potential for more overseas activity to become taxable.

– The University’s businesses look to diversify their product offerings, develop new revenue streams and deepen existing capabilities.

– A joint Board now provides oversight of these businesses and is developing an overarching strategy to ensure they continue to thrive by exploiting business synergies and new distribution channels.

– The University continues to monitor the key risks associated with its combined international activities.

– The Strategic Partnership Office coordinates functional due diligence of proposed new international activities, sharing best practice.

– The University leverages specialist external taxation and legal advice in support of its core internal capabilities.

Inability to attract and retain the best academics and adequately resource professional and administrative staff through a failure to compete with escalating levels of international reward levels, growth in the University’s complexity and scale, and high costs of living and housing in the Cambridge area.

In particular, there is a risk that the USS triennial revaluation leads to increased employer and employee contributions to fund a valuation deficit.

– The University continues to focus on pensions and pay as key components of a competitive employment proposition, seeking economy, efficiency, and effectiveness in its operations to accommodate pay and pension inflation as necessary.

– The University is also focusing on the provision of transport, nursery schooling, and housing, with the Eddington development designed to ease pressures.

– The USS’s triennial valuation, currently under review, indicates an increased deficit and likely materially increased cost of provision of future defined benefits. The University is working with the sector to explore sustainable long-term options that might provide employers and staff with better value for money and more flexibility.

Failure to maintain adequate risk management of Health & Safety related risks and compliance with associated regulations across the distributed University estate and activities leads to personal injury / fatality or significant loss of facilities.

– The University has policies and procedures in place to support appropriate risk management and compliance across the organisation. However, the devolved nature of the University and diverse nature of associated direct and indirect activities represent a challenge in ensuring full assurance coverage.

Sub-optimal management of long-term financial sustainability leads to erosion of financial health with enforced curtailment of investment in capital and operational requirements in support of academic priorities.

Declines in the value of long-term investments leads to reduced financial strength.

– The University continues to explore new revenue streams, modernize processes to seek cost efficiencies, and ensure its capital programme is fully funded ahead of new commitments being made.

– The University is investing further in its Development and Alumni Relations activities. A new campaign with a target to raise £2 billion across collegiate Cambridge was launched in October 2015 and has already exceeded £1.2bn.

– The professionally managed CUEF has allocations across a diversified range of asset classes, sectors, styles, and geographies with a broad equity focus, designed to be resilient over the long term.

Inadequate long-term maintenance and development of the academic and non-academic estate and supporting infrastructure.

– The University has an ambitious capital building programme and is actively sharpening the prioritization and management of its strategic investments.

– The University seeks to optimize available funding through maximizing associated capital grants and philanthropic resources and by increasing net operating cash flows.

Significant data breach, failure to comply with GDPR, or major information security event (cyber security) leads to loss of confidential / commercially sensitive information or failure of IT infrastructure.

– The University has invested resources to understand its data assets and the security landscape across a devolved institution, and to enable assessment of the risks associated with loss of confidential and commercially sensitive information.

– The University is developing an updated Cyber Strategy to deliver enhanced security controls across the University, noting that this is a challenge in more devolved areas of control and in an environment of increased and changing threats.

Anthony Odgers
Chief Financial Officer

CORPORATE GOVERNANCE

1. The following statement is provided by the Council to enable readers of the financial statements to obtain a better understanding of the arrangements in the University for the management of its resources and for audit.

2. The University endeavours to conduct its business in accordance with the seven principles identified by the Committee on Standards in Public Life (selflessness, integrity, objectivity, accountability, openness, honesty, and leadership) and within the general principles of the Higher Education Code of Governance, which has been provided by the Committee of University Chairs. Further information is given at paragraph 9 below.

Under the Statutes, the Governing Body of the University is the Regent House, which comprises the resident senior members of the University and the Colleges, together with the Chancellor, the High Steward, the Deputy High Steward, the Commissary, and the external members of the Council. The approval of the Regent House is required for changes to the University’s Statutes and Ordinances and for any other matter for which in Statute or Ordinance the University’s approval must be obtained; the Council and the General Board may also decide to seek the Regent House’s approval on questions of policy which are considered likely to be controversial. The Council of the University is the principal executive and policy-making body of the University, with general responsibility for the administration of the University, for the planning of its work, and for the management of its resources. The membership of the Council includes four external members, one of whom chairs the Audit Committee (see paragraphs 4 and 7 below). The Statutes provide for the appointment of a Deputy Chair of the Council, normally one of the external members, to take the chair as necessary or when it would be inappropriate for the Vice-Chancellor to do so, in particular in relation to the Vice-Chancellor’s own accountability. The General Board of the Faculties is responsible for the academic and educational policy of the University.

3. The University is an exempt charity and is subject to regulation by the Office for Students (OfS). The members of the University Council are the charity trustees and are responsible for ensuring compliance with charity law.

