UK: There May Be Trouble Ahead

Last Updated: 28 February 2011
Article by Julie Mutton

The ASB has revised the timing of its transition from UK GAAP to IFRS. We look at the implications of the changes for housing associations.

The Accounting Standards Board (ASB) first started its consultations on the transition of UK GAAP to international financial reporting standards (IFRS) in 2004. The initial idea was for a gradual transition, but the thinking has changed. The preferred option is now a 'big bang', with change expected to take place in time for March 2015 year ends. It would be hard to understate the significance of the change, since a considerable part of what we regard as normal accounting will be different under IFRS; the implications for finance functions, boards and loan covenants are substantial.

So what is on the cards?

The ASB proposes to divide entities into three tiers. The top tier, tier 1, will need to comply with IFRS, in full. Tier 2 will apply a simplified version of IFRS, referred to as financial reporting standard for medium-sized entities (FRSME). Tier 3 will be eligible to comply with the existing financial reporting standards for small entities (FRSSE). Whichever tier an entity is in, it can adopt a higher tier if it wishes (so for example, a tier 2 entity can adopt full IFRS).

Under the rules, if a housing association has issued a listed bond in its own name, and is traded on a market such as the stock exchange, then it will be in tier 1; otherwise, unless it is very small, it will be tier 2. The ASB envisages a continuing role for a RP SORP although it is not clear how much leeway it will have.

Why does this matter?

There are very substantial differences between full IFRS, FRSME and FRSSE. It will make comparisons between entities that happen to be in tier 1 and tier 2 respectively extremely difficult. It is hard to see why having a listed bond (and therefore tier 1), as opposed to a bond issued jointly with two or three other RPs (and therefore tier 2), should necessitate fundamentally different financial reporting rules.

In practice, apart from the ten or so RPs that have issued listed bonds (although this number is set to grow given the current market conditions), the majority of RPs will be tier 2. Some RPs with less than 50 employees (provided other conditions are met) may be able to use FRSSE, which will provide some respite.

Additionally, some of the 'rules', particularly in FRSME, are arbitrary and potentially highly damaging to the sector. The main examples are listed below.

Capitalised interest

FRSME does not allow any interest to be capitalised. This change would also be retrospective and require prior year adjustments. The effect for developing associations would be a substantial reduction in both reserves and the surplus in the year.

Financial instruments

Basic swaps and forward contracts would require additional documentation to be compiled, demonstrating that the instruments are effective hedges. In these circumstances, although there would be some fluctuations on the balance sheet, the movements can be kept away from the reported surplus. However, anything with optionality in it, including prepayment, extension or early termination features (for example callables) would need to be fair valued with movements going through the income and expenditure account. The effect would be potentially huge swings in the surplus as relatively small interest rate movements can have a profound impact on fair values. This volatility would also be hard to predict since it would depend on the position as at the year end, potentially varying significantly from the position only a few days previously.


Housing properties would have to be carried at historic cost. For those associations adopting valuation accounting, FRSME would remove this option.


FRSME would not allow grants to be deducted from housing properties. This therefore would require them to be shown gross, potentially increasing the risk of impairment charges.


Although not retrospective, FRSME will not allow merger accounting for future business combinations (other than reorganisations of existing groups). Any future merger would be dealt with under acquisition accounting (unless it was in substance a gift). In addition, there are a substantial number of additional disclosures that will be required, probably making the financial statements longer and, arguably, less intelligible.

Quite apart from the extra work this will require, there is a risk that lenders may take the opportunity provided by the changes to re-price some loans; the impact on borrowing costs and administration costs could be substantial.

What can associations do?

In our view, there is a genuine opportunity to influence the ASB to make substantial changes. It is unlikely that the ASB will be aware of the serious repercussions of its proposals for the RP sector. Provided sufficient numbers of housing associations (preferably in excess of 100) respond making a reasoned case, we believe the ASB is likely to make changes to some of the points which are causing problems. These are the areas on which we suggest associations comment.

1. The requirement to adopt full IFRS when a listed bond is issued should be modified to exempt those where the level of trading in the bond is low. This is provided that the board can reasonably judge that bond holders do not have a desire for full IFRS to be applied.

2. Capitalised interest should be permitted as an option, in line with UK GAAP.

3. Where the purpose behind entering into derivatives is for reduction in risk, the entity should be required to account for the instrument as a hedge. Rather than follow a set of rules which ultimately lead to classification as a trading instrument by default if you are unable to meet the required tests for treating it otherwise, for FRSME entities the approach should be based on the substance of the arrangement. There should not be an option to change classification after the initial decision on how to treat the instrument.

4. For those sectors with substantial fixed assets (such as RPs), FRSME should permit carrying fixed assets at valuation using specific methodologies set out in their respective SORPs.

5. FRSME should allow entities to deduct capital grants from the carrying value of housing properties.

6. Merger accounting should be permitted in those circumstances where genuinely there is no acquirer or acquiree.

7. The timetable for implementation should be delayed to allow further time for planning and assessment of the implications.

8. The number of entities applying FRSSE should be increased; one option would be to increase the present size limits to double those for small companies.

9. The impact analysis does not presently take into account the risk of re-pricing loans. It would be sensible to conduct more research into assessing how significant this risk is, and the potential impact.

In order to influence the debate, you will need to write to the ASB on or before 30 April 2011 with a summary of the points you wish to make; please feel free to use any of this text as part of your letter.

Letters should be addressed to:

Michelle Sansom

Accounting Standards Board

5th Floor Aldwych House

71 – 91 Aldwych



It would be sensible to avoid using too many pejorative terms; phrases such as 'outrage', 'criminal' and 'deserve to be taken out onto the street and hanged' don't tend to go down too well with accounting standards setters, and probably only belong in your responses to your bankers' revised borrowing margin proposals.

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.

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