Review of CAA ATOL changes – March 2016

16 May 2016

The CAA has issued new guidance on the financial tests that ‘Small Business’ ATOL holders (SBA’s) and smaller (under £20 million ATOL turnover) ATOL holders will have to meet in future.

The new rules take effect on June 1st 2016, this means any new applications from that date must comply, which may result in a spate of applications in the next three months from businesses wishing to apply for their first SBA. Although they may avoid the rules this year, renewals next year will be caught, and for existing ATOL holders, the rules will apply from this autumn renewal.

Who is affected?

There are no major changes for large ATOL holders, identified as those with an ATOL limit of £20 million or more, they will continue to have ongoing monitoring on a monthly or quarterly basis which will include a review of financial performance, liquidity and any obvious changes to their business.

For all other ATOL holders, a range of new tests will be used to assess finances, for SBA holders, there will be 4 tests, for ATOL holders up to £20 million of ATOL turnover there will be an additional three tests. This is of course the first time that SBA holders have had any detailed investigation of their financial position and the CAA has expressed concern that some SBA businesses appeared to be technically insolvent based on their accounts.

The CAA has developed with the help of outside professionals a risk factor analysis which looks at specific ratios based on the accounts to assess the risk of failure and therefore the potential for failure. The CAA however will not be discussing the methodology used or the actual ratios expected.

The tests

The tests will be based on the figures provided in the last set of accounts and for new applicants the CAA will project to the year end and see whether the business ought to pass the tests or not, if no accounts are available.

Online assessment

The CAA, as promised, has developed an on line assessment tool which will enable ATOL holders to input figures based on their last statutory accounts to assess whether they will pass the tests, and if not, it will advise what is likely to be necessary to meet the tests.

There will no verification of the information provided by ATOL holders, so if the accounts submitted in due course for renewal are materially different, the outcome may also be different. Initially the CAA are promising a 5 day turnaround after submission but this is likely to become quicker in due course.

By 2017, the CAA expects that the whole renewal process can be completed online with no need for paper renewals at all.

Accounts

The CAA will insist on audited accounts for all businesses whose turnover exceeds £5 million, notwithstanding that Companies House may not require an audit for companies until their turnover is twice this size.

Accountants

Don’t forget that from April 1st all reports that need an accountant’s signature must be completed by an ATOL Reporting Accountant. The CAA has introduced the scheme because of concerns over the quality of reporting by both ATOL holder and accountant.

It is important to note that only ARAs can provide these reports but that some ATOL holders may also require a statutory audit which can be performed by anyone who is a registered auditor (and who may not necessarily be an ARA). The ATOL holder may wish to explore whether there may be some cost savings in having an ARA who is also the registered auditor.

These changes may lead to considerable confusion at first, on a long term basis they should ensure fewer failures, lower claims on the Air Travel Trust and possibly a reduction in APC payable by all ATOL holders in the future.

The tests appear below:

Financial ratio   Test
Current ratio Current assets/current liabilities will show liquidity and the higher the ratio the better
Cash ratio Cash/current liabilities will show whether the business can repay short term obligations from cash, again a higher ratio is better
Leverage ratio

Total liabilities/total assets, a measure of balance sheet strength, a lower ratio is better, if the ratio is above 1 there is a net balance sheet deficit

Return on assets Net profit or loss/total assets to assess how efficient the business is, a higher ratio is best

For standard ATOL holders only, there are 3 further tests:

EBITDA Margin EBITDA/total revenue is a good indication of profitability, the higher the ratio the better
Revenue Growth Revenue/Prior year revenue to assess the growth or decline of a business, a significant decline is never good, excess growth may be a sign of overtrading
Revenue Variance Revenue/Projected Revenue compares the actual results to the forecasts given in the previous year, useful to assess accuracy of forecasting and whether the business is where it expected to be

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