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:
Very helpful article