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GT - Housing Sector. Component Accounting Survey 2012


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Our component accounting factsheet sets out the findings from a survey carried out by Grant Thornton, to the housing sector about their experience of component accounting to date.

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GT - Housing Sector. Component Accounting Survey 2012

  1. 1. Component AccountingSurvey 2012
  2. 2. Component Accounting Survey 2012As we draw nearer to What components are being used? roofs varies from 25 years to 75 years We expect that housing associations across the responding population.year-end and the adoption have now concluded on the type The wide range of UEL reflects theof SORP update 2010, and number of components. 67% differing replacement strategieshousing associations of respondents are separating 6-9 applied by housing associations,across the sector are individual components. This majority which could be due to different typescollating historic data is slightly higher than at the last survey, or ages of property or quality of the which may be as a result of associations components fitted.for calculating the being further down the componentcomponent accounting accounting process. Table two: useful economic livesadjustment and assessing 160 Maximum Minimum Averagethe impact on the 140 Table one: types of components 120financial statements. 100% 100 80 80% 60 40We expect that the 60% 20 40% 0majority of housing s ic e rs n m s cs ft ing or em ur he Li br o ile tri nc ct ro do tc fa bo st 20% ec ru th Fe Ki sy ain dassociations will have now El st Ba s an Ga al M of nic s Ro ow ha 0% ind ecagreed a methodology W ic e s rs n m s cs ft ing M or em ur he Li br o ile tri nc ct ro do tc fa bo st ec ru th Fe Ki sy ain d El st Ba s an Ga al Mfor the adoption of of nic s Ro ow The key points to note from the above ha ind ec W Mcomponent accounting analysis of UEL on components are as follows:and that finance & asset The trends in components are very similar to the previous survey with • 70% of respondents will bemanagement teams will depreciating windows & doors roofs, windows & doors, kitchensbe well progressed in and bathrooms being the most over a period of at least 30 years,gathering data. popular components. making this generally the longest life A number of respondents component outside of fabric and roof highlighted that ‘renewables’ (e.g. PV/ • the spread of UEL on kitchens is notThis factsheet sets as significant as other components solar panels & insulation) were beingout the findings from a accounted for as separate components. with 60% opting for the average lifesurvey carried out by This is likely to become more relevant of 20 yearsGrant Thornton, to which in the coming years. • bathrooms have generally been assigned a longer life than kitchens,there were 61 respondents Rate of depreciation? with an average of 27 years comparedwho collectively own/ to 24 years for kitchens. Some The useful economic life (UEL)manage over 400,000 of components should be derived organisations are using a life as highproperties. We have also in conjunction with the asset as 35-40 years for bathrooms • there is a high spread of UELused anecdotal evidence management or replacement strategy of the association. The results of this for ‘mechanical systems’ and afrom discussions with our relatively low average life of 24 survey have highlighted that there isclients over the past generally a wide range of UEL for each years, which could reflect that somesix months. component. For example, the UEL of associations include boilers within
  3. 3. this component and are weighting availability of accurate historic data and resource and, notably, 40% of (shortening) the UEL accordingly the resulting impact on the calculation respondents used external resources• there is a range from 50 years to of the prior year adjustment. such as consultants and temporary staff. 150 years in relation to the UEL of The majority of associations (81%) the main fabric, the average though Table four: years of detailed available data that responded to our survey are of 90 years is as would be expected. planning to maintain component data 20% 11% 1 - 3 years at an individual property level, whichOne potential implication of 4 - 6 years is clearly a detailed approach. This highcomponent accounting could be to level of detail is perhaps reflected in the 7 - 9 yearsincrease the life of the fabric/structure, 41% estimation of the time to be spent on 28%given that the shorter life components 10 years+ component accounting this year butare now held separately. However, our also perhaps indicates a closer link tosurvey results suggest that only 16% are asset management and recordsexpecting to use an increased UEL for 56% of respondents are expecting going forward.the structure and the majority of these to experience difficulty in obtainingexpect to increase the UEL by less than historic data. The effect of this is that Table six: number of hours spent10 years. implementing component accounting over 50% have detailed records for less than 6 years. 