IFRS - What’s All The Fuss About?

What are the implications of IFRS for the finance directors of RSLs? Jonathan Pryor gives an update.

While it is reasonable to try to gain an overview of International Financial Reporting Standards (IFRS), there is no point in spending significant amounts of time trying to achieve a detailed understanding. Certainly, it is a myth to suggest Registered Social Landlords (RSLs) should start planning now since no one knows what the impact will be. The debate has not even started on several unanswered questions.

We believe the sequence of events will run as follows.

1. The SORP working party will put together some initial thoughts. This is likely to take several months and its report may not be published until next year.
2. There will be extensive consultation. This will probably result in the SORP working party needing to rethink some of its original plans, for the following reasons.
   1. IFRS may well change a great deal of current accounting by RSLs and is unfamiliar to most people in the RSL sector. Therefore, IFRS changes are likely to have some consequences which were not fully anticipated.
   2. Both IFRS and FRS are evolving, so the time spent over consultation could lead to refinements in IFRS.
   3. Most crucially, accountancy firms are likely to subject IFRS proposals to a high level of technical examination, which in turn should raise a number of issues. The technical teams may be less familiar with RSLs, but their fresh perspectives may well lead to challenges to the accounting treatment on several fronts.
3. The SORP working party will then need to modify its proposals.
4. A further round of consultation will probably follow.
5. Hopefully, this will lead to the process of finalising the SORP, although this is more likely to be prolonged.

What Are The Anticipated Changes?

Until the extensive programme of design and consultation is sufficiently progressed, no one can reliably predict the outcome. Clearly, covenants will need to be reassessed, but at this stage we can only guess to what degree and in what ways.

Classifying Housing Properties

Under IFRS, housing properties may be classified as investment properties. The IFRS definition is subtly different from the FRS one; property held to earn rentals can be classified as investment property. It is questionable whether this really applies in the RSL sector, since in most cases RSL housing properties are not held in order to earn rentals but to fulfil a social need. However, if they do meet the test, IFRS allows a choice of either cost less depreciation (much the same as at present) or valuation, but with the valuation movements going through the income statement – whether up or down. Even if an RSL chooses to use cost less depreciation, IFRS requires valuations to be performed so that a disclosure note can be made. Clearly, this will have a cost implication for those RSLs not currently obtaining annual valuations.

Calculating Deferred Tax

Unlike in FRS where revaluations are exempted, IFRS revaluations of housing properties are reflected in the deferred tax calculation.

Business Combinations

Under IFRS, when one RSL combines with another there will be no merger accounting (except possibly with group reorganisations). All business combinations (unless they fall outside IFRS 3) must have an acquirer, with fair value adjustments made to the assets and liabilities of the acquiree.

In addition, there are more intangibles such as trademarks that need to be separated out and valued. Positive goodwill is not amortised and negative goodwill is released directly to the income statement in the year it arises.

Accounting And Disclosure

Accounting and disclosure in relation to financial instruments becomes much more challenging. In addition to horribly complex disclosure requirements, derivatives and swaps, etc. are subject to intricate accounting rules, complicated further by hedge accounting. If you needed a reason to fervently hope that IFRS is delayed as long as possible for the RSL sector, then the accounting and disclosures in relation to financial instruments should be at the top of your list.

Implementation Timelines

As IFRS is now operational for listed companies, Aim companies have been complying since the end of 2007. Government is next on the list and IFRS will ultimately be required for the RSL sector. This will either come directly via the SORP adopting IFRS in 2011 or 2012, or at the point FRS and IFRS are fully aligned. This will happen gradually to some extent, but we expect to complete around the same time. It is highly likely that there will be another FRS-based SORP update before this around 2010. It is therefore not a question of whether, but when, IFRS will hit the RSL sector.

However, for RSLs with shared ownership or those which have received stock transferred from a local authority, the new SORP 2008 should be a priority. In our view, for finance directors who are considering financial reporting issues, this is where they should be focusing their energy.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.