As you may be aware we recently sent out a survey on the adoption of component accounting. Thanks to all that took the time to respond.
The results of the survey with our comments in italics are as follows:
Did you use specialist software to implement component accounting?
Yes – 25.9% ; No – 74.1%
This is broadly in line with what we would have expected using our own clients as a benchmark
If you did not use specialist software are you intending to procure software in the future?
Yes – 34.5% ; No – 39.7% ; n/a already using software – 25.9%
Overall 60% of Associations will be using software for component accounting in the future. Many Associations felt that complying with component accounting for the first time as well as implementing new software could be problematic. The survey bears this out
Did the adoption of Component Accounting lead to covenant compliance issues for your Association?
Yes – 13.8% ; No – 86.2%
As covenants were set prior to the adoption of component accounting there was always a chance that covenant compliance issues could arise particularly with those Associations that suffered a large write-down in asset values. Bearing in mind that the change has had no affect on the Association’s ability to repay debt, lenders should be fairly relaxed about this – but in many cases won’t be…
Did your lenders require additional information for you as a direct result of the adoption of component accounting?
Yes – 37.9% ; No – 60.3% ; not applicable 1.7%
The amount of Associations being asked for additional information from their lenders is less than we would have expected. This may be due to the fact that clients tend to engage with us on this when lenders ask for additional information. It does show that many lenders are comfortable with component accounting so long as covenants are complied with.
If lenders asked for additional information , was the level of information requested in your opinion, reasonable?
Yes – 28.1% ; No – 14.0% ; Not applicable – 57.9%
A third of those that were asked to provide additional information felt that the amount of information requested was unreasonable. We have heard from many Associations stating that lenders are looking for reworked accounts and projections and even for accounts to be audited on a non-component basis. As noted above adopting component accounting would have no impact on an Association’s ability to repay loans – so the concern is that either some lenders have not fully grasped what the effect of component accounting is, or that they may be seeking to take advantage of the situation.
Do you anticipate problems in future years in complying with Component Accounting?
Yes – 12.3% ; No – 87.7
We expected the level of Associations anticipating problems in future years to be higher than 12.3% The current and future periods are likely to present their own challenges such dealing with partially completed maintenance contracts, reconciling spreadsheets back nominal ledger etc.
Overall, was the adoption of component accounting a worthwhile exercise for your Association?
Yes -31% ; No – 69%
A surprising number of Associations felt that adopting component accounting was a worthwhile exercise. There may be a number of reasons for this including sarcasm, masochism or the sector’s love of complying with difficult accounting requirements.
Other explanations include sarcasm and accountants being happy when the figures improve regardless of the reason for that improvement.
Were there any particular problems that you faced in complying with component accounting
We received 40 responses to this question (out of a total of 58).
The most common responses were problems with historic records (9) and the significant amount of resources required to comply (17).
Other respondents noted software issues that they had encountered and others complianed about the adoption of component accounting from a technical perspective.
We have included some of the comments below (edited to remove expletives and defamatory comments) and added our comments where appropriate:
“The only particular problem was the level of resource required to analyse the prior years information and then to process on to the format required by the auditors.”
“Complete waste of time and money.”
“It has had an adverse impact on our SHAPS Pension Scheme Risk Assessment”
“Historical information severly lacking. Using a spreadsheet has meant some errors creeping in already. Time input was great. Extra cost incurred.”
Bearing in mind that 37% of respondents intend to continue spreadsheets in the future this raises an issue. As we all know spreadsheets tend to become messier as they age. For spreadsheets that may include thousands of components this effect may be an issue in coming years.
“There were no particular problems as department managers worked together to discuss and agree approach being implemented”
“The main problem is that it forces HA’s to take a big step along the road of Enron-style accounting i.e. “Lets reclassify our running costs as investments, it will increase our surpluses and strengthen our balance sheet”. The trouble with this line, especially for non-charity HAs, is that it hugely increases tax liabilities and weakens their cash position. We also foresee more problems developing in the future in the practicalities of the operation of component accounting.”
The adoption of component accounting should be tax neutral. Whether expenditure is allowable for tax purposes wouldn’t be driven by the Association’s accounting policies. That being said the point re tax is interesting as component accounting could lead to tax-paying Associations having to explain significant adjustments in the tax computations to HMRC.
We plan to leave the survey open for the time being and will post the details on this blog.
Once again thanks to everyone who contributed and feel free to add comments.