The SORP working party has issued an invitation to comment on proposals for a new SORP which will be in issued in draft form in the Autumn of this year. The new SORP will reflect the changes brought about by the introduction of FRS 102 and will apply to all accounting periods commencing on or after 1 January 2015 – so for most RSLs it will apply for 2015/16. However, implementation will also require restatement of the previous year to this (2014/15) – so for most RSLs the opening position at 1 April 2014 will have to be restated.
The Invitation to Comment (ITC) has 24 questions and has a deadline for responses of 17 May 2013. The questions cover those areas where there are likely to be changes to existing practice and ask for comments on initial proposals. The main areas being:
- Housing Properties
- Employee Benefits (Pensions)
- Stock Swaps
- Agreement to improve existing properties
- Financial Instruments
- Narrative Reporting
This is the first in a series of blogs about the ITC – and will cover the Housing Properties and Employee Benefit aspects.
The ITC also notes that the conversion to FRS 102 will require ‘a significant number of changes to the format, language and drafting of the current SORP’.
The main proposals for Housing Properties and Employee Benefits are as follows:
Housing property that is held for social benefit should be treated as ‘Property, Plant and Equipment’ (i.e. fixed assets). Housing assets that are not held for social benefit are to be treated as ‘Investment Properties’. It is noted that head office properties would not normally be classed as ‘Investment Properties’. Draft Guidance on this is provided in an appendix to the ITC.
Based on this guidance the vast majority of properties owned by Scottish RSLs will be classified as Property, Plant & Equipment. The guidance states that properties held for market rent, shared equity properties, commercial properties and student accommodation would normally be categorised as investment properties. Also, land banks with no agreed development plan would be treated as investment properties.
Under FRS 102, investment properties are shown at their fair value (i.e. market value) and any change in that value taken to the income and expenditure account – not to the revaluation reserve, also, no depreciation is charged.
So, an RSL with a land bank (and no current agreed development plan for that land) would recognise the land at its market value in the balance sheet. Any change in that value from year to year would be taken to the income and expenditure account.
As predicted the SORP Working Party propose recognising the liability for any agreed contribution to the past service deficit in a defined benefit pension scheme, such as SHAPS.
As we have noted in a previous blog this will result in an initial reduction in reserves as the liability for the contribution to the past service deficit will be brought into the balance sheet. However, there will be an ongoing reduction in operating costs, as the contribution payment will repay the liability, not written off to operating costs.
There is a further complication in that under FRS 102 the liability should be discounted using the yield rate of a high quality corporate bond. The effect of the discount unwinding as the payments are made is taken to the Income & Expenditure Account (see blog posting – Changes in Accounting for Pensions – for more details).
The ITC notes that Social Landlords provide a number of employee benefits that will be accounted for in accordance with FRS 102. The key change, other than the changes in accounting for pensions, will be the recognition of the holiday pay accrual.
The SORP Working Party is of the view that “the recognition of the holiday pay accrual should be applied by social landlords in accordance with FRS 102. This will be addressed in the transitional guidance in the revised SORP”.
RSLs will have to recognise any holiday pay that has been earned by staff members, but not taken by the balance sheet date. It should also be noted that this principle would apply to all short-term employment benefits where the RSL has an unfulfilled obligation at the balance sheet date.
RSLs should therefore consider what the impact of this will be on them and consider whether any policy changes are needed prior to 1 April 2014 in order to avoid the need for recognising a substantial accrual in the accounts. For example, realigning the holiday pay year end with the financial year end and limiting the number of holiday days that can be carried forward.
Throughout the document the ITC uses the language of the International Standards – (e.g. Plant, Property & Equipment rather than fixed assets and Statement of Financial Position rather than balance sheet) and also notes that the conversion to FRS 102 ‘requires a significant number of changes to the format, language and drafting of the SORP’. This would suggest that the future SORP will be written in the language of the International Standards.
We will be posting further blogs in the coming weeks on the ITC covering, in particular, grants and financial instruments. However, if you are too excited to wait the ITC can be found at the following link –