4. The Council is advised in carrying out its duties by a number of committees, including the Finance Committee, the Audit Committee, the Planning and Resources Committee, the Remuneration Committee, the Investment Board, and the Risk Steering Committee. The Finance Committee is chaired by the Vice-Chancellor and advises the Council on the management of the University’s assets, including real property, monies, and securities, and on the care and maintenance of all University sites and buildings. The Audit Committee, which has a majority of external members, governs the work of the Internal and External Auditors, reporting on these matters directly to the Council. The Planning and Resources Committee is a joint committee of the Council and the General Board. Its responsibilities include the preparation of the University’s budget. The Remuneration Committee is chaired by an external member of the Council and advises the Council on the remuneration of senior staff in the University. The Investment Board, which has a majority of external members, advises the Council on the management of the University’s investment assets. The Risk Steering Committee is responsible to the Council for the identification of the major corporate risks and their management. The West and North West Cambridge Estates Board reports to the Council on its oversight of the development of two key University sites. The Press and Assessment Board advises the Council on matters concerning Cambridge University Press and Cambridge Assessment.

5. Under the terms of the OfS’ Terms and Conditions of funding for higher education institutions and the Terms and Conditions of the Research England grant between the University and the OfS, the Vice-Chancellor is the Accountable Officer of the University.

6. Under the Statutes, it is the duty of the Council to exercise general supervision over the finances of all institutions in the University; to keep under review the University’s financial position and to make a report thereon to the University at least once in each year; to recommend bankers for appointment by the Regent House; and to prepare and publish the annual accounts of the University in accordance with UK-applicable accounting standards such that the accounts give a true and fair view of the state of affairs of the University.

7. It is the duty of the Audit Committee to keep under review the University’s risk management strategy and implementation; to keep under review the effectiveness of the University’s internal systems of financial and other controls and governance; to advise the Council on the appointment of external and internal auditors; to consider reports submitted by the auditors, both external and internal; to monitor the implementation of recommendations made by the internal auditors; to satisfy itself that satisfactory arrangements are adopted throughout the University for promoting Value for Money (economy, efficiency, and effectiveness); to monitor the University’s management and quality assurance of data submitted to the OfS and other bodies; to establish appropriate performance measures and to monitor the effectiveness of external and internal audit; to make an annual report to the Council and to the OfS; to receive reports from the OfS and other authorities. Membership of the Audit Committee includes as a majority five external members (including the chair of the Committee), appointed by the Council with regard to their professional expertise and experience.

8. There are Registers of Interests of Members of the Council, the General Board, the Finance Committee, and the Audit Committee, and of the senior administrative officers. Declarations of interest are made systematically at meetings. For the academic year 2017–18, members of the Council were asked to self-certify against the OfS indicators of a ‘fit and proper person’.

9. The University is a self-governing community whose members act in accordance with the seven principles of public life (see paragraph 2 above) and in pursuit of the objectives and purposes of the University as set out in its Statutes. The University complies with most but not all of the voluntary Higher Education Code of Governance published in December 2014 and revised in June 2018 by the Committee of University Chairs. In particular the Vice-Chancellor is chair of the Council, which does not have a majority of external members, and the Council is subject to the statutory authority of the Regent House.

MEMBERS OF THE COUNCIL AND THE CHARITY TRUSTEES DURING THE YEAR ENDED 31 JULY 2018

Position	Name

The Chancellor:	Lord Sainsbury of Turville

The Vice-Chancellor:	Professor Sir Leszek Borysiewicz (until 30 September 2017) Professor Stephen Toope (from 1 October 2017)

Heads of Colleges:	Dr Anthony Freeling Mr Stuart Laing (until 31 December 2017) The Reverend Dr Jeremy Morris (from 1 January 2018) Professor Michael Proctor Professor Susan Smith

Professors and Readers:	Professor Ross Anderson Professor Nick Gay Professor Fiona Karet Professor Susan Oosthuizen

Members of the Regent House:	Dr Richard Anthony Dr Ruth Charles Dr Stephen Cowley Dr Jennifer Hirst (from 2 March 2018) Dr Nicholas Holmes Dr Alice Hutchings Dr Pippa Rogerson (until 12 January 2018) Dr Mark Wormald Ms Jocelyn Wyburd

Student members:	Ms Evie Aspinall (from 1 July 2018) Ms Daisy Eyre (until 30 June 2018) Ms Darshana Joshi (until 30 June 2018) Ms Umang Khandelwal (until 30 June 2018) Mr Marcel Llavero Pasquina (from 1 July 2018) Ms Sofia Ropek-Hewson (from 1 July 2018)

External members:	Professor Sir David Greenaway (from 1 October 2017) Mr Mark Lewisohn Mr John Shakeshaft Ms Sara Weller

The Chancellor, external members, student members, Mr Laing, Dr Morris, Professor Proctor (after 1 October 2017), Professor Smith, Dr Freeling, Dr Anthony, and Dr Wormald are not employees of the University. The other members of the Council are employees of the University. No member of the Council receives payment for serving as a member of the Council.

STATEMENT OF PUBLIC BENEFIT

The University is an exempt charity subject to regulation, with effect from 1 April 2018, by the Office for Students under the Higher Education and Research Act 2017; it was previously regulated by the Higher Education Funding Council for England.

The University reports annually on the ways in which it has delivered charitable purposes for the public benefit.

