Uk cg reportingand_accountingupdateforregisteredsociallandlords
18547 sg LookingForward 21/3/07 10:40 am Page 1 March 2007 Audit Looking Forward – reporting and accounting update for Registered Social Landlords SORP 2007 If you are looking to adopt the shared The exposure draft of the SORP was ownership proposals early remember the published in summer 2006 and it was other accounting implications: expected that the final SORP would have • The proportion of shared ownership been published at the end of this month with properties to be sold under a first tranche RSLs encouraged to adopt early in their sale needs to be included within current March 2007 accounts. assets and an analysis given between completed shared ownership properties However, the proposals, particularly in and those in the course of construction. respect of shared ownership accounting, have met with significant opposition. It seems • The first tranche sale proceeds need to be unlikely that the shared ownership included within turnover and the relevant accounting proposals will be dropped proportion of the development costs as completely, but the SORP working party is well as marketing and legal costs should reviewing the proposals carefully and is likely be included in cost of sales. to come up with a slightly revised In this issue: consultation draft of the SORP in the next Other key changes in the exposure draft of • SORP 2007 – Main issues and implications couple of months with another Exposure the SORP include the following: Draft in the autumn. Although the SORP has • General Determination 2006 – reminder of • Accounting for complex developments – not been issued in final form, a number of disclosure changes where an RSL is involved in cross subsidy RSLs are already accounting for first tranche schemes, i.e. properties are being built for • Variable service charge reporting – it’s back sales through the income and expenditure sale within a development in order to on the agenda account and it is likely that more will be finance social housing in the same scheme, adopt this accounting policy in this year’s • Charities Act – implications for RSLs profits should not be recognised on the financial statements. properties for sale if the result would be • Companies Act – timetable for change that the social housing would be carried at FRS 18 permits this treatment provided that • The longer term – IFRS convergence – a value in excess of its EUV-SH valuation. the directors can justify that inclusion of first implications for RSLs However, complications may arise where tranche sale proceeds in the income and the properties for sale are being developed • Pension costs – accounting for SHPS expenditure account gives a fairer view of the in one entity within an RSL group but the performance of the RSL rather than the social housing is being recorded in another previous treatment. It should not be simply entity. In this instance, particular care because it would allow the RSL to meet its needs to be paid to allocating costs debt covenants or show a surplus rather than between the two entities and potentially a deficit! FRS 18 requires an RSL adopting profits in the entity selling the properties this treatment to disclose the rationale for may need to be eliminated on and fact of the departure from the 2005 consolidation if this results in the social SORP in their financial statements, and, if this housing being held at a value in excess of treatment is adopted for the first time this EUV-SH in the group accounts. year and the effect is material, to restate the prior year accounts to reflect a change in • Related Party disclosures – the exposure accounting policy. draft appears to require disclosures which go beyond those strictly required by FRS 8. Our response to the exposure draft recommended that the SORP should not include these disclosures. If the Housing Corporation believe that the additional disclosures are required then they should . . Audit Tax Consulting Corporate Finance . . instead be included in the next version of the General Determination.
