The Scottish Housing Regulator has issued a draft Determination for consultation which contains a number of changes, mostly to bring the Determination up to date and to remove overlaps between the SORP/ FRS 102 and the Determination.
One part of the Determination that has raised a few eyebrows is paragraph 13.1 of part 2 of the Determination, which states that the following should be disclosed:
“The aggregate amount of gross rent arrears, the net present value adjustment where a repayment schedule is in place, the amounts of any provision for bad or doubtful debts and the aggregate amount for net rent arrears”
So why the need for the “net present value adjustment where a repayment schedule in place”?
The source of this is, unsurprisingly, is FRS 102, paragraph 11.13 to be precise:
When a financial asset or financial liability is recognised initially, an entity shall measure it at the transaction price (including transaction costs in the initial measurement of financial assets and liabilities that are measured at fair value through profit or loss) unless the arrangement constitutes, in effect, a financing transaction. A financing transaction may take place in connection with the sale of goods or services, for example, if payment is deferred beyond normal business terms or is financed at a rate of interest that is not a market rate. If the arrangement constitutes a financing transaction, the entity shall measure the financial asset or financial liability at the present value of the future payments discounted at a market rate for a similar debt instrument.
Therefore in a situation where an RSL enters into an arrangement with a tenant with regard to their rent arrears, then this is a financing transaction as the payment is being “deferred beyond normal payment terms”. This would mean that the arrear should be valued in the balance sheet at the net present value of the future payments discounted at a market rate for a similar debt instrument.
Determining the level of arrears that are currently under arrangements is not necessarily striaghtforward for RSLs as there is no ledger detailing these arrangements. In most cases the information will be contained in the Housing Management system in the form of notes or similar.
However, for many RSLs the total payable under these arrangements may not be material and in some cases the arrangement will be short term and therefore not require to be discounted. It is also worth remembering that some arrears cases that are being repaid under arrangement may already be included within the bad debt provision.
Even for those RSLs that have immaterial levels of arrangements, some work will have to be done to demonstrate this fact. It should also be noted that with the transition to FRS 102 the key date is 1 April 2014 – in other words you will need to know what arrangements were in place on 1 April 2014, which is unlikely to be a straightforward task. We would suggest that RSLs speak to their auditors about what approach to take.
If it is necessary to discount arrears being paid under arrangement to their present value we would expect that the discount rate to be very high, as you are required to use the market rate for a similar instrument – which could be defined as the rate that the tenant could borrow at.
As we have said before on this blog, FRS102 is a complete change in the accounting framework and it is likely that – as well as the big changes – there will be many small changes, some of which will come out of the woodwork as time passes.
Alexander Sloan will be hosting our annual RSL seminar on the 13th and 15th January 2015 in Glasgow and Edinburgh. As well as looking at the SORP, Andrea Paterson of is4 will be covering Asset Management and we will also be covering risk management.
With regard to the SORP we will seek to focus on the areas causing the most concern by surveying attendees prior to the seminar asking which areas they wish us to focus on, as well as asking for any technical questions they may have.
For those looking for more bespoke assistance in implementing the SORP, Alexander Sloan are providing SORP Healthchecks to guide RSLs through the minefield of SORP compliance.
If you need any more information on the seminar or the SORP Healthcheck please contact us at firstname.lastname@example.org, or call Phil Morrice or Andy McBean on 0141 204 8989, or use the contact form below: