FRS 102 Version 2.0

The preparation of the financial statements for most RSLs this year meant that the new FRS 102 based SORP would have to be complied with. This resulted in a number of significant changes to financial reporting in the sector and was for many a difficult and time-consuming exercise.

The news, therefore, that the Financial Reporting Council (FRC) is consulting on changes to FRS 102 is unlikely to met with much joy.  The FRC has issued a consultation document as part of its triennial review of accounting standards. This consultation will be followed by two Financial Reporting Exposure Drafts (FREDs) issued in the first and third quarters of 2017. The first exposure draft will contain proposed changes that will be effective in 2019 and the second, with more substantial changes, will be effective from 2022.

The changes due for 2019 will be incremental changes and clarifications. The major changes ( coming in 2022) will be in two main areas:

  • Incorporating the expected loss model for impairment of financial assets in line with IFRS 9
  • Updating lease accounting to be consistent with IFRS 16

The first change is unlikely to have any impact on RSLs as it is aimed at financial institutions only (although the FRC will consult on what a financial institution is). The second change at first glance could lead to more significant changes. IFRS 16 removes the distinction between an operating and finance lease and requires all leases (expect leases lasting less than a year and low value leases) to be accounted as an asset an liability by the lessee. However, there is no change in the accounting for the lessor. Therefore, no potential change in accounting for tenancies, but for any RSL that, for example, leases office premises this will result in a change. For most, however, the changes are likely to be limited to additional disclosure on how the RSL manages risks associated with leases.

Until the actual exposure drafts are issued we cannot be certain that there won’t be changes that will have a significant impact on RSLs in the future, for example, the FRC have said that they will clarify the accounting treatment of two-way break clauses in loan facilities, but at the moment it does not appear as if the next change in FRS 102 will be a major one for RSLs. It is also worth noting that the consultation document notes the inconsistency in accounting for government grants and that this is ‘not ideal’ but it has no immediate plans to change this.

We will provide updates when the exposure drafts are issued.

We will, as ever, be attending the SFHA Finance Conference on the 10th & 11th. If you are attending please come and see Allison, Jim and I at our stand in the exhibition area.



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The Impact of Lower Bond Yields

Most RSLs are members of the Scottish Housing Association Pension Scheme (SHAPS). SHAPS recently provided its members with a tool to calculate the liability that will have to be incorporated into the accounts when the new SORP is adopted next year.

This is not the RSL’s share of the deficit on the pension scheme, or the ‘buy out’ liability if you chose to leave the scheme. This is the liability for the payments the RSL is making towards the past service deficit as part of the recovery plan.

FRS 102 and the SORP requires that this liability be discounted at a rate equivalent to the yield on a high quality corporate bond with a similar term as the liability. Why a straightforward agreement to make annual payments requires to be discounted to its net present value is not explained.

The effect of this is that the liability that you will show in your accounts will not be the amount that you have agreed to pay – but will be an amount less than that. The higher the discount rate used the lower the liability in the balance sheet (or Statement of Financial Position if you prefer the new terminology). The other side of this is that as each year passes the total discount will ‘unwind’ (i.e. reduce) and be charged to income and expenditure account.

To add to the complexity of this – the discount factor is not a constant. Yields on high quality corporate bonds are likely to vary over time and this may mean having to recalculate the liability based on a new discount factor.

The SHAPS tool for calculating this liability illustrates this issue. The tool suggests using a rate of 3.42% for discounting the liability at 31 March 2014 and a rate of 2.22% for discounting the liability in 2015. These rates were supplied to the Pensions Trust by Bank of America Merrill Lynch.

The impact of this is that the liability has to be remeasured using the new discount rate. For those RSLs in the SHAPS scheme this means that when the 2015 accounts are re-stated for compliance with the SORP there will be extra costs of around 36% of the annual payment towards the past service deficit to be accounted for. It will also mean that the liability will increase from 2014 to 2015 – despite the payments made to reduce it.

