FRS 102 and the new Statement of Recommended Practice: Accounting for registered social housing providers

Transcription

1 FRS 102 and the new Statement of Recommended Practice: Accounting for registered social housing providers December 2013

2 Plan for the session Part 1 Part 2 Part 3 Part 4 Introduction and background Key areas of change (and debate) Implementation, resources, costs What should I do now? 2

3 PART 1 Introduction and background 3

4 Tier structure Plans for convergence of UK GAAP with international standards talked about for a number of years. These are now incorporated into New UK GAAP (FRS 102) published in March Proposed accounting regime Previous Tier structure Current proposals (January 2012) Tier 1 EU Adopted IFRS EU-listed entities AIM entities Other publicly accountable entities EU-listed entities AIM entities If required by Company Law Tier 2 FRS 102 (new UK GAAP) Non publicly accountable entities Other entities Majority of sector 4

5 Role of SORPs Continuing role for the Statement of Recommended Practice (SORP) in the social housing sector SORP will provide supplementary guidance for sector specific issues Early adoption of FRS 102 is permitted, to the extent that it does not conflict with the existing SORP HCA Accounting Direction will have same legal status 5

6 The FRS 102 transition timetable Transition planning and implementation 1 April 2014 / 31 March 2015 O/Bal sheet / comparatives 31 March 2016 First full year financial statements Date Milestone 14 Nov 13 SORP 2014 exposure draft issued 14 Feb 14 Consultation on SORP 2014 exposure draft closes March 14 SORP Working Party considers responses May 14? June 14? July 14? CAPE to approve SORP Accounting council approve SORP Financial Reporting Council Meeting approves SORP 1 Apr 14 Transition date for opening balance sheet 31 Mar 15 Comparative year end 31 Mar 16 First full FRS 102 year end financial statements

7 PART 2 Key areas of change (and debate) 7

8 Key areas of change (and debate) There are a number of changes introduced by FRS 102 and the Exposure Draft of the new SORP, the key areas are highlighted below: Narrative reporting Housing properties Grant accounting (including recycling of grants) Stock swaps Impairment Defined Benefit Pension schemes Financial Instruments 8

9 Narrative reporting Current position Operating and Financial Review for social landlords with more than 5,000 units Detailed guidance setting out the requirements for the Operating and Financial Review FRS 102 and SORP Exposure Draft FRS 102 silent on narrative reporting, but SORP Working Party felt it was important to include narrative reporting in the SORP SORP now refers to strategic reporting and sets out the general principles to be followed and the high level requirements only Consistent with the new Companies Act requirements 9

10 Narrative reporting Proposed content of the strategic report Objectives and strategy for achieving those objectives; Business model; Development and performance in the year and at the year end; Future prospects; Principal risks and uncertainties; Key performance indicators; Environmental matters; Analysis of gender of directors, senior managers and employees; and Governance. 10

11 Narrative reporting And the following principles applied: Fair, balanced and understandable; Concise; and Where appropriate, information should be forward looking and specific to the entity. The structure and presentation of the strategic report should be reviewed annually to ensure it continues to meet its objectives in an efficient and effective manner. 11

12 Housing properties Property plant and equipment vs investment properties Are housing properties property, plant and equipment or investment properties? Key consideration is the intended use of property Is the housing property held primarily for social benefit? Yes = property, plant and equipment and can be measured at cost or valuation No = investment property measured at market value SORP sets out guidance on considerations to be applied in assessing the intended use of a housing property 12

13 Accounting for government grants Current position Social housing grant (government grant) is netted off fixed assets on the balance sheet to give the net book value of the fixed asset FRS 102 and SORP Exposure Draft FRS 102 requires that government grant is accounted for applying either the accrual model or the performance model The SORP mandates: Accrual model for those at historic cost Performance model for those at valuation 13

14 Accounting for government grants Area of significant debate for the SORP Working Party the logic applied to the different accounting treatment based on the following: Majority of government grant is to assist with the cost of development of housing properties, and accrual model reflects the substance of this arrangement. On revaluation the link between the cost of the housing property and the grant is extinguished and in applying the performance model reflects the fact that government grant is partly intended to compensate for the fall in value for social housing property. 14