The Council, in reviewing the University’s activities in this regard, has taken into account the Charity Commission’s guidance on public benefit. The Council is satisfied that the activities of the University as described in these Reports and Financial Statements, and in the Annual Report of the Council, fully meet the public benefit requirements.

The mission of the University

The mission of the University is ‘to contribute to society through the pursuit of education, learning, and research at the highest international levels of excellence’. The University makes a significant contribution, through these activities, directly and most obviously to the advancement of education, research, and dissemination of knowledge.

Research

The University is widely recognized as one of the leading research universities in the world both in terms of quality and in terms of scope and breadth. Research is undertaken at the highest level across a wide range of areas. The University takes seriously its obligations to disseminate and make publicly accessible the outcomes of its academic research activities through publication, teaching, conferences, consultancy, and other knowledge transfer and outreach activities. It therefore contributes to public benefit through the continued advancement of knowledge across the sciences, medicine, arts, humanities, culture, and heritage.

A substantial proportion of the research undertaken in the University across the fields of clinical medicine, biomedicine, physics of medicine, and engineering leads directly to the advancement of health and the saving of lives. Research is also carried out in the area of sustainability, environmental protection, and improvement.

Research work in the University is focused at local, national, and international levels. The products of this research have a wide-ranging influence through the advancement of understanding and its application in scientific and technological advances, and through informing public debate on policy. The impact of the University’s research extends to governments, public sector bodies, and charities.

Education

The University’s research activities feed directly into its teaching at every level. Around 20,000 students, of whom 12,000 are full-time undergraduates, pursue courses across a wide range of disciplines. The quality of the education (and, as importantly, the educational experience) which the University provides is consistently recognized by the University’s status at or near the top of national and international rankings.

The University is committed to admitting students of the highest intellectual potential, irrespective of social, racial, religious, financial, or other considerations. The University works to ensure that individuals from all backgrounds can benefit from the opportunities afforded by a first-rate education and are not unreasonably excluded from those opportunities by the charging of fees. The University seeks to provide bursaries where necessary and undertakes outreach activities to improve participation by under-represented groups. Financial support is provided to students from overseas through University funds and by trusts associated with the University. Further information is available at https://www.cambridgestudents.cam.ac.uk/cambridgebursary and http://www.graduate.study.cam.ac.uk/finance/funding.

The University is aware that there are significant variations in the educational opportunities, information, and support available to individuals. It therefore invests significant resource and effort into its access and widening participation activities. The University encourages applications from people with disabilities and from mature students.

For the wider community a broad range of lectures, seminars, and courses provide the opportunity for members of the public to share in the University’s educational provision. The University’s Institute of Continuing Education offers short courses, and residential and summer schools.

The University is committed to providing those who participate in its educational programmes with the highest quality of teaching and pastoral, infrastructural, and academic support. It is fundamental to the University’s mission that its students are personally, academically, and professionally equipped to contribute positively to society. In this regard, the quality and depth of their student experience benefits them directly but also benefits the societies to which they will contribute, through their participation in the workforce and as informed and questioning citizens.

The wider applications of the University’s commitment to disseminating knowledge

The University’s publishing house, Cambridge University Press, contributes to the University’s commitment to make publicly accessible the outcomes of academic research activities in Cambridge and from across the world by publishing peer-reviewed academic material and other educational publications. Through Cambridge Assessment, the University develops and delivers a range of widely used and respected examinations, benefiting the UK and world-wide community by offering internationally recognized qualifications, raising aspirations, and transforming lives.

STATEMENT OF INTERNAL CONTROL

1. The Council is responsible for maintaining a sound system of internal control that supports the achievement of policies, aims, and objectives, while safeguarding the public and other funds and assets for which the Council is responsible, in accordance with the Statutes and Ordinances and the Office for Students’ (OfS) Terms and Conditions of funding for higher education institutions and the Terms and Conditions of the Research England grant.

2. The system of internal control is designed to manage rather than eliminate the risk of failure to achieve policies, aims, and objectives; it therefore provides reasonable but not absolute assurance of effectiveness.

3. The system of internal control is designed to identify the principal risks to the achievement of policies, aims, and objectives, to evaluate the nature and extent of those risks (including making an assessment of their likelihood of materialising and their impact), and to manage them efficiently, effectively, and economically on an ongoing basis. The review of risks considers business, operational, compliance, financial, and reputational risks. This approach is promulgated across the University’s institutions for consideration of institutional risks. This process was in place for the year ended 31 July 2018 and up to the date of approval of the financial statements, and accords with OfS guidance.

4. The Council is responsible for reviewing the effectiveness of the system of internal control. The following processes have been established:

(a)The Council meets for up to eleven ordinary meetings and two strategic meetings throughout the year to consider the plans and strategic direction of the University.

(b)The Council receives periodic reports from the Chair of the Audit Committee concerning internal control and the minutes of all meetings of the Audit Committee.

(c)The Council’s Risk Steering Committee oversees risk management. The Council receives periodic reports from the Chair of the Risk Steering Committee and an annual report from the Risk Steering Committee. The annual report sets out how risks are identified and evaluated and how risk management is embedded. It enables the Council to assess the effectiveness of the arrangements in place.

