1. 18547 sg LookingForward 21/3/07 10:40 am Page 1
March 2007
Audit
Looking Forward – reporting and accounting
update for Registered Social Landlords
SORP 2007 If you are looking to adopt the shared
The exposure draft of the SORP was ownership proposals early remember the
published in summer 2006 and it was other accounting implications:
expected that the final SORP would have
• The proportion of shared ownership
been published at the end of this month with
properties to be sold under a first tranche
RSLs encouraged to adopt early in their
sale needs to be included within current
March 2007 accounts.
assets and an analysis given between
completed shared ownership properties
However, the proposals, particularly in
and those in the course of construction.
respect of shared ownership accounting,
have met with significant opposition. It seems • The first tranche sale proceeds need to be
unlikely that the shared ownership included within turnover and the relevant
accounting proposals will be dropped proportion of the development costs as
completely, but the SORP working party is well as marketing and legal costs should
reviewing the proposals carefully and is likely be included in cost of sales.
to come up with a slightly revised
In this issue: consultation draft of the SORP in the next Other key changes in the exposure draft of
• SORP 2007 – Main issues and implications couple of months with another Exposure the SORP include the following:
Draft in the autumn. Although the SORP has
• General Determination 2006 – reminder of • Accounting for complex developments –
not been issued in final form, a number of
disclosure changes where an RSL is involved in cross subsidy
RSLs are already accounting for first tranche
schemes, i.e. properties are being built for
• Variable service charge reporting – it’s back sales through the income and expenditure
sale within a development in order to
on the agenda account and it is likely that more will be
finance social housing in the same scheme,
adopt this accounting policy in this year’s
• Charities Act – implications for RSLs profits should not be recognised on the
financial statements.
properties for sale if the result would be
• Companies Act – timetable for change that the social housing would be carried at
FRS 18 permits this treatment provided that
• The longer term – IFRS convergence – a value in excess of its EUV-SH valuation.
the directors can justify that inclusion of first
implications for RSLs However, complications may arise where
tranche sale proceeds in the income and
the properties for sale are being developed
• Pension costs – accounting for SHPS expenditure account gives a fairer view of the
in one entity within an RSL group but the
performance of the RSL rather than the
social housing is being recorded in another
previous treatment. It should not be simply
entity. In this instance, particular care
because it would allow the RSL to meet its
needs to be paid to allocating costs
debt covenants or show a surplus rather than
between the two entities and potentially
a deficit! FRS 18 requires an RSL adopting
profits in the entity selling the properties
this treatment to disclose the rationale for
may need to be eliminated on
and fact of the departure from the 2005
consolidation if this results in the social
SORP in their financial statements, and, if this
housing being held at a value in excess of
treatment is adopted for the first time this
EUV-SH in the group accounts.
year and the effect is material, to restate the
prior year accounts to reflect a change in • Related Party disclosures – the exposure
accounting policy. draft appears to require disclosures which
go beyond those strictly required by FRS 8.
Our response to the exposure draft
recommended that the SORP should not
include these disclosures. If the Housing
Corporation believe that the additional
disclosures are required then they should
. .
Audit Tax Consulting Corporate Finance . . instead be included in the next version of
the General Determination.
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Looking Forward – reporting and accounting update for Registered Social Landlords
• Accounting for transfers – the SORP The most significant of the changes is the test, it is well worthwhile formally reviewing
requires that RSLs consider whether large additional fixed asset addition disclosures. the proposals to ensure that there are no
scale voluntary transfers are actually This, coupled with the 2005 SORP adverse implications for some of the entities
transfers of an undertaking rather than a requirements on accounting for expenditure within your Group.
simple purchase of assets. Key features of on existing properties will make any
the former might be that existing staff are ‘aggressive’ capitalisation of major repair The concept of an exempt charity has gone
being transferred together with operating expenditure very clear to readers of the and charitable RSLs will need to comply in full
systems and other operating assets. accounts. For those RSLs who have adopted with charity law. It is yet to be seen how the
The implications are that if the transfer is component accounting it will be important Housing Corporation intends to carry out its
really an acquisition of a business rather for them to draw readers’ attention to their role as regulator on behalf of the Charities
than the acquisition of fixed assets, then accounting policy as there is a danger that Commission for the sector. It is possible that
the assets and liabilities acquired should be readers may wrongly interpret high levels of the Housing Corporation will look to introduce
fair valued and accounted for under FRS 7. major repair expenditure being capitalised as additional disclosure requirements in order to
evidence that the RSL is being imprudent in assist their monitoring of the sector.