The fact that this liability will have be remeasured each year means that there is an added volatility to RSL accounts. Potentially, this could have an impact on covenant compliance. We would therefore suggest that RSLs carry out sensitivity analyses on changes in this discount rate to assess whether or not this represents a risk.

It should be noted when calculating the liability that will appear in the accounts,  the annual amount that you are paying is not entirely a contribution towards the deficit. If you look at the amount that has been advised to you and compare it to the amount of ‘contributions paid’ per SHAPS online calculator (the reconciliation on the second page) you will note that the amount in the calculator is different. In the sample we checked the amount was 3.5% less than the amount due to be paid. The difference is ‘scheme expenses’.

How these ‘scheme expenses’ will accounted for will be determined by the substance of the transaction, but they will either be provided for as a separate liability, or will be treated as an additional pension cost each year. We will, of course, research the nature of the transaction and get back to you.

If anyone has any queries regarding this issue please feel free to contact us.

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The Return of Service Potential

Following the consultation exercise on the forthcoming SORP a number of concerns were raised with regard to the impact of the proposed changes to impairment on social housing. The removal of the ‘planned internal subsidy’ it was argued would have a damaging effect on the appetite to develop new housing, reducing delivery of new homes by 50,000 by 2018 and impacting on investors’ perceived strength of the sector as assets could be written down by £4bn.

Following the consultation there has been some significant changes to the proposals:

  • that assessment should reflect that social housing assets are held for their (public) service potential, not only their income-generating capacity.
  • clarity that impairment should not be routine, i.e. as soon as a development is delivered this will not trigger a write down in value
  • more flexibility in the definition of what constitutes a cash generating unit e.g. allowing consideration of the whole development programme

The result of this is that an additional consultation exercise will take place, on the revised impairment guidance. This exercise will close on the 4th June 2014 and will mean that the final SORP will not now be issued until September 2014, although past experience would suggest that it will be later than this.

The main change to the guidance is to re-introduce the concept of service potential.

Para 14.2 of the revised guidance states:

This SORP considers that properties held for their social benefit are not held solely for the cash inflows they generate and that they are held for their service potential.

This contrasts with para 14.17 of the original draft of the SORP:

In the rare circumstances that a social landlord needs to measure the recoverable amount of an asset based on its service potential as set out in paragraph 27.20A of FRS 102, this SORP does not consider that depreciated replacement cost is an appropriate measurement model as it would only be appropriate for a highly specialised asset for which there is no determinable market value, which are rare for assets owned by social landlords.

In short the opinion of the SORP Working Party has gone from considering the use of service potential as being rare, to being applicable to all social housing. Depreciated Replacement Cost also gets a reprieve and it is now considered that it ‘may be a suitable measurement model’ for measuring value in use (para 14.16).

This change in attitude to the idea of service potential it is fair to say has been driven by the fact that the sector was looking at a £4bn write down in assets – as well as the knock on effects on development and the attractiveness of the sector to lenders.

So what is service potential?

The service potential of an asset is the anticipated benefits receivable from the asset. The argument therefore is that where an asset is held for social benefit, the overall anticipated benefits are not purely economic and some allowance should be made for the social benefits arising.

This approach is often used with charitable assets, particularly those that have no income streams (e.g. RSL office premises). It is difficult to put an appropriate value on these assets as market value is not appropriate and there is no income to calculate a value in use.

Therefore, a service potential approach is taken, which would normally mean, assuming the asset is in full use, comparing the carrying value with the depreciated replacement cost (DRC) (i.e. the cost of replacing the asset adjusted for its physical deterioration). However, if the asset is not being fully utilised it is clearly not meeting its full service potential then there is likely to be an impairment.

The revised guidance recommends this approach for all assets held for social benefit.

So is this a good thing for Scottish RSLs?

In the short-term it certainly is, particularly for those RSLs that were looking at impairment issues arising from the removal of the planned internal subsidy. In addition to this it also potentially removes the office building impairment issue that arose due to the removal of use of service potential.

