UK: RP Issues - A Briefing For Registered Providers Of Social Housing.

In this edition of RP issues, we look at a help sheet for the SORP 2008 impairment provision requirements. We also discuss the results of our Housing Association Executive Reward survey, which show a dramatic pay gap between housing association groups and single associations.

REDUCING THE UNCERTAINTY ABOUT IMPAIRMENT PROVISIONS

For RPs left confused by the SORP 2008 requirements for impairment provisions, help is now available.

There has been a huge amount of discussion and concern about potential impairment provisions that need to be made to the carrying value of housing properties in the 2009 financial statements. There are fears over the consequent effects this may have on covenant compliance, which have been made worse by a lack of clarity over precisely how the impairment judgement should be assessed.

Although there is commentary in the 2008 Statement of Recommended Practice (SORP), which is unchanged from previous years, its precise meaning has been very much open to interpretation and for most registered providers (RPs) has previously not had to be applied in any significant way.

With this in mind, both the SORP working party and the Institute of Chartered Accountants in England and Wales (ICAEW) Social Housing Committee (SHC) have been trying to reduce this uncertainty. The SORP working party has started a consultation process with the ultimate aim of reflecting revised guidance in a forthcoming SORP.

The ICAEW SHC, however, has been much more focussed on the short-term position of the 2009 financial statements. It has just published a help sheet for members of the ICAEW, which discusses various questions on the subject of impairment, specifically in the context of housing association accounts. If you are a member, the help sheet is available from its website. If you are not a member, it should be obtainable from your auditors and is also available in full on our website.

It is worth emphasising that the help sheet is not in any sense guidance. It does not have the authority of the SORP and should only be regarded as contributing to the debate, rather than as an authoritative interpretation. As always, each RP and each firm of auditors considering this issue for their clients will need to take the specific circumstances of the RP into account.

We have identified some of the help sheet's more significant suggestions. These should be considered when assessing impairment issues.

• It is not normally appropriate to take into account the open-market value of an estate if it is tenanted, although void sales can be taken into account, as may grant abatement where appropriate.
• A 'planned internal subsidy' does not represent an impairment. In other words, if the scheme meets the criteria the association applies in order to decide whether to proceed or not, then no impairment provision is required.
• Additional grant can be anticipated, provided a reasonable expectation has been established at the end date of the retrospective reporting period.
• Although existing use value as social housing is a measure of relevance, in practice, sales between RPs have been taking place at markedly higher amounts.

The process of putting together this help sheet has involved considerable debate among the leading firms of auditors in the sector. This has enabled a broad consensus to be achieved, which simply would not have been possible without such a catalyst.

However, it has not been without controversy. Both the Tenant Services Authority and members of the G15 have expressed concerns about it, although it would seem these concerns have been derived, at least in part, from an incomplete appreciation of what the help sheet would be saying.

Ideally, a full consultation on the discussion points would have taken place and the exercise would have been conducted by the SORP working party, the body with the appropriate authority to issue guidance on accounting issues for the sector. However, in practice, the time available has been too short to do this. The choice was therefore between doing nothing and producing something which we consider to be of value to many RPs and firms of auditors. Although imperfect, we are confident it will help increase consistency of reporting and speed up the various discussions during the preparation of the financial statements.

SMITH & WILLIAMSON SURVEY REVEALS UNEVEN PLAYING FIELD

A new benchmarking survey has revealed a 12% pay difference at chief executive level between similar sized housing association groups and single associations.

Our Housing Association Executive Reward survey, published in December last year, has highlighted a distinct salary gap between senior staff at housing association groups and single associations. It has also revealed a growing trend toward performance-related pay and found that half of surveyed organisations are operating a bonus scheme for their top tier management.

We designed the survey to provide associations with detailed and current information on executive pay. It also acts as a useful benchmarking tool for associations looking to review their remuneration packages for senior employees. The survey data was collected from 232 individuals across 33 associations, representing a spectrum of registered providers, including 6 of the 10 largest organisations.

The survey report analyses the different executive roles, housing association structures and reward packages in considerable depth. The data has also been analysed by seniority of role, gender, turnover, number of employees, units under management, region and job function. The survey focuses on top team posts and analyses total reward packages, including bonuses and benefits, such as holiday entitlement, pension schemes, private medical insurance, company cars, family friendly benefits and use of flexible benefit schemes.

