UK: Reducing The Uncertainty About Impairment Provisions

Last Updated: 25 February 2009
Article by Jonathan Pryor

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.

To read the help sheet in full, please visit www.smith.williamson.co.uk/media-events/publications

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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