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.

Valuation

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

Grants

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.

Mergers

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

London

WC2B 4HN

asbcommentletters@frc-asb.org.uk

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.