Examining The Gap

It emerged that the average pay for a chief executive of one of the larger groups is £214,038 per annum (p.a.); which is more than double the average for a chief executive of a single association entity, which was £102,428 p.a. This pay difference is not just due to the size of the organisations – the association structure also has a significant influence. Taking an association of £80m turnover, a chief executive of a group structure can expect to command a salary that is 12% higher than if he/she headed a single association entity with the same turnover. This differential also applies at director level, where a group director can expect to be paid 35% more than a single association director.

The survey results also raised the following points of interest.

• 56% of housing associations have a bonus scheme in place for senior management.
• Of those, only 60% of chief executives and 41% of directors received a bonus payment in the last year.
• The average level of bonus is 7.3% of salary.
• 21% of surveyed associations have a bonus scheme that applies to all staff, while 45% have a scheme purely for their executive teams.

This survey differentiates between group and single association roles, recognising the differences in complexity and management challenge. Because of this, the data provides valuable and accurate insights into total reward at the most senior levels in housing associations.

Pay For Performance

Most associations rely on inflation trends and the retail price index (RPI) to guide their pay decisions each year. However, Smith & Williamson's Pay and Reward team is seeing an increasing desire to link pay more closely to performance.

Almost half of the surveyed associations have no link between pay and performance at present, but a good proportion are keen to change this. We have supported several associations to develop mechanisms which ensure that pay rises are based on merit rather than cost of living. This helps associations to target limited pay budgets at their best performing staff to encourage the recruitment and retention of high calibre people. At executive level, this has usually meant a clear link between achievement of corporate key performance indicators and the level of pay increase for the executive team.

Dramatic Drop In Pay Rises

Smith & Williamson conducted a short follow-up survey in January of this year to see how expectations for 2009 pay rises have been affected by the plummeting economy.

It emerged that the recent economic downturn has had a significant impact on pay budgets in the housing sector, with associations cutting the estimated average pay awards by almost 30% since the autumn.

The highlights from this follow-up survey include the following.

• The average expected pay increase in 2009 is now 2.5%, down from 3.5% as recorded in the December 2008 survey.
• The average predicted pay rise is 2.6%, down from 3.8% in December 2008.
• Responses ranged from no pay increases up to an expected rise of 5.5%.
• Three associations have already implemented their 2009 pay deals, with average awards of 1.5%, 2.5% and 3.0%.
• Awards are likely to be highest among associations of £10m to £50m turnover, where the average rise is expected to be 2.8%.

For our Housing Association Executive Reward survey last year, we invited housing associations to respond to a broad range of questions, including a number relating to their 2009 pay review process. The data was collected before the economic downturn, so we felt that their pay expectations for 2009 were likely to have been reviewed and their plans re-shaped. To ascertain how far the pay landscape has changed, we sent an electronic survey to 820 housing associations in the UK asking what they expected their average pay rise to be in 2009.

The survey also shows that the most common month for pay reviews in the sector is April, with 79% of respondents holding their review at this time.

It emerged that some associations link pay awards to the level of the RPI of inflation in the previous September and face making above market awards of 5.0% or more. However, continued use of this formula means that their 2010 awards could be based on sub-zero levels of inflation.

Other associations are taking a pragmatic approach to this year's pay review. One commented that while they had an agreement linked to the 5.0% September RPI percentage, they have met with their trade unions and agreed to implement this increase over two years, with the first 2.5% in April 2009.

Others are linking this year's awards to reviews of existing practices and benefits, such as the introduction of market related pay or the review of final salary pension schemes.

TIME TO REVISIT YOUR LOAN ARRANGEMENTS

Now that the recession has hit, banks will be scrutinising the terms of loan arrangements, so now would be a good time to review your documentation.

We are now officially in the grips of a recession, which is likely to continue for a sustained period of time. Despite the massive bail out by the Government, the banking crisis continues to escalate, with banks announcing record losses of billions of pounds, and the Royal Bank of Scotland making the biggest loss in UK corporate history.

Therefore, it is not surprising that banks are taking every measure to mitigate these enormous losses. One of the easiest ways to do this is from their existing customer base. In our experience, banks are using every trick in the book to alter the terms and conditions with customers to favour their interests. There is more incentive to do this for loans made to the RP sector, as margins achieved on RP lending traditionally have been low. As a result, banks are paying far more attention to what is included in your loan documentation, including covenants and notifiable events. It is important for RPs to be aware of this and hopefully remain one step ahead of the banks.