(d)The Audit Committee receives regular reports from the internal auditors, which include the internal auditors’ independent opinion on the adequacy and effectiveness of the University’s system of internal control and risk management, together with recommendations for improvement. Risk management is a standing item on the Audit Committee agenda and is the driving element in the design of the annual internal audit programme of work.

(e)The University provides information (primarily through web-based resources) to those who own or manage central or School risks.

(f)A system of indicators has been developed for the University’s key risks.

(g)A robust risk prioritization methodology based on risk ranking and cost-benefit analysis has been established.

The Council’s review of the effectiveness of the system of internal control is informed by the work of the internal auditors, Deloitte LLP.

5. The Council’s review of the effectiveness of the system of internal control is also informed by the work of the senior officers and the risk owners within the University, who have responsibility for the development and maintenance of the internal control framework, and by comments made by the external auditors in their management letter and other reports.

STATEMENT OF THE RESPONSIBILITIES OF THE COUNCIL

Under the University's Statutes and Ordinances it is the duty of the Council to prepare and to publish the annual accounts of the University in accordance with UK applicable accounting standards such that the accounts give a true and fair view of the state of affairs of the University.

The Council is responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the University.

In preparing the financial statements the Council is required to:

(a)select suitable accounting policies and then apply them consistently;

(b)make judgements and estimates that are reasonable and prudent;

(c)state whether applicable accounting standards have been followed;

(d)prepare the financial statements on a going concern basis unless it is inappropriate to presume that the University will continue to operate;

(e)ensure that income has been applied in accordance with the University’s Statutes and Ordinances, the Terms and Conditions of funding for higher education institutions, the Terms and Conditions of the Research England grant, and the funding agreement with the National College for Teaching and Leadership; and

(f)safeguard the assets of the University and take reasonable steps to prevent and detect fraud and other irregularities.

Independent auditors' report to the Council of the University of Cambridge (the 'University')

Report on the audit of the financial statements

Opinion

In our opinion, the University of Cambridge’s Group financial statements and University financial statements (the “financial statements”):

•give a true and fair view of the state of the Group’s and the University’s affairs as at 31 July 2018 and of the Group’s and University’s income and expenditure, gains and losses, changes in reserves and the Group’s cash flows for the year then ended;

•have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland”, and applicable law); and

•have been properly prepared in accordance with the requirements of the Statement of Recommended Practice – Accounting for Further and Higher Education and the requirements of the Office for Students’ (“OfS’s”) Accounts direction (OfS 2018.26).

We have audited the financial statements, included within the Reports and financial statements, which comprise: the Group and University Balance Sheets as at 31 July 2018; the Group and University Statements of comprehensive income, the Consolidated statement of cash flows, and the Group and University Statements of changes in reserves for the year then ended; and the notes to the financial statements, which include a description of the significant accounting policies.

Our opinion is consistent with our reporting to the Audit Committee.

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities under ISAs (UK) are further described in the Auditors’ responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Independence

We remained independent of the Group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, which includes the FRC’s Ethical Standard, as applicable to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements.

To the best of our knowledge and belief, we declare that non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Group.

Other than those disclosed in note 14 to the financial statements, we have provided no non-audit services to the group or the University in the period from 1 August 2017 to 31 July 2018.

Our audit approach

Overview

	Overall Group materiality: £18.7 million (2017: £18.o million), based on 1% of total income.
	The scope of our work covered the University, Cambridge Assessment, Cambridge University Press and the Cambridge University Endowment Fund. Our audit scope addressed 95% of Group Income and 97% of Group Assets.
	Valuation of North West Cambridge Valuation of pension schemes Revenue recognition for donations and research grants Valuation of investments

The scope of our audit

As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements. In particular, we looked at where the directors made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain.

We gained an understanding of the legal and regulatory framework applicable to the group and the industries in which it operates, and considered the risk of acts by the group which were contrary to applicable laws and regulations, including fraud. We designed audit procedures at group and significant component level to respond to the risk, recognising that the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery or intentional misrepresentations, or through collusion. We focused on laws and regulations that could give rise to a material misstatement in the Group and University financial statements. Our tests included, but were not limited to, review of the financial statement disclosures to underlying supporting documentation, review of correspondence with and reports to the regulators, discussions with in house legal team, enquiries of management and review of internal audit reports in so far as they relate to the financial statements. There are inherent limitations in the audit procedures described above and the further removed non-compliance with laws and regulations is from the events and transactions reflected in the financial statements, the less likely we would become aware of it.

We did not identify any key audit matters relating to irregularities, including fraud. As in all of our audits we also addressed the risk of management override of internal controls, including testing journals and evaluating whether there was evidence of bias by the directors that represented a risk of material misstatement due to fraud.

Key audit matters

Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by the auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters, and any comments we make on the results of our procedures thereon, were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. This is not a complete list of all risks identified by our audit.

Key audit matter

How our audit addressed the key audit matters

Valuation of North West Cambridge

Refer to note 21b (Investment Property).