However, in the medium to long-term it is not quite so clear-cut. On the one hand it removes an obstacle to developing new housing, by reducing the chances of an impairment charge, but on the other hand it encourages investment decisions to be made on a basis that is not purely economic and then not suffer any corresponding write down in asset values.

Furthermore, it could be argued that it lets government off the hook for properly funding social housing and allows them to pressurise social landlords to build housing that may not be economically viable. If social landlords are providers of social housing rather than funders of social housing then the £4bn ‘impairment’ could be said to be the shortfall in grant that could have been provided to build this housing and has instead been funded ultimately from the landlord’s reserves. This essentially means that tenants are increasingly funding new social housing.

Overall, there are pluses and minuses to the service potential approach and we would suggest that RSLs would not want to get over-exposed to reliance on it. As anyone who has been involved in accounting in this sector knows – accounting rules, particularly controversial ones, have a habit of changing and the concern would be that a future SORP may change this approach.

We will be posting new blogs as the SORP develops.

The new guidance and the survey can be found from the following link:




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Everything you know is (partly) wrong

The draft SORP has been released and there will be a consultation on particular aspects of it which will be open until 14 February 2014. A copy of the draft SORP and the consultation questions are available from the following link:

The SORP has been drafted to take account of FRS 102. From an RSL’s point of view FRS 102 replaces all existing accounting standards, so unlike previous new SORPs which were updated for changes in accounting practice since the previous SORP, this draft SORP is a complete rewrite to take account of an entire new accounting framework based on International Standards.

On reading through the new draft SORP a few points come to mind:

  • The language used is more technical that in the past. It reads more like an Accounting Standard than previous SORPs.
  • Throughout the SORP the reader is referred to FRS 102, for example, the section on Related Parties contains 10 clauses – 9 of which refer the reader to the FRS. The SORP itself says that it should be read in conjunction with FRS 102 and it is the case that in most cases it would not be possible to obtain guidance on an accounting matter without having to refer to FRS 102.
  • The rewriting of the SORP to comply with FRS 102 has led to some significant changes, but also some more subtle changes that may have a significant impact for some RSLs

With regards to the consultation we would urge all RSLs to respond to the questionnaire (see link above). In particular we would draw your attention to questions 12 and 13, which ask for comments on the proposal for housing grants to be written off over the life of the structure of the house. As many Scottish RSLs have allocated grant to components when calculating depreciation this could have  signficant negative effect on some RSLs. It should also borne in mind that no grant will be allocated to land either – which would have a positive effect.

In the meantime it would worthwhile estimating what the impact of this change will be on you. Essentially, you would be calculating what the depreciation charge would be without any SHG or other grants and deducting the annual release of the grant (which would be the total grant divided by the useful life of the houses). This should then be compared to the current depreciation charge to see what the overall effect is.

This exercise would be useful, both in terms of planning and for gathering evidence for the consultation submission.

We will be producing future blogs on individual areas of the new SORP in the coming months as well as providing our clients with detailed worked examples on technical issues.

As stated above, the new draft SORP has a number subtle changes from previous treatments. To give some examples:

  • There is a change in emphasis with regard to impairment. Currently, an impairment review is required where there is an indication of impairment (or the asset is depreciated over greater than 50 years). The draft SORP states that a ‘Social Landlord must assess’ whether there has been an indication of impairment and sets a minimum standard of what must be considered as part of this assessment. So there is a change from carrying out a review when you become aware of an indication of impairment to actively seeking indicators of impairment.
  • Impairment is stricter than in the previous SORP – there is no mention of planned internal subsidy which may cause issues for RSLs that have recently undertaken development projects. Also, if an asset’s recoverable amount is based on its service potential then using depreciated replacement cost as a value is prohibited (the current SORP para 112 suggests using replacement cost).
  •  Para 16.3(c) states that pension schemes for the benefit of employees are always regarded as related parties.
  • Para 16.6 requires total aggregate compensation to key management personnel to be separately disclosed. This is over and above any requirements of the Accounting Determination.
  • Para 18.3 Designated reserves are an internal matter and should not be disclosed in the accounts

There are other examples of changes, particularly with regard to disclosure. The important thing to remember is that with the introduction of FRS102 and the new SORP everything has been rewritten and although a great many things remain the same, there will be a number of changes and some will be less heralded than others.

