UK: Taking Account of Change - How Will Changes To Financial Reporting Affect RP's?

Last Updated: 9 April 2012
Article by Jonathan Pryor

An outline of the forthcoming changes to financial reporting and how these may impact housing associations.

On 30 January 2012 the Accounting Standards Board (ASB) published its revised version of future accounting in the UK. The new proposals (covered by financial reporting exposure drafts (FREDs) 46, 47 and 48) are likely to result in three new financial reporting standards (FRSs):

  • FRS 100 – application of financial reporting requirements
  • FRS 101 – reduced disclosure Framework
  • FRS 102 – the financial reporting standard applicable in the UK and Republic of Ireland (the replacement for the previously proposed financial reporting standard for medium-sized entities (FRSME)).

The ASB has retained its original vision of combining all the requirements for financial reporting into one standard for most entities based on the international financial reporting standard (IFRS) for small to medium-sized entities, but has responded to the views of consultees in permitting more choice on accounting treatment than the IFRS equivalent. From the housing association perspective, there are some considerable improvements. These include:

  • the option to use valuations in relation to housing properties
  • the option to capitalise interest on development of fixed assets
  • the ability to amortise grants relating to assets over the life of the asset in line with the depreciation of the asset
  • a delay in application of the new requirements to accounting periods beginning on or after 1 January 2015, in other words for most housing associations to the year ended 31 March 2016.

However, there are still a number of areas where accounting changes will be required. Some of these are presentational (for example the use of the term 'property plant and equipment' in place of 'fixed assets'), others have relatively minor effect (for example the requirement to accrue for 'compensated absences', e.g. untaken holiday entitlements, which is arguably a requirement in UK Generally Accepted Accounting Principles (GAAP) already but not usually complied with), whereas others are potentially very significant. Top of this list are two specific areas where the implications are far reaching and will require planning:

  • financial instruments – the requirement to carry some instruments at fair value
  • grants relating to assets – the requirement to show these balances within creditors and not net them off fixed assets.

These two areas of change will require considerable analysis and will be covered in lengthier articles in our next edition. However, it is worth emphasising that each housing association will need to invest time in understanding the implications for their overall financial position and loan covenants. The major issue is likely to be relating to volatility and unpredictability with the risk of having to record some financial instruments at fair value with movements in the income and expenditure account. Although there are some solutions to this, in particular the possibility of hedge accounting, the rules relating to this are very complex and require a detailed understanding.

Other areas that we have identified as being of significance for the housing association sector generally are as follows.

  • Prior period errors require correction as a prior year adjustment when material, as opposed to the current requirement of when fundamental.
  • The costs included within stock items such as assets held or produced for sale will be renamed inventories and are calculated slightly differently.
  • Movements in valuation of investment properties are taken through the income and expenditure account.
  • The requirements in relation to component accounting are similar. However, where expenditure is capitalised on the basis of it leading to incremental future benefits, unlike with the equivalent in FRS 15 the exposure draft requires the write-off of part of the existing asset to reflect the element replaced.
  • Deferred tax needs to be provided on revalued properties based on the difference between the carrying value and the cost of the asset for tax purposes. This would potentially lead to a substantial reduction in net assets for those entities with a substantial revaluation reserve.
  • There are differences in the way in which DB pension scheme assets and liabilities are measured. This is likely to have the effect of increasing the costs recorded in the income and expenditure account for schemes in deficit compared to the current FRS 17 methodology.
  • Accounting for leases is likely to be problematic, particularly in relation to shared ownership properties. However, precisely how the principles set out in the FRED will be implemented in the housing association sector will require further debate.
  • Land options will probably be regarded as financial instruments and therefore be carried at fair value.

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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