Following the completion and bringing into use of Phase 1 of North West Cambridge the group has recorded the development as an investment property at fair value including related land with relevant planning permissions, totalling £327.2m.

The valuation is supported by a discounted cash flow model prepared internally in order to assess the cash flows arising from a combination of rental and sales income streams expected from the development, together with external valuations for certain elements, including land. There are a number of judgemental assumptions including: discount rate, yields, expected sales prices for those units for sale.

As a result of the valuation, an impairment of £50.4m has been identified and accounted for.

We have considered the background facts and circumstances and consider that it is appropriate to record North West Cambridge as an investment property. We reviewed the original Council and Finance Committee meeting minutes to assess the intent behind the development. While there is some judgement in respect of certain individual properties, the overall rationale behind the project was to create an income generating development, and as such, we agree with management’s judgement to classify it as investment property.

We have performed testing of the internally-prepared discounted cash flow model by checking its mathematical accuracy, agreeing estimates back to supporting evidence where available (including to sales contracts already in place, third party valuations, and evidence in support of current rental income). We also assessed the assumptions that feed into the model (including discount rate, expected rental yields and sales proceeds). We used the PwC Valuations team to assist us with assessing the assumptions adopted by management and concluded that they all sit within external market ranges, where available, are consistent with underlying support and in line with our own expectations.

Based on this work, no material issues were noted.

Valuation of pension schemes

Refer to note 28 (Pension liabilities) and note 34 (Pension schemes).

The Group has defined benefit pensions plans with net liabilities of £516.2m, which is significant in the context of the Group balance sheet. The Group also holds a liability in respect of the deficit reduction agreement for the USS of £118.9m.

Defined pension scheme liabilities are material to the Group and are affected by the value of the scheme’s underlying assets and the actuarial assumptions, such as discount rates and life expectancy, used to calculate the value of the pension liabilities. There is a range of assumptions that can be used by actuaries depending upon the individual circumstances of the scheme, and a change of a few percentage points in the assumptions can have a significant financial impact on the year-end pension liability.

In respect of the CPS and Press defined benefit schemes, we obtained the pension valuation reports from the external actuaries. With the assistance of our internal actuarial specialists we compared the inflation rates and discount rates used in the valuation of the pension liability by the external actuary to our internally developed benchmarks.

We compared the assumptions around salary increases and mortality to national and industry averages as well as University specific information.

We performed testing over the census data on which the valuation is based.

We agreed underlying assets in the scheme to confirmations obtained from fund managers, and obtained controls reports and/or financial statements to evaluate the reliability of the evidence obtained.

Based on this work, no material issues were noted.

In addition USS announced in July 2018 that it was invoking rule 76.4-8 to complete the March 2017 valuation of the scheme. Under this rule, the costs of funding the scheme are shared between employers and members. Contributions paid by the University would increase from 18% of salary currently to 24.9% of salary from April 2020. This includes contributions of 6% of salary to fund the deficit, up from 2.1% of salary. The changes announced are subject to consultation with scheme employers. The period over which the deficit contributions will be payable is unclear, meaning that the University cannot calculate a revised provision for deficit funding contributions.

In respect of the USS deficit recovery provision we have tested the contribution data and actuarial assumptions and are satisfied that the assumptions used for the USS provision are reasonable and we have confirmed the integrity of the underlying model used for its calculation.

We have also reviewed the impact of USS’s announcements on future contribution rates. We note that there is uncertainty over whether the announced contribution rates will be implemented as announced. Therefore, we consider that the liability should not be re-measured at present. We have confirmed that the nature of this uncertainty is disclosed in the financial statements.

Revenue recognition for donations and research grants

The Group recognised £63.8m of income in the year from donations and endowments and £524.9m from research grants (see notes 7 and 9).

Research grants are recognised when the terms of the grant or contract are met, primarily as allowed expenditure is incurred. Often there will be timing differences between when cash is received and recognition criteria are met which requires income to be accrued or deferred. In addition there is judgement applied where performance conditions are used as the basis for income recognition.

There is also judgement involved in determining when to recognise donation income with regards to when performance conditions have been met that allow recognition.

We have evaluated and tested the accounting policy for income recognition to ensure that this is consistent with the requirements of accounting standards. No exceptions were noted.

We performed detailed testing of these revenue transactions, including deferred revenue. For a sample of research grants we tested the revenue recognised back to underlying grant agreements to identify any specific performance conditions that were attached to recognition. We also tested a sample of cash received and tested a sample of expenditure to confirm that the funds had been spent in accordance with the requirements of funding. We also tested a sample of donations and agreed that these were recognised in accordance with any performance conditions in the underlying donation agreements with a particular focus on larger individual donations. We also tested a sample back to cash receipt or where cash has not yet been received that the accrual or deferral is appropriate. We also performed income cut-off testing in the month before and after year-end to ensure income was recognised in the correct period.

No exceptions were noted from our work.

Valuation of investments

Refer to note 21 (Non-current investments) and note 11 (Investment income)

£2.8bn of the group investments are held within CUEF. The valuation of the units, used by the various components of the group in determining their investment valuations is key. In recent years there has been an increase in the value of property related assets, and other investments where judgement is needed when performing valuations.