15 Accounting for government grants How would accrual model apply to social housing grant? Defer social housing grant on balance sheet as liability Amortise (release to profit and loss) over life of asset. Amortise over life of structure (not land) Only amortise over components if grant is given for that purpose Impact: Smoother profit and loss over life of the property assets Amortisation of grant offsets (in part) the increased depreciation 15

16 Accounting for government grants What does the accruals model look like? Cost 100,000 (land = 30,000, structure = 70,000) Grant 50,000 UEL 100 years Dr Fixed asset cost 100,000 Cr Cash 100,000 Dr Cash 50,000 Cr Deferred Income 50,000 Dr Depreciation expense 7,000 Cr Accumulated Depreciation 7,000 Dr Deferred Income 5,000 (50/100) Cr Grant income 5,000 16

17 Accounting for government grants Accrual model Comparing the impact of current accounting arrangements to the requirements of FRS 102 and the new housing SORP: Under current accounting arrangements Under FRS 102 and the SORP Depreciation charge (200) (700) Amortisation of grant Net impact each year (200) (200) 17

18 Accounting for government grants How would performance method apply to social housing grant? Initially hold on balance sheet as liability Recognise the grant as income as soon as performance-related conditions are met When are performance-related conditions met? Impact: Increased volatility in the profit and loss Higher depreciation charge on assets in future years 18

19 Accounting for government grants Performance model (all conditions met) Cost 100,000 (land = 30,000, structure = 70,000) Grant 50,000 UEL 100 years Dr Fixed asset cost 100,000 Cr Cash 100,000 Dr Cash 50,000 Cr Grant income 50,000 Dr Depreciation expense 7,000 Cr Accumulated Depreciation 7,000 19

20 Accounting for government grants Performance model Comparing the impact of current accounting arrangements to the requirements of FRS 102 and the new housing SORP: Under current accounting arrangements Under FRS 102 and the SORP Depreciation charge (200) (700) Recognition of grant 0 50,000 Net impact in year 1 (200) 49,300 Net impact each year (200) (700) 20

21 Accounting for non government grants FRS 102 requires that non government grants must be recognised using the performance model the accrual model cannot be used Recognise grant when performance conditions are met Could be relevant for grants received from private companies for solar panels, eco-grant etc. 21

22 Recycling of grants Current position Where there is an obligation to recycle or repay social housing grant this is recognised as a liability on the balance sheet on disposal of the associated housing property FRS 102 and SORP Exposure Draft Debate over whether the requirement to recycle social housing grant is a liability Conclusion reached was that it is a liability and therefore no change to accounting requirements from previous SORP Recognised as a provision on disposal of a property 22

23 Stock swaps Current SORP Silent on stock swaps no specific accounting guidance provided FRS 102 and SORP Exposure Draft Accounting and disclosure requirements introduced for stock swap transactions FRS 102 sets out the accounting requirements for property, plant and equipment acquired for non-monetary assets these principles apply to stock swap transactions Fair value of property, plant and equipment acquired = existing use valuation for social housing ( EUV-SH ) 23

24 Stock swaps FRS 102 and SORP Exposure Draft Social housing grant transfers with the properties Receiving social landlord will have the obligation to recycle or reuse the social housing grant in the event of the assets received being disposed of The current value of the grant obligation transferred is included in the EUV-SH No transitional arrangements must be applied retrospectively 24

25 Stock swaps How does this work in practice? The following stock is being swapped between social landlords (both account for housing properties at cost): RP1 100 units Cost = 8,000,000 Unamortised grant = 3,200,000 EUV-SH = 12,000,000 RP2 80 units Cost = 6,000,000 Unamortised grant = 2,400,000 EUV-SH = 10,000,000 25

26 Stock swaps Fair value of properties is determined as EUV-SH therefore RP2 will pay 2,000,000 in cash to RP1 in addition to the stock transferred. Accounting entries for this transaction would be: RP1 RP2 Cr Fixed assets 8,000,000 6,000,000 Dr Grant 3,200,000 2,400,000 Dr Fixed assets 10,000,000 12,000,000 Dr Cash 2,000,000 Cr Cash 2,000,000 Cr Profit on disposal 7,200,000 6,400,000 26

