UK: RP Issues - A Briefing For Registered Providers Of Social Housing (Spring 2010)

Last Updated: 1 April 2010
Article by Jonathan Pryor

Editor's Comment - Testing Times

This edition of RP issues covers a wide range of topics of particular significance in today's challenging times. The core theme of value for money pervades all of the articles; it highlights the importance of an awareness of cost pressures and the difficult state of Government funding, particularly for housing, and the need to avoid unnecessary cost.

This in turn feeds directly into the need to evaluate whether group structures really do add value, and the care all Associations need to take when bidding for government related work not to take on avoidable pension costs. Another key theme is the very real cost of irrecoverable VAT that the sector has to bear, potentially set to rise further if VAT rates are increased, and the need therefore to ensure that you are taking advantage of appropriate reliefs and planning. In our experience, all too often insufficient attention is paid to this area leading to unnecessary cost.

We include two articles on future accounting changes; one makes some further comments on component accounting (it seems inevitably), which we covered in depth in our previous issue, and the other summarises the future changes in treatment of negative goodwill.

There is a very interesting article on motivation, which may well prove particularly important for organisations going through restructuring, or who are feeling pressures from drives to improve efficiency. We have also included a further reference to Brixx, which is now proving to be an invaluable modelling resource for many registered providers of social housing (RPs), and with which we have particular expertise.

Finally, we are delighted to welcome a guest article from a recently retired finance director, who has shared with you some of his ideas on how to improve financial reporting. Clearly, each organisation will need to take particular care in considering his innovative ideas on accounting policies and presentation.

Overall, there is so much in this edition of real significance to housing associations. In each case, we are outlining issues and solutions from a position of in-depth knowledge. Please do not hesitate to contact us if there any points you would like to discuss in more detail. We are really keen to help and look forward to your call.

OPTIMISING GROUP STRUCTURE FOR TAX PURPOSES

Thinking about simplifying your group structure? We look at how best to restructure for tax purposes.

In recent years, we have seen mergers between housing association groups which have led, in some cases, to very complicated structures. These often include a large number of entities, including charitable RPs, non-charitable RPs and non-charitable, non-RP companies. It was also fashionable in the late nineties/early noughties to create group structures that were 'ready for anything', with separate entities being created to carry out each activity of the RP group.

Apart from the administrative and governance issues that such unwieldy structures bring, they can also increase the rate at which corporation tax has to be paid by taxable group entities, give rise to the need to consider transfer pricing issues on inter-company transactions, and inhibit the ways in which profits earned by non-charitable entities within the group can be sheltered by gift aid payments.

There are therefore often compelling reasons to consider simplifying large groups, which may have evolved over several years and for several purposes. As a result, we are now seeing a trend towards the collapse of the larger group structures. Generally this is achieved by amalgamation or a transfer of engagements and undertakings and there are various reliefs available to make this as neutral as possible from a tax perspective. However, a review of the proposed restructuring is essential to ensure that no unintended tax liabilities arise.

In some instances, a group will contemplate a collapse of all operations into one charitable RP on the basis that there are fundamentally no non-charitable activities being undertaken. This may well be a risky oversimplification, as there are often grey areas for tax, particularly when considering shared-ownership or mixed-tenure developments. Such a charitable housing association may find its scope for certain activities restricted, or else that it has inadvertently generated non-charitable (i.e. taxable) profits, which, for a charity, cannot be sheltered by a gift aid payment. It should also be remembered that there is often a disparity between what activities are acceptable for a charity to undertake for legal/regulatory purposes, and what will qualify for tax exemptions.

Is there an optimum structure for tax purposes for a housing association group? It would need to minimise the number of active companies and allow sufficient flexibility with regard to the activities that can be carried out, and the ability to shelter taxable profits by way of gift aid. This would probably comprise a charitable RP (usually the parent company), a non-charitable RP, particularly for shared-ownership and mixed-tenure developments with a potentially non-charitable element, and a non-charitable, non-RP company for any activities of the group which may not sit well within an RP, or where it might be preferable for them to be carried out in an unregulated environment.

VAT should also not be overlooked. Often the overall recovery rate can be enhanced with a careful review of the group structure, perhaps by introducing a non- VAT group development company.

To an extent, this 'optimum' structure presupposes an ideal world, and there may be other configurations that will be equally workable. The most important point is that any restructuring exercise should always include consultation and advice on the tax consequences of the proposals, even in a largely charitable environment. This will ensure that no unforeseen tax issues arise, either when the restructuring occurs, or subsequently, in the operation of the new group.