Revisit Your Loan Documentation

It is well worth re-familiarising yourself with your loan documentation. We fully appreciate that it is a lengthy tome, but there may well be terms and conditions that were entered into at the inception of the loan which have been forgotten, or weren't considered relevant at the time the loan was entered into.

In particular, you may find that there are a large list of events where you need to notify the bank and obtain their consent. Such circumstances will include mergers and changes to year end, constitution, group structures and auditors. The bank's reaction to being notified to a change in circumstance may need to be factored in when making strategic decisions, as it may give the bank the opportunity to revisit the terms of the loan and the rate that you are charged. For example, we have recently seen a simple group reorganisation lead to a renegotiation of terms to a significantly higher rate of interest, even though the substance and the risk profile of the RP in question had not changed.

Covenant Compliance

Banks are looking far more carefully at compliance with bank loan covenants. This includes covenants of all types, financial and non-financial. Some organisations view non-financial covenants as 'soft covenants' and do not take them as seriously as financial covenants. For those organisations, be warned, your bank may not share this view and all covenants should be taken seriously. If the breach of covenant enables the bank to demand immediate repayment of the loan, this may provide it an excuse to renegotiate the terms of the loan and achieve a higher rate of interest and charges.

An example of a non-financial covenant would be the provision of management accounts within a certain deadline.

However, aside from the action that the bank might take if a covenant is breached in these circumstances, there is further bad news within the financial reporting standards (FRS).

If an organisation does have the misfortune of breaching its covenants during the year, FRS 25 paragraphs 50A to 50E apply. These paragraphs provide guidance on the split of loans between current and long-term liabilities and prescribe that the accounting treatment is dictated by the position at the year end. FRS 25 dictates that if a covenant is breached prior to the year end, the loan is classified as a current liability. This is unless the lender agrees prior to the year end to a waiver or to a period of grace beyond 12 months from the balance sheet date. This applies even if the lender agrees to a waiver or grace period after the year end. Therefore, the only way to avoid this re-disclosure is to receive written confirmation from the bank prior to the year end.

MORE TO SORP 2008 THAN YOU MIGHT THINK

SORP 2008 includes several updates and requirements which will need to be carefully considered when compiling your 2009 accounts.

There has been much coverage of the headline grabbing aspects of SORP 2008 – accounting for shared ownership and mixed tenure developments. It is important to remember that a raft of other minor updates and disclosure requirements arise from the new SORP and will appear for the first time in many sets of accounts to 31 March 2009.

Furthermore, in making a prior year adjustment in respect of changes in accounting for shared ownership schemes, more pages of the statutory accounts are affected than you might first think. We discuss these, and provide advice on the necessary actions.

Related Parties

Considerably more disclosure is now required concerning related parties. Certain relationships are required to be explained, whether transactions have taken place or not, for example, relationships between parents and subsidiaries.

Transactions between related parties are required to be disclosed in accordance with FRS8, as previously. However, the SORP is much more explicit concerning the detail required.

Board members who are councillors or employees of related local authorities also require mention, including a statement that transactions between the RP and those authorities are on normal commercial terms, and that board members cannot use their position to their advantage.

OFR

Guidance on the content of the operating and financial review (OFR) has expanded. Comment should now be made on compliance with loan covenants and the SORP now includes the term "efficiency" regarding performance. This suggests that performance should be compared either to other RPs or to prior year performance.

Designated Reserves

The broad message is that the use of designated reserves is further discouraged. These should not be used unless for expenditure that is expected to be incurred in a near future period and will allow the reserve to be reversed. SORP 2008 states that: "The use of designated reserves should be limited and social landlords should only designate reserves for specific purposes and circumstances." Commentary is then required on each designated reserve that is not fully spent in the following period.

Land Acquired At Below Market Value

SORP 2005 introduced the distinction between acquisition from a public body and a private body. SORP 2008 adds a further consideration as to whether or not the land was acquired in connection with a development. If it was acquired in connection with a development then the "value will generally equate to the amount paid".