The majority (92.4%) of investments are valued using market data, and are therefore relatively non-judgemental. Investments more subject to judgement are investments in private companies (of which £29m relates to the investment in Cambridge Innovation Capital), direct property investments and interests in property vehicles (together £219m).

For all quoted investments and pooled investments we have obtained confirmations from the custodian. For quoted securities, we have performed independent verification of the prices used for valuation, and noticed no discrepancies. On a sample basis, we obtained confirmations from fund managers for pooled funds, and performed procedures over the reliability of the information received. No exceptions were noted from the work.

Investments in direct properties have been valued by a third party valuation expert. We have assessed the competency of the valuers used by management and used internal experts to assess the valuation methodology and review the reasonableness of the year-on-year capital movements. No exceptions were noted from this testing.

Included within interests in property vehicles is £24m in relation to the CUEF’s interest in two property vehicles. The original investment in these vehicles was made a number of years ago, and management are valuing these interests internally. At 31 July 2018 the valuation of these interests is not significantly sensitive to the assumed value at the end of the arrangement, and therefore we concur with the values used.

No exceptions were identified during our testing.

How we tailored the audit scope

We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the structure of the group, the accounting processes and controls, and the industry in which it operates.

In relation to scoping our work the following were considered significant components – the University, Cambridge Assessment, Cambridge University Press, and the Cambridge University Endowment Fund.

Materiality

The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and in aggregate on the financial statements as a whole.

Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:

Overall group materiality	£18.7 million (2017: £18 million).
How we determined it	1% of total income.
Rationale for benchmark applied	As the entity is a not-for-profit organisation, the most suitable benchmark to use for overall group materiality is deemed to be total income. This is a generally accepted auditing benchmark.

For each component in the scope of our group audit, we allocated a materiality that is less than our overall group materiality. The range of materiality allocated across components was £6.3m – £18.7m. Certain components were audited to a local statutory audit materiality that was also less than our overall group materiality.

We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £935,000 (2017: £900,000) as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.

Conclusions relating to going concern

We have nothing to report in respect of the following matters in relation to which ISAs (UK) require us to report to you when:

•the Council’s use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or

•the Council has not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the Group and University’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue.

However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the group and University’s ability to continue as a going concern.

Reporting on other information

The other information comprises all of the information in the Reports and financial statements other than the financial statements and our auditors’ report thereon. The Council is responsible for the other information. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form of assurance thereon.

In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are required to perform procedures to conclude whether there is a material misstatement of the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report based on these responsibilities.

Based on the responsibilities described above and our work undertaken in the course of the audit, ISAs (UK) require us also to report certain opinions and matters as described below.

Responsibilities for the financial statements and the audit

Responsibilities of the Council for the financial statements

As explained more fully in the Statement of the Responsibilities of the Council set out on page 213, the Council are responsible for the preparation of the financial statements in accordance with the applicable framework and for being satisfied that they give a true and fair view. The Council is also responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the Council are responsible for assessing the Group and University’s ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the Council either intend to liquidate the Group or University or to cease operations, or have no realistic alternative but to do so.

Auditors’ responsibilities for the audit of the financial statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

A further description of our responsibilities for the audit of the financial statements is located on the FRC's website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditors’ report.

Use of this report

This report, including the opinions, has been prepared for and only for the Council as a body in accordance with the Charters and Statutes of the University and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

Other required reporting

Opinions on other matters prescribed in the OfS and Research England Audit Code of Practice issued under the Further and Higher Education Act 1992 (as amended)

In our opinion, in all material respects:

•funds from whatever source administered by the University for specific purposes have been properly applied to those purposes and, if relevant, managed in accordance with relevant legislation;

•income has been applied in accordance with the University’s statutes; and

•funds provided by the Higher Education Funding Council for England, the OfS and Research England have been applied in accordance with the relevant terms and conditions, and any other terms and conditions attached to them.

Appointment

Following the recommendation of the Audit Committee, we were appointed by the members on 1 December 2008 to audit the financial statements for the year ended 31 July 2009 and subsequent financial periods. The period of total uninterrupted engagement is 10 years, covering the years ended 31 July 2009 to 31 July 2018.

PricewaterhouseCoopers LLP

Chartered Accountants and Statutory Auditors
Cambridge
22 November 2018

STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 JULY 2018

		Group Year ended 31 July 2018	Group Year ended 31 July 2017	University Year ended 31 July 2018	University Year ended 31 July 2017
	Note	£m	£m	£m	£m
Income
Tuition fees and education contracts	5	295.1	276.4	283.0	263.6
Funding body grants	6	173.6	178.0	173.6	178.0
Research grants and contracts	7	524.9	466.0	515.5	457.5
Examination and assessment services	8	432.5	411.7	360.4	334.8
Publishing services		313.0	310.6	275.6	277.6
Donations and endowments	9	63.8	79.1	62.9	81.0
Other income	10	142.1	130.2	127.2	106.7
Investment income	11	19.8	17.9	16.3	14.6
Total income	12	1,964.8	1,869.9	1,814.5	1,713.8