A BLEAK OUTLOOK FOR SOCIAL LANDLORDS

We look at what the future holds for RPs now that we are (for the moment at least) out of recession.

Technically, the recent increase in GDP of 0.3% means that the economy is now out of recession. But as we look to the future – and putting aside fears of a double dip recession – what can social landlords expect from the economy and the Government?

Unemployment

The worst aspect of any recession is the human cost of unemployment: lives put on hold, childhoods blighted and for some youth unemployment moves seamlessly into long-term unemployment.

There is also the financial cost to consider: not just unemployment benefits and housing benefits, but also the wider support which higher levels of unemployment requires to mitigate its effect. And while people are unemployed they are not creating wealth.

So, what now? Regrettably, the story is a rather pessimistic one. In the last two recessions, unemployment lagged GDP and continued to increase even as the economy started to grow (shown in figure 1). If unemployment follows the same trend this time around, the headline rate could easily increase by a further 2% of the work force. That would imply a further 400,000 people becoming unemployed over the next six months and potentially remaining unemployed for at least two years.

Unemployment always seems to bear down hardest on those who are in lower-paid work and so social landlords need to be braced for more tenants falling out of work. Housing benefits should protect the rental income in the longer term, but inevitably the transition from paid employment to benefit claiming is not easy. Social landlords will need to offer more support and assistance, and may also face an increase in rental debtors while housing benefit claims are resolved.

Government Spending And Public Debt

The treasury estimated that the recession will reduce the national income by 5.2%, which will increase the public sector deficit by some £73bn. In the short term, this hole is being filled by increased Government borrowing, which will push up the overall forecast debt requirement for 2009/10 to an incredible £177.6bn.

The current Government expects to reduce the deficit and the borrowing requirement in the following ways.

  • Through the effects of economic growth, which is assumed to resume at an annual rate of 2.75%. Such growth will increase the tax take and should, in time, reduce the cost of social benefits.
  • By implementing a fiscal tightening regime which will reduce the gap between Government income and expenditure by £77bn over the next eight years. This will be implanted by tax rises and by freezing outgoings at current levels, i.e. a reduction in total spending in real terms.

The Impact Of Fiscal Tightening

Fiscal tightening will be felt throughout the economy. Currently, there is a lack of clarity as to exactly how and where reductions in spending will arise. This is partly because some of the tightening is expected to be achieved so far in advance. However, the Government has limited scope to reduce expenditure and certain spending is deemed to be outside of the normal budgetary control scope, for example:

  • unemployment benefits are dependent on the numbers eligible to claim that benefit (which could rise significantly)
  • interest payments will inevitably rise due to the massive increases in borrowing, and potentially, increases in interest rates
  • other social costs will increase due to demographic changes in society – for example, old age pensions will increase due to the changing age profile of society.

The Government has also committed to 'protect' certain expenditure – namely, expenditure on health, schools and overseas aid.

The net result is that some expenditure will continue to increase, so that there is proportionately less money for other areas. Freezing the health service budget in real terms can only be achieved by concentrating reductions in other budget areas.

It is estimated that these other areas will face a 12.9% cut on average by 2012/13.

However, the cuts are planned to be incremental over eight years. Should the Government choose to keep protecting the expenditure on health, schools and overseas aid, these reductions will deepen to a cumulative 23.8% by 2014/15 (with more to come by 2018).

Capital vs Revenue

As with most organisations, the Government now splits its spending between investment (i.e. capital outlay) and current outlay (i.e. operating costs). Over the last ten years there has been a significant increase in investment spending, which has risen from less than 1% of national income to over 3.5%. Included within this expenditure has been the considerable recent spending on housing.

However, this situation will change over the next four years; while spending overall is forecast to be frozen, current expenditure is forecast to increase by 0.7%, which requires large reductions in investment spending.

Investment expenditure, which increased by 12.5% from 1997/98 to 2010/11, is forecast to reduce by 14.4% by 2014/15.

Impact On Social Housing

The outlook for social housing providers is particularly dire.

Capital Grants

The forecast reduction in Government capital spending of 14.4% over the next four years will impact most on those departments which have high levels of investment expenditure. The department of Communities and Local Government is one such department, which currently spends over 50% of its budget on investment.

It is therefore highly likely that the significant increase in investment in housing over the last ten years will be reversed in the next four, with further reductions thereafter. New building programmes will be severely affected.