27 Impairment Current position Concept of planned internal subsidy whereby impairment is not recognised when it has been approved as part of the overall assessment of the scheme / development FRS 102 and SORP Exposure Draft FRS 102 refers to fair value less costs to sell and value in use within the impairment sector Debate over value in use and how this concept could be applied to the social housing sector Planned internal subsidy not a suitable valuation method Discussions with valuers provided additional information on EUV-SH and how it is calculated 27

28 Recent developments FRS 102 and SORP Exposure Draft (continued) Determining the carrying amount of an asset how is grant taken into account? Triggers for impairment internal and external factors to be considered When it is necessary to carry out an impairment review More frequent impairment reviews? 28

29 Defined benefit multi employer pension schemes Current position Multi-employer exemption available for defined benefit schemes where it is not possible to separately identify the underlying assets and liabilities of the scheme Pension scheme information is disclosed in the notes to the financial statements but not included in the balance sheet Updated SORP Exposure Draft Multi- employer exemption still holds...this is dependent on Trustees to continue to not be able to identify underlying assets and liabilities Agreements in place to fund past deficits will require recognition as a liability in the Statement of Financial Position 29

30 Financial instruments Current position Limited fair value accounting of financial instruments in the housing sector Majority follow disclosure requirements of financial instruments standards only Updated SORP Exposure Draft Basic financial instruments held at amortised cost same as now Complex (or non-basic) FI fair value movements taken to profit and loss account volatility Hedging arrangements new arrangements under FRED 51 Very complicated likely to require specialist input if you have complex instruments 30

31 Other areas of change Leases Standard rental agreements with tenants meet the definition of a lease under FRS 102 No change in accounting, BUT increased disclosure requirements Related party transactions Disclosure required for all transactions with related parties This includes board members therefore all transactions and year end balances with board members must be disclosed in the notes to the accounts Disclosure of transactions with board members can be aggregated 31

32 PART 3 Implementation, resources and costs 32

33 Implementation resource requirements Practical implications of conversion PROCESS SYSTEMS PEOPLE Accounting policies New controls New valuations Impairment modelling Budgeting process Project set up External audit costs Budgets and forecasts Comms to stakeholders Accounting systems Data gaps Update chart of accounts Training Increase data collection Management reporting Communication strategy Training strategy Project Management support Resource / skills Corporate governance Embedding knowledge in new policies and processes 33

34 How much will it cost? Depends on a number of factors: PROCESS SYSTEMS PEOPLE Process costs Drafting policy / process maps External valuer costs Changes to reporting Project team Audit fees System changes / costs Quality of data (property / grant) Treasury management system General ledger tailoring People costs 3-4 year process, 2-3 people Other sectors employed contractors Skills available internally? Likely to require treasury expertise Requires full ownership Costs of training 34

35 PART 4 What should I do now? 35

36 Next steps What is the impact of FRS 102 and the new SORP on your organisation? Need to collate information and start looking at key areas now Not just a finance team responsibility Engage with Board and Audit Committee members some of the changes will have a significant impact on the reported results Engage with lenders to discuss impact on loan covenants 36

37 A successful conversion model: what should I do now? Transition planning and implementation 1 April 2014 FRS 102 o/bal 31 March 2015 FRS 102 Comparatives 31 March 2016 First year of reporting Phase 1 Phase 2 Phase 3 Impact Assessment 2.1 Project Set-Up 2.2 Evaluation & Issues Resolution 2.3 Initial Conversion opening balance sheet Embed Change

38 Assessing the impact. Phase 1 Impact assessment Phase 1.1 Phase 1.2 Phase 1.3 Conduct desktop review High level diagnostic sessions Report findings & develop implementation plan Objectives Identify the principal issues created by transition to FRS 102 Identify implications of each chapter. Could be grouped into impact on financial results, processes, systems and people Formulate a high level FRS 102 implementation plan 38

39 Questions 39

40 Contacts 40

41 This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it PricewaterhouseCoopers LLP. All rights reserved. In this document, refers to PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.