As you are probably aware the new Housing SORP 2014 has been published and will be effective for financial years beginning on or after 1 January 2015, although early adoption is permitted.
Unlike with previous SORPs, which were updated to take account of changes in accounting standards, this SORP is a complete re-write in order to comply with a new accounting framework – in particular FRs 102.
The new SORP (para 1.8) states that is ‘drafted to provide guidance on formats, accounting treatments and disclosures which will enable social landlords to comply with FRS 102; however it is not a substitute for the accounting standard itself. This SORP should be used in conjunction with FRS 102 as the detailed accounting requirements of FRS 102 are not repeated in full within this SORP”.
What this means is that in most cases it isn’t possible to refer to the SORP on its own, you will also have to refer to FRS 102 to get full details of the requirements. For example, chapter 6 on Financial Instruments of the SORP begins by stating ‘This section is only designed to signpost the relevant sections of FRS 102’ – in other words in order to find the proper accounting treatment and disclosures for loans and other financial instruments – you will have refer to FRS 102.
So what are the key accounting changes?
Most of the key changes have been well trailed in this blog and elsewhere, but it is useful to summarise them here, although it should be noted that the points below are quick guides and not a detailed analysis. The devil is very much in the detail with FRS 102 and you should be sure that you fully understand the requirements before taking any action:
- Grants accounting has completely changed. For those RSLs that hold their housing property at cost, grants are reclassified as a liability and are written off to income over the life of the asset to which they relate. In the draft SORP, grants had to be written off over the useful life of the structure (i.e. not the components). This would have caused a substantial write down of reserves for some RSLs. Fortunately, the final SORP (para 13.18) gives the option of recognising the grant ‘over the useful life of the hosuing property structure and its individual components (excluding land) on a pro rata basis’.For RSLs that present their housing properties at valuation – the grant is written off when the performance conditions are met – in most cases this would be when the houses have been completed.
- For those RSLs that are members of the SHAPS Scheme a liability will be recognised for the present value of agreed future payments towards the past service deficit. The total amount payable will be discounted using the yield rate of a high quality corporate bond.
- Those RSLs with financial instruments that are considered to be complex, such as interest rate swaps, these will have to be carried in the balance sheet at their fair value. For most RSLs with an interest rate swap this will mean recognising a liability, in some cases a substantial one.
- The rules on impairment have changed substantially . RSLs will have to assess on an annual basis whether an impairment review is required. The SORP lists a number of areas to consider each year (e.g. increased voids). Should a full impairment review be required the RSL will compare the carrying value of the cash-generating unit (i.e. the group of houses or other assets that may be impaired) with its value in use, taking account of its service potential – this is taken to be its Depreciated Replacement Cost (DRC).
- The rules on employee benefits mean that RSLs will have to accrue the full cost of any untaken staff holidays and other time off (e.g. TOIL).
- There are a number of transitional reliefs available for the first time adoption of the SORP / FRS 102. The ones that are likely to attract the most attention in the coming months are the ability to revalue assets at the date of transition and for this valuation to be deemed to be cost; and taking a previous valuation and taking this to be cost. In other words there is a one-off opportunity to revalue housing property and for this value to be treated as cost in the future.
- Designated Reserves are no longer allowed within the financial statements
- There are a large number of changes to disclosure throughout the SORP / FRS 102. In some cases the changes are subtle, but in other cases they are substantial.
As the SORP has been completely re-written it is likely that some issues will arise as RSLs try to comply with it. One fairly obvious example will be the unsold part of shared equity properties currently classified as fixed asset investments, with both cost and grant netting off to zero. If the grant is to be classified as a liability – is this treatment still valid?
Also, para 14.2 states:
Social landlords hold a range of assets including properties held for their social benefit. The principles to applied in assessing whether a property is held for its social benefit are set out in paragraphs 8.4 to 8.6 of this SORP…..
Therefore paragraphs 8.4 to 8.6 should provide details on how to judge whether a property is held for social benefit. Para 8.4 (extract) states:
A social landlord must determine the intended use for each property (or class of properties). In determining the intended use for the property, social landlords should consider the following questions:
Is the asset held for social benefit?
As noted above there is a substantial changes in disclosure in FRS 102 compared with the previous accounting framework. A number of these changes will require small inconsequential changes to RSL accounts but some will require a great deal more disclosure (e.g. there will be substantially more disclosure on long-term loans).
To give an example of disclosure changes the previous SORP (para 26) stated the following:
In normal cirumstances the disclosure of details regarding the rents and year-end arrears of tenant board members will not be required. However, if the rent level or the policy for managing arrears for tenant board members is not on normal commercial terms, these disclosures should be made. Similarly, if the levels of tenant board members’ arrears differ materially from those of non-board member tenants these disclosures should be made.
So more often than not tenant members’ rent or arrears balances would not have to be disclosed. However, paragraph 16.8 of the new SORP states:
All related party transactions, including transactions with board members, and any balances outstanding at the year end, must be disclosed in a note to the financial statements regardless of whether they are carried out on an arm’s length basis. Paragraph 33.13 of FRS 102 permits the disclosure of items of a similar nature in aggregate and therefore, for example, disclosure of transactions with tenant board members for rents received during the year and year-end arrears is required in aggregate only.
So, tenant members rent and arrears balances now have to be disclosed, albeit in aggregate, however, for RSLs with only one tenant member this may be problem.
Overall, although this SORP is shorter than the previous version, this is largely due to the fact that it in a lot of cases it directs you to FRS 102. There will be a number of changes in RSL accounts (including terminology) some significant, some fairly minor and some problems to resolve.
We will be producing a series of blogs in the future (some of which will be for clients only) on the new SORP to provide guidance on the key issues.
We have also developed a SORP Healthcheck product, where we will assess your requirements and provide you with a report on the issues that you will need to address and the impact on your RSL. If you are interested in this please contact me directly, or email email@example.com
Oh – and there will be a new accounting determination coming out too….