Revenue Grants

Even the modest 0.7% increase in current expenditure represents a reduction in real terms and the reductions will not be spread evenly.

We can expect the Government to cut expenditure whenever and wherever it can. Supporting People funding rates are already under pressure; this will only continue as the Government's fiscal tightening gradually takes hold over the next eight years.

Other revenue grants will also be squeezed and social programmes reduced or eliminated.

Housing Benefit

Currently, housing benefits payable to social landlords are some £10bn per annum. Although the current rent regime does not appear generous at the moment, a change to the Retail Price Index (RPI) + 1 formulae would provide a quick and easy way to reduce expenditure. Might we then see RPI + ½%, or even just RPI in the future?

What Should You Do Next?

The last two years have been difficult for social landlords, but the reality is that the future is probably going to be even worse.

Development programmes will need to be significantly curtailed as investment drops back to 1999 levels. Major developing social landlords may need to significantly reduce their development staff and may need to rethink their entire business models.

Revenues will come under intense pressure and social landlords will also need to deliver more for less as tenants become more needy, through increased unemployment and reduced net incomes.

Although it is possible that the Government's projections for the economy are pessimistic, many economists think the exact opposite. They worry that the recession is not over and that the assumed future growth rates are overly optimistic. Should this be the case, we can expect higher reductions in Government spending much sooner.

As Government spending is frozen for the next eight years, the coming decade will be one of stagnation for social landlords at best (January 2010's shock borrowing requirement does not bode well).

TOPICAL VAT ISSUES FOR RPs

Our recent survey has highlighted some important issues for RPs to consider.

Some key VAT issues arose from our recent VAT survey of the housing association sector. The survey produced a number of interesting talking points, not least of which is the quantum of irrecoverable VAT the sector incurs, which by our estimates runs into some £500m every year. This in turn underlines the need for housing associations to make sure they get the VAT basics right. The best way to make this happen is to ensure that your in-house accounts team has a sound knowledge of VAT principles, and an understanding of the method adopted for compiling the VAT return.

Nobody is expecting accounts staff to be VAT experts, but the key is being able to identify where there may be issues, and knowing when to ask a question. We are expecting a higher level of vigilance from HMRC in the future, and spotting problem areas early on in the VAT process may prove crucial to avoid VAT penalties. To help with this we regularly provide our clients with the opportunity to have informal VAT updates for their accounts teams.

Funding Arrangements

The growing complexity of funding arrangements entered into by housing associations often leaves the VAT adviser struggling to rationalise the expected VAT exempt treatment with the commercial deal. Most associations will automatically assume that any income stream tagged with the title 'grant' must mean that no VAT has to be accounted for. While this may often be the case, the arrangements should be confirmed. Our experience is that there are growing problems where more than one association is involved in providing services, and at least one of the service lines is connected with Supporting People grants. Identifying the correct VAT liability of the services can often prove problematic.

Property Development

These issues often arise where property development is key. While a material part of the development may qualify for zero rating, as representing new 'relevant residential' units, it is common to find that an aspect of the development also requires the provision of rooms, either for administration, training or meetings. The VAT liability of this part of the development is unlikely to qualify for zero rating as 'relevant residential purposes', and it will be important to confirm whether zero rating is possible using the 'relevant charitable' relief. This will inevitably require a detailed review of how the rooms are to be used before a valid zero-rate certificate can be given to the contractor.

A number of respondents to our survey appeared to be uncertain whether all the VAT reliefs available to them were being fully utilised. In the case of property works, particularly redevelopment, the value of certain zero-rate reliefs can be material, and in at least one case we have dealt with we were able to negotiate additional zero-rating with HMRC to the extent that the savings allowed for a step up in the general build specification of the development.

Temporary Staff

Finally, with the change last year to the VAT treatment of the supply of temporary staff, housing associations have been incurring much higher VAT costs on this item of expenditure, which for most associations is a material figure. The changes to the temporary concession which took place still allow agencies to charge VAT on their commission in certain cases, and Smith & Williamson is looking at ways of applying the new rules to assist associations in reducing their VAT costs.

CHANGES IN ACQUISITION ACCOUNTING IN THE NEW SORP

How will the changes in the new SORP affect the way RPs treat acquisitions?

With all the talk of component accounting it may surprise you that there are some other changes afoot in the new statement of recommended practice (SORP) which could be of significance to some associations. One such change that has not been as well publicised to date is in relation to the treatment of acquisitions.

