Colleges: Area review and impact on college population

In September 2017 the AOC published an update on the impact of area review and the drive to rationalise the sector.

In 1993 when the sector was formed there were c450 colleges established and based on the latest projections this has reduced by more than a third over the past 25 years to c290.

The key statistics for 2017:

• Seven mergers have completed between January to June 2017;
• Fifteen mergers on 1 August 2017;
• Nine mergers planned to be finalised before December 2017;
• Thirteen Sixth Form conversions to academy status as at 1 September 2017;
• Twelve further sixth form conversions planned before December 2017.

Future plans:

• Five potential mergers for 2018;
• Four university marriages.

What is a merger?

Colleges are able to merge together in one of two ways:

• Type A merger - where both existing corporations are dissolved and a new one created. This option has limited use since the time constraints and level of bureaucracy tends to be prohibitive.
• Type B merger – where one corporation dissolves transferring all staff, assets and liabilities to the remaining corporation. This option offers far more flexibility over timeframe and provides an element of continuity.

The above options are simply the legal route for merger and do not reflect the actual nature of any combination. There are numerous examples in the sector where the Chief Executive and Chair of the dissolving college continue in these roles within the merged entity. Therefore, the dissolution of your college does not mean it has been taken over.

This is an important message to publish as it is people’s perception that is key to a successful transition rather than the legal reality.

Accounting treatments

Mergers are accounted for under either Merger or Acquisition accounting rules.

Under merger accounting the combination is reflected as if it had always been combined. Simply put the results for both colleges are added together to provide the result for the merged college with the accounting comparatives restated on the same basis.

Under acquisition accounting the college being dissolved has its assets and liabilities fair valued resulting in a balancing goodwill value that is recognised through the I&E account. 

To adopt Merger accounting the combination needs to meet each of the following definitions otherwise acquisition accounting is applied:

• No party is portrayed as either the acquirer or acquiree;
• There is no significant change in the classes of beneficiaries of the combining entities or the benefits provided as a result;
• All parties, as represented by the board, participate in establishing the management structure of the combined entity and in selecting the management personnel and that decision is made on the consensus between the parties rather than purely voting rights.

Consideration when assessing against the above criteria should also include the relative size and financial health of each college.