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.