When an acquisition is made the recognised assets and liabilities of the acquired association are measured at fair value at the date of acquisition. For instance, housing properties will normally be recognised at existing use value for social housing.

In the RP sector it is not unusual for acquisitions to be made by way of a transfer for engagements for negligible consideration and often for no consideration at all.

Under the current SORP, where the fair value of the acquired is higher than the consideration given, negative goodwill is created, which is shown separately on the face of the balance sheet in 'capital and reserves'. The SORP gives very little opportunity to release negative goodwill and in all likelihood it will be released very slowly, if at all, and will remain as a distinct and separate reserve forever.

The feedback during the current SORP consultation was that the concept of negative goodwill did not reflect the true substance of the transaction undertaken. It was also recognised that the use of the terminology 'negative goodwill' led to confusion within the sector, especially with the contradictory use of the word 'negative' for a transaction which strengthened the net asset value of the association.

The proposed revised treatment under the new SORP will be to scrap the concept of negative goodwill. The acquired assets and liabilities will still be included at fair value but where the consideration given is lower than the fair value the resulting credit will be treated as a donation and included on the income and expenditure account within turnover.

For acquisitions that have been undertaken in previous years, the new guidance will create a change in accounting policy. Depending on the final text in the revised SORP, this may therefore lead to a prior year adjustment and the transfer of any negative goodwill to the income and expenditure reserves. However, even if RPs are not required to restate, it may still be sensible to do so and should not be too problematic.

STEERING STAFF THROUGH STORMY WATERS

Do you manage a team of people? Have you picked up on some of the changes in behaviour in your team over the last year? Rachel Stone, who leads Smith & Williamson's People Management team, reflects on some of the people issues facing managers in such demanding times.

Improving staff morale during difficult times can be challenging. We look at ways in which you can reassure staff without breaking the bank.

Thirst For Communication And Information

When the economy tightens, staff want instant information on how this affects them and the organisation they work in. Perhaps you have noticed an increase in questions about corporate performance, budgets and the management team's response to harsher times. This is a great opportunity to share important information and to gain the whole team's buy-in.

Head In The Sand

For some staff it is all too much. They revert to the core activities of their jobs, paying less attention to team needs and trying to create a sense of control over their day-to-day working life. Spending time one-on-one with each team member allows them to talk about their concerns and gives you the chance to make sure that they are focusing on the right things.

Money Misers

Money is tight, right? For some staff, this is the moment to re-use the teabags and ration the toilet roll. Make sure that your team aren't saving money in the wrong places – reducing customer or staff morale and effectiveness by cutting back in the wrong areas. Helping staff to understand the costs of your part of the organisation and giving them a remit for effectiveness rather than cost savings can help to avoid a reduction in service levels to your customers. Austerity living may be in vogue, but customers expect a high standard of response, regardless of your budget.

Dad's Army

Remember Corporal Jones and Private Fraser? Between them, their messages of "Don't panic" and "We're all doomed" served to un-nerve their colleagues at moments of pressure. If you have colleagues, particularly at senior level, who tend to automatically focus on the negatives, agree with them that their input is valuable, but that the team needs to agree constructive messages for staff that everyone adheres to. If your senior team presents a united and positive front, staff will have confidence in the decisions the team makes.

And Finally...

Don't forget that your behaviour may have changed as well. Review your own daily actions and attitudes to see if you are unconsciously giving your team the wrong messages about their ability to survive and thrive. If you lead a team of people, your stance on the key issues of the day will inform their views, so think, reflect and adapt to best support your team through a difficult year.

WINNING CONTRACTS FROM THE PUBLIC SECTOR

Many RPs tender for contracts outsourced from the public sector. Pension commitments associated with these contracts go beyond the standard TUPE requirements that apply to private sector transfers.

Updated guidance for Best Value Authorities was published in December 2009 but experience suggests that some authorities are not as familiar with this (or previous guidance) as they should be. This leaves RPs exposed to the risk of taking on potential liabilities that they would not have acquired had the letting authority adhered to issued guidance.

Pension Options

There are two options available to contractors: adhere to the public sector scheme through 'admitted body status' (local government pension scheme (LGPS)) or 'direction status' (NHS scheme), or offer a private scheme that is deemed to be 'broadly comparable'.

The LGPS is a funded scheme with a core funding rate for each local authority. Variations to this will apply to each participating employer, reflecting its membership profile and associated liabilities.

