The accounts, which must be presented to the Further Education Funding Council by the end of November, will give the first official indication of how the 500 colleges in England and Wales have fared since going independent in April 1993.

The FEFC will prepare an analysis of a 16-month period ending in July this year. This will be published early next year, although no decision has yet been taken on whether individual college accounts will be made public.

But leaders of college associations fear the accounts will reveal a bleak outlook over the next two to three years, with many smaller colleges, particularly those in cities already well served by FE institutions, being forced to seek mergers as a solution to their financial problems.

Dave Gibson, president of the Association of Principals of Colleges, says that colleges which have inherited deficits or missed enrolment targets could find themselves in a downward spiral.

“There has been considerable encouragement to increase numbers by a quarter over three years, at the same time as keeping a tight grip on costs. If colleges have inherited deficits they have started off at a distinct disadvantage.”

The competition to increase numbers from a relatively static pool of students will inevitably lead to some losers, he adds.

Small colleges are particularly vulnerable, as they cannot always compete with larger institutions for increased student numbers and often rely on existing staff to keep their books rather than employ financial specialists.

The grim outlook of straitened financial circumstances, mergers and the consequent staff redundancies reflects the haste with which FE college independence has been introduced, Mr Gibson says.

But John Bevan, secretary of the Association for Colleges, feels that independence has worked well for the vast majority of colleges at the “broad policy level”. However, difficulties in working out the transfer of assets and liabilities - which is at the root of some deficits - should have been foreseen.

No more than five colleges are facing serious deficits - and of these several relate to disputes which predated incorporation, such as at Coventry Technical College.

“A handful are in or facing serious deficits,” says Mr Bevan. “The reasons vary, but in total the number adds up to no more than 1 per cent of all institutions.”

He agrees that the more serious issue for the sector is the number steering a fine line between breaking even and deficit. “It’s these colleges which are awaiting this month’s enrolment figures. Those which have been running a tight ship but miss their targets could find themselves in difficulties.”

For most colleges, says Mr Bevan, the biggest financial worries have been disputes over the transfer of legal liabilities, such as compensation for injuries sustained on the premises, or liabilities attached to land or buildings. (Legal action and two court cases have established that liabilities for compensation incurred before incorporation - for example, where a member of staff has been injured but the compensation not agreed until late - are not the responsibility of colleges.) But where land or buildings have been transferred with a liability, such as an order to carry out repair work, the law is still unclear and local authorities could argue that colleges are responsible for such bills, he adds.

College finances are based upon a complex formula related to student units with tariffs varied according to the length and type of courses and the numbers of students. FEFC grants typically account for between 75 and 85 per cent of budgets, with the rest made up through fees and income.

“Broadly speaking, the arrangements for transition were right - where it went wrong was because of local difficulties. These have arisen either from inadequate record-keeping or from a genuine debate over who was liable for certain costs.”

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Nick Holdsworth