Expenditure
Staff costs	13	849.6	798.8	787.4	738.3
Other operating expenses	14	933.5	886.4	845.1	785.2
Depreciation	14, 19	94.4	89.9	93.6	86.9
Interest and other finance costs	14, 15	33.6	31.4	33.5	31.4
Total expenditure		1,911.1	1,806.5	1,759.6	1,641.8

Surplus before other gains and losses		53.7	63.4	54.9	72.0
Gain on investments	21	219.0	407.1	166.6	325.9

Surplus before tax		272.7	470.5	221.5	397.9
Taxation	16	(3.1)	(4.1)	(2.2)	(0.8)

Surplus for the year	32	269.6	466.4	219.3	397.1
Other comprehensive income
Actuarial gain	28, 29	122.5	26.3	122.5	26.3
Gain / (loss) arising on foreign currency translation		(2.9)	0.1	(2.3)	(0.2)
Profit on acquisition of Foundation	35	1.6	–	–	–
Acquisition of non-controlling interest		–	(0.5)	–	–
Total comprehensive income for the year	32	390.8	492.3	339.5	423.2

Represented by:
Endowment comprehensive income for the year	30	127.8	208.7	112.6	180.4
Restricted comprehensive income for the year	31	74.3	49.5	74.5	49.0
Unrestricted comprehensive income for the year	32	188.7	234.1	152.4	193.8
		390.8	492.3	339.5	423.2

STATEMENTS OF CHANGES IN RESERVES FOR THE YEAR ENDED 31 JULY 2018

	Endowment £m	Restricted £m	Unrestricted £m	Total £m
*Group*
Balance at 1 August 2016	1,519.2	79.2	2,756.4	4,354.8

Surplus for the year ended 31 July 2017	208.7	49.5	207.7	465.9
Other comprehensive income	–	–	26.4	26.4

Total comprehensive income for the year ended 31 July 2017	208.7	49.5	234.1	492.3
Release of restricted capital funds spent in the year ended 31 July 2017	–	(43.2)	43.2	–

Balance at 31 July 2017	1,727.9	85.5	3,033.7	4,847.1

Surplus for the year ended 31 July 2018	127.8	74.3	67.5	269.6
Other comprehensive income	–	–	121.2	121.2

Total comprehensive income for the year ended 31 July 2018	127.8	74.3	188.7	390.8
Release of restricted capital funds spent in the year ended 31 July 2018	–	(61.9)	61.9	–
Dividend paid to non-controlling interest	–	–	(0.5)	(0.5)

Balance at 31 July 2018	1,855.7	97.9	3,283.8	5,237.4

*University*
Balance at 1 August 2016	1,268.9	78.5	2,527.4	3,874.8

Surplus for the year ended 31 July 2017	180.4	49.0	167.7	397.1
Other comprehensive income	–	–	26.1	26.1

Total comprehensive income for the year ended 31 July 2017	180.4	49.0	193.8	423.2
Release of restricted capital funds spent in the year ended 31 July 2017	–	(43.2)	43.2	–

Balance at 31 July 2017	1,449.3	84.3	2,764.4	4,298.0

Surplus for the year ended 31 July 2018	112.6	74.5	32.2	219.3
Other comprehensive income	–	–	120.2	120.2

Total comprehensive income for the year ended 31 July 2018	112.6	74.5	152.4	339.5
Release of restricted capital funds spent in the year ended 31 July 2018	–	(61.8)	61.8	–

Balance at 31 July 2018	1,561.9	97.0	2,978.6	4,637.5

BALANCE SHEETS AS AT 31 JULY 2018

		Group 31 July 2018	Group 31 July 2017	University 31 July 2018	University 31 July 2017
	Note	£m	£m	£m	£m
Non-current assets
Intangible assets and goodwill	18	63.5	76.6	62.6	74.0
Fixed assets	19	2,559.3	2,488.2	2,554.6	2,484.2
Heritage assets	20	70.6	67.3	70.6	67.3
Investments – other investments	21a	2,911.9	2,766.1	2,346.7	2,239.3
Investments – investment property	21b	501.4	407.1	501.4	407.1
		6,106.7	5,805.3	5,535.9	5,271.9

Current assets
Stocks and work in progress	22	47.4	49.6	40.8	43.7
Trade and other receivables	23	418.2	379.9	424.2	369.2
Investments	24	498.9	344.8	1,063.3	873.3
Cash and cash equivalents	25	869.3	281.3	815.5	245.9
		1,833.8	1,055.6	2,343.8	1,532.1

Creditors: amounts falling due within one year	26	(1,096.8)	(896.0)	(1,651.3)	(1,404.4)
Net current assets		737.0	159.6	692.5	127.7

Total assets less current liabilities		6,843.7	5,964.9	6,228.4	5,399.6

Creditors: amounts falling due after more than one year	27	(949.6)	(356.3)	(938.3)	(345.1)
Pension liabilities	28	(635.1)	(739.1)	(631.0)	(734.1)
Other retirement benefits liabilities	29	(21.6)	(22.4)	(21.6)	(22.4)