18547 sg LookingForward 21/3/07 10:40 am Page 2 Looking Forward – reporting and accounting update for Registered Social Landlords • Accounting for transfers – the SORP The most significant of the changes is the test, it is well worthwhile formally reviewing requires that RSLs consider whether large additional fixed asset addition disclosures. the proposals to ensure that there are no scale voluntary transfers are actually This, coupled with the 2005 SORP adverse implications for some of the entities transfers of an undertaking rather than a requirements on accounting for expenditure within your Group. simple purchase of assets. Key features of on existing properties will make any the former might be that existing staff are ‘aggressive’ capitalisation of major repair The concept of an exempt charity has gone being transferred together with operating expenditure very clear to readers of the and charitable RSLs will need to comply in full systems and other operating assets. accounts. For those RSLs who have adopted with charity law. It is yet to be seen how the The implications are that if the transfer is component accounting it will be important Housing Corporation intends to carry out its really an acquisition of a business rather for them to draw readers’ attention to their role as regulator on behalf of the Charities than the acquisition of fixed assets, then accounting policy as there is a danger that Commission for the sector. It is possible that the assets and liabilities acquired should be readers may wrongly interpret high levels of the Housing Corporation will look to introduce fair valued and accounted for under FRS 7. major repair expenditure being capitalised as additional disclosure requirements in order to evidence that the RSL is being imprudent in assist their monitoring of the sector. Housing Corporation – Accounting its accounting policies. Requirements for Registered Social Companies Act 2006 Landlords – April 2006 Service Charge accounting and The provisions of new Companies Act will The Housing Corporation issued a new reporting impact most companies within RSL groups General Determination in April 2006. This will The Commonhold and Leasehold Reform Act going forward. Key areas of substantial be first year that RSLs will have to adopt the 2002 introduced a requirement for fuller and change in the Act include: new disclosure requirements although many more consistent reporting of variable service • Directors’ duties and derivative claims. voluntarily gave these disclosures in their charges to tenants and leaseholders, 2006 financial statements. As a reminder, the together with new provisions for the holding • Shareholder rights. main changes are as follows: of service charge payers’ monies. The • Electronic communications. Government’s initial proposals for accounting • more analysis is required in ‘note 3’ for and reporting on service charge statements • Business Review for quoted companies. ‘other costs’ where these other costs were particularly onerous and were represent more than 5% of total operating • De-regulation of private companies. withdrawn after the initial consultation. costs; • Limitations on directors’ and auditors’ • the disclosure requirements for Supporting The Department for Communities and Local liability. People income have been amended Government has been working on new although the detail proposed in the proposals and we understand that these are The deregulatory provisions of the Act will be consultation draft of the Determination due to be published for consultation shortly. welcomed by RSLs with many corporate has been much reduced; An audit of individual service charges is subsidiaries. However, some work will be unlikely to be required although an needed to take advantage of these as many • separate disclosure is required in the fixed accountant’s report will be needed for each of them will require changes to articles of asset note of additions to completed service charge scheme. There will also be a association. For a useful summary of the new properties, differentiating between work to prescribed format for the service charge provisions and answers to commonly asked completed properties acquired and works statement, setting out the minimum questions please consult the Deloitte to existing properties; disclosure required. We understand that publication “CompAct – Q&As on the 2006 • there are new disclosure requirements for there may be some minor concessions for Companies Act” which can be found at showing the movement on the disposal RSLs but overall the new reporting regime is www.deloitte.co.uk/corporategovernance proceeds fund and the Recycled Grant likely to add significant cost to most RSLs. fund in order to ‘show greater In particular, the implications of the new There has also been a degree of confusion as transparency’ of how these funds are used; reporting regime need to be carefully to the extent to which recent changes to the considered at an early stage to ensure old Companies Act 1985 affect Industrial and • payments to directors need to include systems and processes can generate the Provident Societies. Company directors’ board members (where remunerated). required information, including potential reports for financial years beginning on or Separate disclosure needs to be made changes to the split of charges in the trial after 1 April 2005 must include a statement between amounts paid to executive staff balance. It is likely that the earliest application that, in the case of each person who is a members and those who are not; date will be for years beginning on or after director at the time when the directors’ • further details are required of proposed 1April 2008. report is approved: financing for capital commitments • so far as the director is aware, there is no indicating amount of grant, agreed loans, Charities Act relevant audit information of which the loans under negotiation, property sales The new Charities Act was passed in auditors are unaware; and and other sources of funding; and November and its various provisions will come into force over a staggered timetable. • they have taken all the steps that they • some disclosure requirements have been One of the main areas of contention is the ought to have taken as a director to make removed including the Chief Executive’s new proposals for the public benefit test. themselves aware of any relevant audit pension arrangements, average number of The Charities Commissions published their information and to establish that the employees (but not the FTE disclosure), detailed proposals for consultation earlier this company’s auditors are aware of that disclosure of RSF (now abolished), and month and whilst at first glance it is difficult information. average number of days taken to pay to envisage a social housing charity having purchase invoices. problems meeting the provisions of the new . 2
