By Jackie Oakes

Component accounting has been covered in some detail in past editions of RP issues, but while previous articles have explained the theory and the process for preparing component accounting numbers, we now focus on the implications.

It is becoming clear that the RP sector as a whole is putting aside its substantial reservations over the benefits of the change to component accounting, and instead is knuckling down to the task. Various points of detail are emerging, but there is now strong consensus on how the changes should be made. In particular, apart from a minority of associations, there is agreement that in nearly all cases a prior year adjustment will be required. In practice, this will provide difficulties to those associations that adopted component accounting early, and took a different view based on the advice they received at the time. Technically, they ought to consider restatement. However, it remains to be seen whether those entities will revisit their policies in the coming year; I suspect they will decide not to.

What is also becoming clearer is that, with the exception of the above point on prior year adjustments, the impact on RPs' financial statements is less influenced by the choices the RP makes now (e.g. in respect of useful economic lives of the components or the specific choice of components), but is hugely influenced by the previous accounting policies adopted by the RP in respect of capitalisation of major repairs. For most RPs we would expect that the higher level of capitalisation that component accounting brings, offset only partially by higher depreciation charges, will lead to a boost to net assets.

However, for a small number of RPs, who had previously adopted very aggressive accounting policies on capitalisation, the impact is going to be different. Not only will they face a marked deterioration in operating results, but net assets will also decrease. This latter point may place them at risk in respect of covenant compliance. In a way (and this will sound harsh to some) all that is happening here is that certain chickens are coming home to roost with a number of years of over-capitalisation being corrected. The question of 'where were the auditors?' is also still appropriate. In my view, associations that had capitalised at such levels, and are now facing a marked reduction in net assets, have not been well served by their advisers. It may be time to consider change.

For most, the effect will not be sufficiently sizeable to cause breaches in covenants to occur. Nevertheless, there may be some changes to the way the association sees itself, both at management and at board level. This is because an organisation which previously had high levels of capitalisation, which is now faced with a reduction in net assets and reduced surpluses in the future, may well consider itself to be less financially strong than before. This in turn may cause it to rethink its business plan.

It remains to be seen, but for those associations who have approached the change positively some real benefits are starting to emerge. These have come from a number of areas, including:

  • better understanding of variations in costs for similar components across the stock
  • clearer appreciation of differences between the asset management strategy (as documented) and the actual component replacement experiences
  • better appreciation of the differences in life and cost for components replaced as part of a planned programme as opposed to replacements that have arisen in response to relettings (or other events)
  • better appreciation of the contractor invoicing processes (in one case, this has led to substantial refunds due to errors that component accounting identified).

For those boards and senior management teams who do not believe these benefits can be achieved, I would urge them to approach the change with an open mind. I am prepared to make a prediction: by 2015 the majority of RPs will look back on the changes as a result of component accounting and agree with the statement that, on the whole, it has been beneficial to have made the change. Anyone wishing to place a bet with me on this only has to get in touch.

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