0 - 15 daysImpact of adoption? The gaps in historical data will 16% 33% 16 - 40 daysThe adoption of component accounting undoubtedly lead to assumptions andis expected to increase capitalisation judgements being required to be made 21% 41 - 70 daysacross the sector. However, to counter by associations in the calculation of the 71 - 99 days 9%this, the annual depreciation charge prior year adjustment. One potential 21% over 100 daysis expected to be substantially higher. implication would be the need to useOur survey results have confirmed external matrices or benchmarks.this expectation with 75% of 50% of the associations respondingrespondents expecting to have increased to our survey are planning to use 33% of respondents expected tocapitalisation levels. external matrices or benchmarks. The invest over 100 days on this first time matrices are useful as a guide when less adoption of component accounting.Table three: impact of prior year adjustments information is available, however theon reserves applicability of the information to the There may be a causal link between individual association must always the fact that of those expecting to incur 28% be considered. more than 100 days, 63% only had data Increase in reserves 34% going back 4-6 years and 68% were Decrease in reserves Resource implications going to need to use external matrices. Don’t know yet It is inevitable that the first time In addition to the staffing 38% adoption of component accounting implications, associations have been will have resource implications considering whether new software for associations. systems are required to manage81% of respondents to our survey component accounting in future years. Table five: has additional resource 65% of the responding population haveare expecting a prior year adjustment been requiredto be required on adoption of purchased new software systems.component accounting. 12% Yes (consultants) Impact on loan covenants? Yes (temporary staff)There were a number of associations Initially, one of the major risks expected 48% 28%(28%) responding to our survey who Yes (internal staff) on adoption of component accountingare yet to conclude on whether the No was whether there would be any 12%prior year adjustment would increase implications for loan covenants.or decrease reserves. 38% of the As expected, the proportion ofrespondents are expecting a decrease associations that have had initial The results of the survey havein reserves. discussions with lenders has increased highlighted that a number of from 20% at the last survey to 66% associations have invested inAdequacy of historical records? in the current survey. Only 8% of additional resource to produce theThe main challenge on adoption the respondents had not yet had any component accounting numbers. 52%of component accounting is the discussion with lenders. of respondents required additional
  4. 4. Table seven: have loan covenants been • Treatment of excess grant – those To discuss the contents of this affected by the adoption of component associations that have received high accounting factsheet or for more information levels of social housing grant in the please contact: past have had to consider how to treat the excess when grant is higher 26% 26% Yes Jenny Brown than the cost of land and structure. No Head of Housing The key consideration is whether Not known yet to reallocate the grant across 48% all components. Arthur Merchant Senior Housing Adviser The SORP update 2010 leaves theSurprisingly 48% of respondents do above areas open for associations tonot believe component accounting apply, following discussionwill affect loan covenants. This could Geraint Davies with their auditors, the approachbe due to the number of cash flow Lead South West Housing contact that is most appropriate to theirbased covenants in the sector or due to particular circumstances.successful negotiation by associationswith lenders regarding the impact of Kyla Bellingall The next steps?component accounting. Lead Midlands Housing contact As highlighted above, the adoption of component accounting is expected toOther considerations require significant assumptions andIn our experience, the majority of Paul Naylor estimates to be made by associations.associations have an agreed component Lead Anglia Housing contact We would expect the Audit Committeeaccounting approach and are a long way and the Board to review and approvedown the road to calculating the prior these key assumptions and consideryear adjustment (where applicable). Judith Newton how sensitive these are to There have been two main areas of Lead Central Housing contact reasonable changes.continued debate over the past few Once the component accountingmonths, as follows: adjustments have been finalised and• Allocation of valuation – those Graham Nunns audited, attention will turn to ensuring associations that hold housing Lead North East Housing contact that the disclosures in the financial properties at valuation have been statements are adequate. We will considering the basis for allocating include some suggested disclosures in the movement in valuation i.e. is this Toby Wilson our model accounts, due to be released to land, to land and structure or, in Lead North West Housing contact in March 2012. rare cases, to other components as well.© 2012 Grant Thornton UK LLP. All rights reserved.‘Grant Thornton’ means Grant Thornton UK LLP,a limited liability partnership.Grant Thornton UK LLP is a member firm withinGrant Thornton International Ltd (‘Grant Thornton International’).Grant Thornton International and the member firms are nota worldwide partnership. Services are delivered by the memberfirms independently.This publication has been prepared only as a guide.No responsibility can be accepted by us for loss occassionedto any person acting or refraining from acting as a result ofany material in this