18547 sg LookingForward 21/3/07 10:40 am Page 3 Looking Forward – reporting and accounting update for Registered Social Landlords Our feeling is that this change may not come in for some time, if at all. The Statement of Principles is not an accounting standard and SSAP 4 – accounting for government grants will still be in force, so it is difficult to see how RSLs could be forced down the path of taking capital grants to revenue in the short term. The ASB intend to review SSAP 4 at the same time as the equivalent IASB project, which will not be in the short term, and this therefore has to be an area which will need to be kept under review. Some RSLs have asked whether the requirement A final IASB standard is expected in mid- It is still very difficult to predict what the is strictly relevant to their organisation, given 2008, at which point the EU may well International Financial Reporting that they are incorporated under the Industrial allow individual member states to adopt it Standards (‘IFRS’) regime will look like after and Provident Societies Acts; others have for all entities other than those for whom 2009, which aspects of IFRS are likely to be questioned what their directors need to do full IFRS compliance is required. incorporated into UK accounting standards in order to be able to make the statement. and particularly those in the ‘middle way’ • The FRSSE – similar to the current Financial The requirements are only binding on entities band. There are one or two standards and reporting standard for small entities. incorporated under the Companies Act and projects which are of particular interest to are therefore not strictly required by those RSLs and could make a big difference to RSL The Statement of Accounting Principles – which are Industrial and Provident Societies. accounting. These include: Interpretation for Public Benefit Entities However, RSLs may see such a statement as is still being considered by the Accounting • IAS 40 – accounting for investment representing good governance and are Standards Board. This is an Accounting properties. The definition of investment therefore encouraged to make the disclosure. Standards Board project which has been properties in IAS 40 is slightly different to RSL boards should not take this disclosure going on for some time now since the first that of the current UK accounting lightly however and need to carefully consultation draft appeared back in 2005. standard. On the face of it, it could mean consider what additional reassurances they The idea behind it was to set out some that an RSL’s properties would fit into this should seek in order to feel confident that common principles for all public benefit definition, with the result that RSLs could they can make this disclosure. In our last entities so that accounting across the sectors have the option of carrying properties at issue of ‘Corporate Governance Update’ we could be more consistent. Probably the valuation with no requirement for set out some suggestions for the steps that greatest area of difference is how capital depreciation. This might make life simpler, Directors should take and a copy of this can grants are accounted for. Under the current but it could make interpretation of an RSL’s be found on the corporate governance SORPs, charities take capital grants as income results even more difficult as gains and section of our website at at the stage they become entitled to it. In losses on revaluation would be taken http://www.deloitte.co.uk/corporategovernance contrast, an RSL would treat the grant as a directly to income and expenditure account deduction from fixed assets and a university with surpluses and asset values fluctuating Financial reporting in the longer term would carry the grant on the balance sheet significantly between accounting periods. After a flurry of activity over the last three as deferred income amortised over the life of years things have gone rather quiet, with the • Another area that could signal change is the asset which it funded. ASB deciding there will be no new standards accounting for leases. Current before 2009. They are carefully reviewing accounting standards differentiate The RSL sector is very against the proposal their options for future accounting standards between operating leases (where the that the charity treatment be adopted for all and are considering introducing a three tier lessee does not have the majority of risks public benefit entities, believing that it will approach to standards: and rewards) which are not recognised on distort the income and expenditure account. • Full IFRS compliance for quoted companies There are also significant complications of the balance sheets and finance leases and public interest entities. The term “public adopting such a policy in practice – if the (where the opposite is true). The IASB’s interest entity” has not been defined but is grant is taken through Income and initial thinking for their lease accounting likely to include RSLs with quoted debt. expenditure account you are likely to suffer project is that interests in assets acquired impairment of the property which the grant under operating leases should be valued • A middle band of entities – these might be and shown on the balance sheet. This is funded. Shared ownership properties get large private companies, or other medium going to be particularly relevant for those even more complicated – if an RSL believes sized organisations. The idea here is that social landlords who rent temporary shared ownership properties will be they might be subject to a regime of ‘IFRS housing under short leases. A discussion staircased there is an argument that related minus’ or ‘FRSSE plus’. This may will take paper is expected in 2008. grants will have to be repaid and therefore the form of the recently issued exposure showing the grant as a liability is more • IAS does not recognise merger draft International Financial Reporting appropriate. accounting believing that all Standard for Small and Medium-Sized entities which includes both simpler combinations consist of one party measurement and disclosure requirements effectively taking over another – than full IFRS. something that many RSLs would dispute. 3