The NHS scheme is unfunded, so no funding deficit can be identified, whether before or during the currency of a contract. Unsurprisingly, it has become difficult to secure approval for contractors to participate in this scheme so a comparable scheme is likely to be needed.

Admitted Body Status – LGPS

If guidance is adhered to, participation in the LGPS should not generate contractor liability for any past service funding deficit when the contract commences. Benefits accrued during the lifetime of a contract are the responsibility of the contractor and the administering authority's actuary will identify any shortfall payable on expiry.

Unexpected Risks

There is a real risk of creating an additional deficit in respect of previous LGPS service where, for example, higher pay increases are granted than would have applied in the public sector. Those with substantial past service will have the biggest impact, so contractors need to exercise caution.

Not all authorities are as familiar with their guidance as one might expect. It is therefore essential to ensure that accrued liabilities are properly funded by the letting authority and that no liability for an existing funding deficit is acquired following a successful tender.

'Broadly Comparable' Scheme

The Government Actuary's department (GAD) decides what is 'comparable' and issues a certificate to this effect, either covering a single transaction (individual assessment) or multiple transfers (GAD passport). A passport will cover all transfers from the same sector within a limited period (around two years).

A scheme that is deemed broadly comparable does not have to replicate exactly the corresponding public sector scheme but it does have to contain the same type of benefits, with a total value of not less than those provided under the original scheme.

Transfer Value

Unlike participation in a public sector scheme, a scheme that is broadly comparable must accept past service liabilities for anyone who wishes to transfer their accrued rights into the private scheme. This is achieved by payment of a transfer value, normally covering all requested transfers in a single transaction.

Contractors have no say in the calculation of transfer values, which are not negotiable. This means that they could create a funding deficit from inception. It is therefore essential to involve an independent actuary at an early stage of the contract negotiation process, so that appropriateness may be assessed.

Should the actuary feel that the transfer value available is lower than needed to cover projected liabilities, an adjustment to contract pricing may be possible. It is therefore appropriate to consider this aspect of scheme funding at an early stage of negotiations. This will generally entail communicating with both the letting authority and the administering authority simultaneously to keep both parties informed.

In practise, few employees choose to transfer to a private scheme, even though this means being treated as a leaver under the public sector scheme that holds their accrued benefit entitlement.

The Best Option?

There is no solution that fits all circumstances. In general, if employments are being transferred from the NHS and the NHS scheme will allow participation through direction status, it is difficult to find a reason not to apply for it.

Where employees are members of the LGPS there are various aspects to consider, depending on the chosen method of future pension provision. Admitted body status is likely to be readily available but the treatment of past service liabilities and the lack of control over funding assumptions give rise to concern.

Providing a comparable private scheme also carries risks, including higher servicing costs (professional advisers, administrators, etc). An area where a GAD passport scheme could pay dividends is when there is an intention to compete for multiple tenders in order to grow the business. The availability of a passport scheme will generally facilitate the negotiation process and the added flexibility that this provides can help to win tenders.

There is no substitute for professional advice when considering the pensions aspects of a particular tender.

COMPONENT ACCOUNTING TIMETABLE DEFERRED TO 2012

Although the implementation date for component accounting has been pushed back to March 2012, it may be worth looking at adopting it sooner rather than later.

At one point, it looked possible that the new requirements on component accounting would be introduced with immediate effect. It quickly became clear, however, that this would have a substantial detrimental effect for many associations because the preparation time required was simply too great to enable the necessary decisions and collection of data to happen with any degree of robustness. The settled position then emerged that March 2011 would be the first year for compliance. This too has now moved to March 2012 as the scale of the task has become clearer.

In our view, this is profoundly good news. From a purely technical perspective, we believe component accounting will benefit the sector. Firstly, it delivers greater consistency and comparability. Secondly, it should provide better financial information and should, over time, save the sector a considerable amount of money from a more in-depth appreciation of lifetime costing. It is clear, though, that many in the sector remain to be convinced. This lack of conviction may lead in some cases to an emphasis on achieving compliance rather than on maximising the benefits from the change. In addition, having worked with several associations who have implemented component accounting in full, and therefore having experienced the change at the sharp end, we fully appreciate the challenges. Many RPs suffer from gaps in information, which would require significant time and effort to resolve. Having an extra year will be helpful in ensuring that the optimum balance is achieved between obtaining the worthwhile benefits from component accounting and minimising the work required, as well as spreading the workload proportionately.