Alexander Sloan are planning for their annual seminar for 2014 to take place on 30th January (Glasgow) and 31st January 2014 (Edinburgh) and will cover the draft SORP in detail.

We have also produced an RSL app that is available from itunes, google play and blackberry. Just search for ‘RSL App’ and click on our logo.

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Changes to SHAPS Accounting?

As you may be aware the SORP Working Party are currently considering changes in the way that Scottish Housing Association Pension Scheme (SHAPS) is accounted for. Currently the full liability for the SHAPS is not included in the balance sheet because they are not able to identify each Association’s share of the assets and liabilities. The working party’s plan  is that a framework will be developed in order that the individual share of assets and liabilities for each Association can be estimated and recognised in the annual accounts.

We have had a presentation from SHAPS on the current proposals and would like to feedback on this to highlight some potential issues that may arise in future years. It should be noted that no proposals have been finalised and the purpose of this blog is to draw attention to issues that may arise in future audits, rather than go through the proposals from a technical point of view.

Each member RSL’s share of the assets and liabilities of the scheme will be arrived at using an agreed framework. Some assumptions will be made, particularly with how assets are split in order to arrive at a valuation.   These figures and additional disclosures will form the basis of the figures that will be recognised in the financial statements from March 2019 onwards.

Our understanding is that there is unlikely to be a new SORP to provide guidance on this treatment and instead the SORP Working Party are hopeful that the Financial Reporting Council (FRC) will provide application guidance in the form of a bulletin. This being the case we are not sure what, if any, consultation will take place with regard to these proposals.

Also – it is suggested that no prior year adjustment will be required as they are suggesting that this is not a change in accounting policy, although it is unclear how this will be introduced. The current policy, under FRS 102, is that the assets and liabilities should be recognised if there is sufficient information to enable this to be done. The argument is that this is not a change in policy, what has changed is that the information to disclose the assets and liabilities will now be available.

Assuming that the proposals go ahead as planned and clear guidance is issued the following should be borne in mind:

Impact on Audit Process

SHAPS have informed us that they will issue these figures in May 2019. They hope to announce the date that these figures will be released. These figures will almost certainly be material and the disclosure is complex. This may mean delays in final accounts being produced and subsequently audited. Our intention is to audit these figures for all of our clients as soon as they are released in order to finalise audits as soon as possible. However, some changes may be required for clients whose audit fieldwork begins in May. This will have an impact on each subsequent year. It should also be noted that this is heavily reliant on SHAPS delivering these figures on time and we need to consider the need for a contingency plan if the figures are delayed.


A potentially substantial change in the accounts will only be known about in May each year. In some cases this could lead to a covenant breach.


We will update the accounts template to take account of this change. Our timescales for this may be impacted depending on when the guidance is issued and SHAPS provide the relevant information.


Online Tool

SHAPS intend to produce an online tool. Each RSL will be able to change the assumptions made.  If assumptions are to be changed from the actuarial assumptions provided we will require audit evidence to support the change. We would therefore recommend that you inform us as soon as possible if you plan to change the assumptions.


Last Man Standing

It will be interesting to see how the fact that the scheme is a last man standing scheme is dealt with in the proposals. Any calculation of assets and liabilities will be based on the assumption that all other members of the scheme will make good on their commitments to the scheme. There is a danger that a reader of the accounts is not aware of this fact. We would expect that there will be disclosure of the nature and potential effect of this contingency.


Each member RSL will have to pay for the valuation each year in order to complete their accounts.

We will be issuing guidance on this once firm proposals are issued. We will also seek to minimise the impact on the audit process for you and us, by, for example, updating the template.


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