Housing Corporation – Accounting its accounting policies.
Requirements for Registered Social Companies Act 2006
Landlords – April 2006 Service Charge accounting and The provisions of new Companies Act will
The Housing Corporation issued a new reporting impact most companies within RSL groups
General Determination in April 2006. This will The Commonhold and Leasehold Reform Act going forward. Key areas of substantial
be first year that RSLs will have to adopt the 2002 introduced a requirement for fuller and change in the Act include:
new disclosure requirements although many more consistent reporting of variable service
• Directors’ duties and derivative claims.
voluntarily gave these disclosures in their charges to tenants and leaseholders,
2006 financial statements. As a reminder, the together with new provisions for the holding • Shareholder rights.
main changes are as follows: of service charge payers’ monies. The
• Electronic communications.
Government’s initial proposals for accounting
• more analysis is required in ‘note 3’ for
and reporting on service charge statements • Business Review for quoted companies.
‘other costs’ where these other costs
were particularly onerous and were
represent more than 5% of total operating • De-regulation of private companies.
withdrawn after the initial consultation.
costs;
• Limitations on directors’ and auditors’
• the disclosure requirements for Supporting The Department for Communities and Local liability.
People income have been amended Government has been working on new
although the detail proposed in the proposals and we understand that these are The deregulatory provisions of the Act will be
consultation draft of the Determination due to be published for consultation shortly. welcomed by RSLs with many corporate
has been much reduced; An audit of individual service charges is subsidiaries. However, some work will be
unlikely to be required although an needed to take advantage of these as many
• separate disclosure is required in the fixed
accountant’s report will be needed for each of them will require changes to articles of
asset note of additions to completed
service charge scheme. There will also be a association. For a useful summary of the new
properties, differentiating between work to
prescribed format for the service charge provisions and answers to commonly asked
completed properties acquired and works
statement, setting out the minimum questions please consult the Deloitte
to existing properties;
disclosure required. We understand that publication “CompAct – Q&As on the 2006
• there are new disclosure requirements for there may be some minor concessions for Companies Act” which can be found at
showing the movement on the disposal RSLs but overall the new reporting regime is www.deloitte.co.uk/corporategovernance
proceeds fund and the Recycled Grant likely to add significant cost to most RSLs.
fund in order to ‘show greater In particular, the implications of the new There has also been a degree of confusion as
transparency’ of how these funds are used; reporting regime need to be carefully to the extent to which recent changes to the
considered at an early stage to ensure old Companies Act 1985 affect Industrial and
• payments to directors need to include
systems and processes can generate the Provident Societies. Company directors’
board members (where remunerated).
required information, including potential reports for financial years beginning on or
Separate disclosure needs to be made
changes to the split of charges in the trial after 1 April 2005 must include a statement
between amounts paid to executive staff
balance. It is likely that the earliest application that, in the case of each person who is a
members and those who are not;
date will be for years beginning on or after director at the time when the directors’
• further details are required of proposed 1April 2008. report is approved:
financing for capital commitments
• so far as the director is aware, there is no
indicating amount of grant, agreed loans, Charities Act
relevant audit information of which the
loans under negotiation, property sales The new Charities Act was passed in
auditors are unaware; and
and other sources of funding; and November and its various provisions will
come into force over a staggered timetable. • they have taken all the steps that they
• some disclosure requirements have been
One of the main areas of contention is the ought to have taken as a director to make
removed including the Chief Executive’s
new proposals for the public benefit test. themselves aware of any relevant audit
pension arrangements, average number of
The Charities Commissions published their information and to establish that the
employees (but not the FTE disclosure),
detailed proposals for consultation earlier this company’s auditors are aware of that
disclosure of RSF (now abolished), and
month and whilst at first glance it is difficult information.
average number of days taken to pay
to envisage a social housing charity having
purchase invoices.
problems meeting the provisions of the new
.
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Looking Forward – reporting and accounting update for Registered Social Landlords
Our feeling is that this change may not come
in for some time, if at all. The Statement of
Principles is not an accounting standard and
SSAP 4 – accounting for government grants
will still be in force, so it is difficult to see
how RSLs could be forced down the path of
taking capital grants to revenue in the short
term. The ASB intend to review SSAP 4 at the
same time as the equivalent IASB project,
which will not be in the short term, and this
therefore has to be an area which will need
to be kept under review.