There is nothing to stop RPs who wish to adopt component accounting early. If the decision is made in principle to proceed to 31 March 2011, and the workplan is manageable, it would arguably be wise to start sooner rather than later. RPs would benefit from building up their knowledge of the change process required, so that if need be the timetable can be relaxed if other issues arise or the process proves more challenging than expected. If RPs consciously defer their development of component accounting to try to be ready just in time for March 2012, there is a greater risk that problems might arise.

ARE YOU GETTING VALUE FOR MONEY?

With many factors affecting the income of housing associations, it's become more important than ever to ensure you have a rounded approach to value for money.

I am sure all associations are very conscious of the challenging environment we are moving into. Although demand for social housing nationally shows no signs of abating (indeed quite the contrary) the resources available, and the costs of delivering the service, look to be heading pretty universally in the wrong direction.

Adrian Wild in his earlier article set out just how bleak prospects are for the economy and for social housing in particular. If that wasn't bad enough, there are numerous factors putting further pressure on RP business plans in the short and medium term.

We have outlined below some of the factors influencing the cost/income profile of housing associations.

  • 2010/11 rent reductions
  • Supporting People funding in decline
  • Pension costs
  • Changes to national insurance
  • Code for Sustainable Homes adding to costs
  • Potential rises in VAT
  • Government funding shortages
  • Ageing property
  • Rising regulatory and client expectations on service standards
  • Seemingly inevitable future increases in interest rates

No doubt there are many more, and if that was not bad enough, we also have potentially far-reaching changes in financial reporting via component accounting (discussed on the opposite page) and International Financial Reporting Standards (IFRS).

It is therefore particularly important that all housing associations invest time and resources in ensuring they have a rounded approach towards value for money. This is absolutely not the same as having a strong procurement department. Although good procurement plays a vital role in any value for money strategy, it is nowhere near sufficient on its own.

We have worked with several housing associations on developing value for money strategies, carrying out research and developing their implementation plans. These have covered a wide range of different aspects of housing association activities, including the operations of the various support functions (especially HR, finance and IT), group structure, procurement, housing management and maintenance functions. Our experiences have confirmed that there clearly is much for the sector to learn and that we have some very useful insights to share.

If you have not done so already, we would welcome a discussion on how to improve value for money, how to demonstrate you are achieving value for money, and how you can report to your board on the subject, consistent with the Tenant Services Authority's new standard.

KEEPING A DIARY OF ACCOUNTING CUNNING PLANS

RP issues is delighted to welcome a guest article from one of the acknowledged leading lights in the RP sector, Robson Conman, recently retired finance director of the Alchemy Housing Group.

Can I start by saying how grateful I am to Smith & Williamson for giving me the opportunity to write an article in this March newsletter. I have always read the articles with great interest, although our paths have not previously crossed and I have never had the opportunity to work with your firm. I have no doubt it would have been a very interesting experience.

I thought your readers would be interested to read excerpts from my diary, which I have kept over the last nine years since first arriving at Alchemy.

17 March 2001

First day at work. Excellent canteen.

18 March 2001

Quick look at financial position. Looks dire. Projected results for the year show a deficit and covenant breaches. Perhaps I should have looked at the accounts before I joined. (Column A of figure 1).

19 March 2001

No problemo! We are capitalising far too little. Some nonsense about only capitalising expenditure which improves the net revenue above the original standard of performance of the asset. This seems to work out at only around 20% of major repair expenditure. A very old fashioned concept; where would the pillars of corporate America such as Enron and Worldcom be with such an idiotic approach?

My grandmother's 80th birthday today; on that basis 80% seems pretty reasonable.

Also added in some extra capitalised interest and development overheads; can't quite believe how high they are but not important since now capitalised. (Column B of Figure 1).

20 March 2001

Just had an excellent meeting with our auditors. (Editor's note: just to avoid any risk of confusion, the auditors were not Nexia Smith & Williamson). I think we can work really well with them. Very pragmatic.

16 July 2001

Accounts all signed.

22 January 2005

Despite my years of experience, the results are still not getting any better. Looks like I will need to impose a tight restriction on maintenance expenditure (unless it can be capitalised of course). (Column C of figure 1).

16 March 2005

Just had an annoying meeting with some tenants disgruntled about a delay in Alchemy delivering some improvement works that some idiot in maintenance promised months back. How dare the tenants complain? Don't they realise I have a business to run!