Shared Ownership And Mixed Tenure Developments

Some RPs are drafting pro-forma accounts to see the impact of any prior year adjustment at an early stage. Our reviews show that RPs have generally grasped the new approach to first tranche disposals, which now give rise to a surplus or deficit. However, we have seen much less thought given to whether there should be any restriction on surpluses as a result of mixed tenures within the scheme. The calculations are not straightforward and for any development with a mix of general needs and shared ownership, for example, the present value of the overall scheme will need to be assessed.

Further complications will arise where the different tenures are held in different group companies. On consolidation, the group perspective will need to be taken and a restriction on surplus may be required.

Those responsible for preparing the accounts also need to keep in mind the following when presenting any prior year adjustment (PYA).

• The statement of total recognised gains and losses will need to reflect the PYA (figure 2).
• The cashflow statement will need to be modified as the operating surplus will change.
• Accounting policies will need careful consideration and will need to be updated.
• Note 2 analysis in accordance with the determination will need to be modified as turnover, operating costs and operating surplus will have changed. The income and expenditure account may now include a line for 'cost of sales' and consideration should be given as to how this will be reflected in this note.

Fig 2: PYA reflected in statement of total recognised gains and losses

CHANGES TO TAX TREATMENT OF EMPLOYER ACOMMODATION

Following changes in legislation, it would be worth reviewing the tax treatment of your employees living accommodation.

There has been something of a stir recently, brought about by the publication of details of a deal struck between tax advisers, acting on behalf of the National Housing Federation (NHF), and HM Revenue & Customs (HMRC). The deal concerns the tax treatment of employer-provided living accommodation for wardens on assisted housing schemes. It has been revealed that HMRC believes wardens have been receiving a taxable benefit in kind, since changes in the law concerning the working time directive and the minimum wage now oblige employers to set up call centre arrangements for 'out of hours' emergencies. HMRC has agreed that if employers come forward with details of the wardens and their living accommodation, tax arrears need only be paid from 2006/07.

Unfortunately, the publication has been written in technical language and the practical issues that you need to understand in order to decide whether this could have an impact on your employees are not adequately explained. If you have 'live-in' wardens, whom you have regarded as exempt occupiers of living accommodation, you might wish to consider:

• the circumstances that trigger loss of exempt status
• how the taxable benefit from living accommodation is valued
• the information that has to be gathered before the taxable value can be calculated
• the way in which loss of exempt status impacts on ancillary matters, such as planned maintenance and improvement expenditure; council tax, utility bills and furnishings
• what should be done about the current tax year for the employees who might be affected
• how to estimate the cost of making a settlement for 2006/07 and 2007/08 with HMRC
• the consequences of taking no action now and waiting for HMRC to make contact with you
• how an employer might 'come forward' to HMRC and take advantage of the deal struck by the NHF.
  
  
  

GIFT AID ROUTE PLANNER

There is an opportunity for non-charitable RPs to eliminate significant corporation tax liabilities.

Non-charitable RPs in a group with charitable RPs can eliminate significant corporation tax liabilities, without depleting the assets of the group as a whole, by making a gift aid payment to one of the charitable entities in the group. Subject to the counter-effects of the recession, this could be particularly relevant in the current accounting period if a significant prior year adjustment arises on the adoption of the SORP 2008. If you are considering taking this action the following points should be taken into consideration.

Cash Gifts

A gift aid payment must be made in cash, generally on, or before, the end of the accounting period for which the tax relief is sought. The payment must not be part of a circular transaction. For example, the funds, once received, must not immediately be lent back to the donor. Also, the donor entity must have sufficient distributable reserves to cover a proposed gift aid payment to ensure that the transaction could not be regarded as an illegal distribution.

Gifting Property

Where a lack of available cash is a problem, the non-charitable RP can consider instead a gift of land and buildings to a group charity. The donor company obtains tax relief in the year the gift is made, against its profits, for the market value of the gifted property.

Property gifted in this way should be part of the donor's fixed asset housing properties, to ensure that any capital gain arising on the disposal is exempt as gifted to a charity. Development properties classified as trading stock, if gifted in this way, may give rise to additional taxable profits, which would defeat the object.

Always Remember...

The accounting implications and the impact on reserves need to be considered. For a cash payment, tax relief may be obtained in a particular accounting period for an amount paid up to nine months after the end of this period, provided the donor is a wholly beneficially owned subsidiary of a charity. There can be issues if the donor company is incorporated under the Industrial & Provident Society rules, and further advice should be sought in this instance.

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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