Total net assets		5,237.4	4,847.1	4,637.5	4,298.0

Restricted reserves
Income and expenditure reserve – endowment	30	1,855.7	1,727.9	1,561.9	1,449.3
Income and expenditure reserve – restricted	31	97.9	85.5	97.0	84.3

Unrestricted reserves
Income and expenditure reserve – unrestricted	32	3,283.8	3,033.7	2,978.6	2,764.4

Total reserves		5,237.4	4,847.1	4,637.5	4,298.0

The financial statements on pages 220 to 265 were approved by the Council on 22 November 2018 and signed on its behalf by:

Professor Stephen Toope

Vice-Chancellor

John Shakeshaft

Member of Council

David Hughes

Director of Finance

CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 JULY 2018

	Note	Group Year ended 31 July 2018 £m	Group Year ended 31 July 2017 £m
Cash flow from operating activities
Surplus for the year		269.6	466.4
Adjustments for non-cash items:
Depreciation	14, 19	94.4	89.9
Amortization of intangible assets	18	33.3	23.3
Gain on investments		(217.1)	(406.5)
Decrease in stocks and work in progress	22	2.2	3.7
Increase in trade and other receivables		(38.1)	(12.3)
Increase in creditors		23.4	18.0
Revision of deficit recovery cost recognized in the year	13, 28	4.5	(1.6)
Other pension costs less contributions payable	28	13.3	9.4

Other retirement benefit costs less contributions payable	29	(0.2)	(0.1)
Receipt of donated assets	20	(3.3)	(0.5)

Currency adjustments		2.9	1.4

Adjustments for investing or financing activities:
Investment income	11	(19.8)	(17.9)
Interest payable	15	14.8	13.5
New endowments	9	(21.6)	(30.4)
Capital grants and donations		(75.6)	(77.5)
Share of joint venture and associated net surplus	10	(1.9)	(0.6)
Gain on the sale of fixed assets	10	(3.9)	(0.6)
Other		1.8	–
Net cash inflow from operating activities		78.7	77.6

Cash flows from investing activities
Capital grants and donations		75.6	77.5
Proceeds from sales of fixed assets		8.8	1.5
Proceeds from sales of other non-current asset investments		185.5	317.7
Net disposal of other current asset investments		(12.0)	0.1
Investment income	11	19.8	17.9
Payments made to acquire intangible assets	18	(20.6)	(24.8)
Payments made to acquire fixed assets		(230.6)	(314.1)
Payments made to acquire heritage assets	20	–	(1.7)
Payments made to acquire other non-current asset investments		(81.2)	(69.2)
Acquisition of non-controlling interest	32	–	(0.5)
Dividend payment to non-controlling interest	32	(0.5)	–
Payments made re. North West Cambridge development costs		(48.1)	(109.6)
Net cash outflow from investing activities		(103.3)	(105.2)

Cash flows from financing activities
New endowments	9	21.6	30.4
Bond proceeds		593.6	–
Interest paid		(13.8)	(13.4)
Capital element of finance lease repayments	26, 27	(1.3)	(1.3)
Repayments of loans	26, 27	(1.5)	(1.1)
Net cash inflow from financing activities		598.6	14.6

Increase / (reduction) in cash and cash equivalents in the year		574.0	(13.0)
Cash and cash equivalents at beginning of the year		281.3	294.3
Cash and cash equivalents at end of the year		855.3	281.3
Represented by:
Cash and cash equivalent assets	25	869.3	281.3
Bank overdrafts	26	(14.0)	–

		855.3	281.3

NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 31 JULY 2018

Notes to the accounts (pp. 224–265)

Contents

Reports and Financial Statements for the year ended 31 July 2018

FINANCIAL REVIEW

Scope of the financial statements

Financial results for the year

Reported surplus for the year

Income

Research

Donations

Investment income

Expenditure

Cash flow and financing

Net assets

Fixed assets

Pension schemes

Long-term borrowings

Financial outlook

Principal risks and uncertainties

CORPORATE GOVERNANCE

MEMBERS OF THE COUNCIL AND THE CHARITY TRUSTEES DURING THE YEAR ENDED 31 JULY 2018

STATEMENT OF PUBLIC BENEFIT

The mission of the University

Research

Education

The wider applications of the University’s commitment to disseminating knowledge

STATEMENT OF INTERNAL CONTROL

STATEMENT OF THE RESPONSIBILITIES OF THE COUNCIL

Independent auditors' report to the Council of the University of Cambridge (the 'University')

Report on the audit of the financial statements

Opinion

Basis for opinion

Our audit approach

Conclusions relating to going concern

Reporting on other information

Responsibilities for the financial statements and the audit

Other required reporting

Opinions on other matters prescribed in the OfS and Research England Audit Code of Practice issued under the Further and Higher Education Act 1992 (as amended)

Appointment

STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 JULY 2018

STATEMENTS OF CHANGES IN RESERVES FOR THE YEAR ENDED 31 JULY 2018

BALANCE SHEETS AS AT 31 JULY 2018

CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 JULY 2018

NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 31 JULY 2018