22 March 2005

Just had an excellent meeting with our auditors. I really like these guys! They suggested some associations were looking at something called component accounting. This lets you capitalise 100%! Yippee!

23 March 2005

A few more thoughts about this component accounting thingee. I don't want to do it for previous years expenditure because it absolutely wrecks the results due to higher depreciation charges and you have to write off previously capitalised items when you replace them (silly idea; this would reduce our surplus!). I only want to do it for this year, and only on some assets. Definitely don't want to do it on kitchens and bathrooms as the depreciation numbers will be too big in future years. Auditors seem happy to accept it is immaterial.

24 March 2005

Nice discussion with our auditors. All sorted. We bring in component accounting from this year only; we pick and choose which assets to apply it to (pragmatic!). No need to look at past expenditure (phew!). (Column D of figure 1).

16 March 2009

Results look dire again. Depreciation charges really starting to mount. Given that we agreed with our auditors that we did not need to revisit earlier expenditure items, as each year goes by the depreciation charges go up a lot. Already extended lives a couple of times, but can't keep doing this. I had hoped the new treatment on shared-ownership first tranches would solve the problem but unfortunately we are selling them below cost.

Stupid board members keep asking questions about cash flow (as if that matters). Told us to slow down development. Don't they realise that this will mess up all the capitalisation of interest and development costs? It will ruin our business. Auditors still on side though. (Column E of figure 1).

Thankfully, no worries on the impairment front. Quite a cunning wheeze, this planned internal subsidy idea. If we know it is a rubbish scheme, and decide to go ahead anyway, no impairment. It's only if we think it is a good scheme and it turns out rubbish that we have a problem. Fortunately, I know all of our schemes are rubbish so no problems there!

16 July 2009

Good and bad news. Good news is that we have decided to merge with NAIV Housing Group. Bad news is some reference to due diligence and wanting to understand our accounting policies a bit better. Isn't it obvious? Slowing down development killed our business; it's that simple. Without the levels of capitalisation I was able to put through, our projections for 2010/11 just looked awful and even I couldn't do much about it (Column F of figure 1). Could have done with another wheeze like component accounting on a selective basis. IFRS might just come to our rescue but looks like it is too many years away.

12 December 2009

Tricky meeting. Lots of questions. Fortunately, most of the criticism seemed to be aimed at our auditors, which is fair enough. They responded quite well I thought: no guidance yet on component accounting, lots of different views, need to be pragmatic, all the usual stuff. Had their technical person explaining why prior year adjustments were not needed when you changed a policy; something about accounts not being qualified in previous years therefore OK and just a change in accounting estimate. Sadly, someone from NAIV started quoting from an FRS (FRS 18 I think), which seemed to be clearly saying this was nonsense and it all went quiet.

NAIV seems to think our auditors are just plain wrong. I said several times; "just following advice from our auditors." Got a few suspicious looks, but seem to have got away with it.

12 February 2010

Sad day. Leaving Alchemy with a heavy heart. I know I have done a really good job and kept the business going, delivering over 4,000 new units of social housing. Nevertheless, not all bad news; nice recruitment agency tells me plenty of other finance director jobs in the sector for someone with my track record and experience.

MODEL OF CHOICE

Brixx is becoming the modelling tool of choice for many RPs.

Brixx is a powerful modelling tool which can create well-structured long-term business plans for RPs in a much more robust manner than the traditional spreadsheet-based tools. Smith & Williamson hosts a user group for RPs to learn more about the tool.

Brixx uses pre-programmed 'objects' with in-built logic to speed development of projections. However, the use of such objects causes the loss of visible audit trail between inputs and outputs. This emphasises the importance of a business plan validation.

One other particular issue is how well RP business plans comply with the new SORP, particularly with regards to component accounting, and longer-term compliance with IFRS. This can be a specific issue when assessing covenant headroom.

Smith & Williamson was the first national accounting firm to become a Brixx accredited partner and now has several members of staff trained to use it. We continue to perform a significant number of business plan validations both in Brixx and Microsoft Excel, either for internal purposes or in connection with submissions to funders or regulators.

There are two active Brixx user groups, and they have become useful mechanisms for disseminating information about current issues that arise and future plans for the tool. Typically the south user group is attended by representatives from more than 30 RPs. The next meeting of the south group will be held at Smith & Williamson's Moorgate office on Wednesday 14 April 2010.

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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