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An outline of the forthcoming changes to financial reporting and
how these may impact housing associations.
On 30 January 2012 the Accounting Standards Board (ASB)
published its revised version of future accounting in the UK. The
new proposals (covered by financial reporting exposure drafts
(FREDs) 46, 47 and 48) are likely to result in three new financial
reporting standards (FRSs):
FRS 100 – application of financial reporting
requirements
FRS 101 – reduced disclosure Framework
FRS 102 – the financial reporting standard applicable
in the UK and Republic of Ireland (the replacement for the
previously proposed financial reporting standard for medium-sized
entities (FRSME)).
The ASB has retained its original vision of combining all the
requirements for financial reporting into one standard for most
entities based on the international financial reporting standard
(IFRS) for small to medium-sized entities, but has responded to the
views of consultees in permitting more choice on accounting
treatment than the IFRS equivalent. From the housing association
perspective, there are some considerable improvements. These
include:
the option to use valuations in relation to housing
properties
the option to capitalise interest on development of fixed
assets
the ability to amortise grants relating to assets over the life
of the asset in line with the depreciation of the asset
a delay in application of the new requirements to accounting
periods beginning on or after 1 January 2015, in other words for
most housing associations to the year ended 31 March 2016.
However, there are still a number of areas where accounting
changes will be required. Some of these are presentational (for
example the use of the term 'property plant and equipment'
in place of 'fixed assets'), others have relatively minor
effect (for example the requirement to accrue for 'compensated
absences', e.g. untaken holiday entitlements, which is arguably
a requirement in UK Generally Accepted Accounting Principles (GAAP)
already but not usually complied with), whereas others are
potentially very significant. Top of this list are two specific
areas where the implications are far reaching and will require
planning:
financial instruments – the requirement to carry some
instruments at fair value
grants relating to assets – the requirement to show
these balances within creditors and not net them off fixed
assets.
These two areas of change will require considerable analysis and
will be covered in lengthier articles in our next edition. However,
it is worth emphasising that each housing association will need to
invest time in understanding the implications for their overall
financial position and loan covenants. The major issue is likely to
be relating to volatility and unpredictability with the risk of
having to record some financial instruments at fair value with
movements in the income and expenditure account. Although there are
some solutions to this, in particular the possibility of hedge
accounting, the rules relating to this are very complex and require
a detailed understanding.
Other areas that we have identified as being of significance for
the housing association sector generally are as follows.
Prior period errors require correction as a prior year
adjustment when material, as opposed to the current requirement of
when fundamental.
The costs included within stock items such as assets held or
produced for sale will be renamed inventories and are calculated
slightly differently.
Movements in valuation of investment properties are taken
through the income and expenditure account.
The requirements in relation to component accounting are
similar. However, where expenditure is capitalised on the basis of
it leading to incremental future benefits, unlike with the
equivalent in FRS 15 the exposure draft requires the write-off of
part of the existing asset to reflect the element replaced.
Deferred tax needs to be provided on revalued properties based
on the difference between the carrying value and the cost of the
asset for tax purposes. This would potentially lead to a
substantial reduction in net assets for those entities with a
substantial revaluation reserve.
There are differences in the way in which DB pension scheme
assets and liabilities are measured. This is likely to have the
effect of increasing the costs recorded in the income and
expenditure account for schemes in deficit compared to the current
FRS 17 methodology.
Accounting for leases is likely to be problematic, particularly
in relation to shared ownership properties. However, precisely how
the principles set out in the FRED will be implemented in the
housing association sector will require further debate.
Land options will probably be regarded as financial instruments
and therefore be carried at fair value.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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