Some RSLs have asked whether the requirement A final IASB standard is expected in mid- It is still very difficult to predict what the
is strictly relevant to their organisation, given 2008, at which point the EU may well International Financial Reporting
that they are incorporated under the Industrial allow individual member states to adopt it Standards (‘IFRS’) regime will look like after
and Provident Societies Acts; others have for all entities other than those for whom 2009, which aspects of IFRS are likely to be
questioned what their directors need to do full IFRS compliance is required. incorporated into UK accounting standards
in order to be able to make the statement. and particularly those in the ‘middle way’
• The FRSSE – similar to the current Financial
The requirements are only binding on entities band. There are one or two standards and
reporting standard for small entities.
incorporated under the Companies Act and projects which are of particular interest to
are therefore not strictly required by those RSLs and could make a big difference to RSL
The Statement of Accounting Principles –
which are Industrial and Provident Societies. accounting. These include:
Interpretation for Public Benefit Entities
However, RSLs may see such a statement as
is still being considered by the Accounting • IAS 40 – accounting for investment
representing good governance and are
Standards Board. This is an Accounting properties. The definition of investment
therefore encouraged to make the disclosure.
Standards Board project which has been properties in IAS 40 is slightly different to
RSL boards should not take this disclosure
going on for some time now since the first that of the current UK accounting
lightly however and need to carefully
consultation draft appeared back in 2005. standard. On the face of it, it could mean
consider what additional reassurances they
The idea behind it was to set out some that an RSL’s properties would fit into this
should seek in order to feel confident that
common principles for all public benefit definition, with the result that RSLs could
they can make this disclosure. In our last
entities so that accounting across the sectors have the option of carrying properties at
issue of ‘Corporate Governance Update’ we
could be more consistent. Probably the valuation with no requirement for
set out some suggestions for the steps that
greatest area of difference is how capital depreciation. This might make life simpler,
Directors should take and a copy of this can
grants are accounted for. Under the current but it could make interpretation of an RSL’s
be found on the corporate governance
SORPs, charities take capital grants as income results even more difficult as gains and
section of our website at
at the stage they become entitled to it. In losses on revaluation would be taken
http://www.deloitte.co.uk/corporategovernance
contrast, an RSL would treat the grant as a directly to income and expenditure account
deduction from fixed assets and a university with surpluses and asset values fluctuating
Financial reporting in the longer term
would carry the grant on the balance sheet significantly between accounting periods.
After a flurry of activity over the last three
as deferred income amortised over the life of
years things have gone rather quiet, with the • Another area that could signal change is
the asset which it funded.
ASB deciding there will be no new standards accounting for leases. Current
before 2009. They are carefully reviewing accounting standards differentiate
The RSL sector is very against the proposal
their options for future accounting standards between operating leases (where the
that the charity treatment be adopted for all
and are considering introducing a three tier lessee does not have the majority of risks
public benefit entities, believing that it will
approach to standards: and rewards) which are not recognised on
distort the income and expenditure account.
• Full IFRS compliance for quoted companies There are also significant complications of the balance sheets and finance leases
and public interest entities. The term “public adopting such a policy in practice – if the (where the opposite is true). The IASB’s
interest entity” has not been defined but is grant is taken through Income and initial thinking for their lease accounting
likely to include RSLs with quoted debt. expenditure account you are likely to suffer project is that interests in assets acquired
impairment of the property which the grant under operating leases should be valued
• A middle band of entities – these might be and shown on the balance sheet. This is
funded. Shared ownership properties get
large private companies, or other medium going to be particularly relevant for those
even more complicated – if an RSL believes
sized organisations. The idea here is that social landlords who rent temporary
shared ownership properties will be
they might be subject to a regime of ‘IFRS housing under short leases. A discussion
staircased there is an argument that related
minus’ or ‘FRSSE plus’. This may will take paper is expected in 2008.
grants will have to be repaid and therefore
the form of the recently issued exposure
showing the grant as a liability is more • IAS does not recognise merger
draft International Financial Reporting
appropriate. accounting believing that all
Standard for Small and Medium-Sized
entities which includes both simpler combinations consist of one party
measurement and disclosure requirements effectively taking over another –
than full IFRS. something that many RSLs would dispute.
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