With housing associations, the housing property typically comprises a number of parts, e.g. the roof, kitchen, bathroom and windows, which are replaced at varying intervals, while the core building remains for a very long time. The amounts of money involved in replacing these parts, or components, are sizeable. It is therefore not surprising that the consultation broadly confirmed the conclusion that component accounting ought to be applied within the housing association sector.
Perhaps what is surprising is that the consultation also concluded that there weren't any very difficult challenges to overcome in making the change. In responding in this way, the sector made it almost inevitable that component accounting would be brought in for all RPs, with only a minority in extremely rare circumstances being able to make a case against it. The likely date for implementation is the March 2011 year end, but with comparatives restated.
So what does it mean?
If your association didn't apply component accounting early, you may think that you have a few months before you need to start worrying about it. Unfortunately, this is not likely to be the case. Associations that applied component accounting early found there were many practical difficulties to overcome, and a period of at least 12 months was needed from start to finish. We strongly advise that you start planning as soon as possible and put together a clear project plan, which should include the decision making process to help structure the work plan. It is not going to be easy.
If you are one of the associations that has already applied component accounting, you need to consider whether your arrangements are consistent with best practice. Many RPs, including, in particular, the larger RPs, such as some of the G15, adopted it incorrectly with partial applications. They should be revising their policies, although it remains to be seen whether they will.
What will be the impact?
There are several effects of component accounting. Firstly, it will tend to smooth results. This is because fluctuations in major repair work from year to year will have much less of an impact on the income and expenditure under component accounting (where the costs will tend to be capitalised and then depreciated over the period of their lives), as opposed to being largely expensed under non-component accounting. Secondly, as a consequence of the first impact, it will be more difficult to influence results by deferring or accelerating major repair expenditure.
Finance directors will need to become more imaginative if they wish to affect their bottom line by late changes to expenditure. The third impact, and potentially the most significant, is that it will shed more light on associations which have been adopting aggressive accounting policies in respect of capitalisation rates. This hugely significant accounting policy, in some cases clearly abused by associations and misunderstood by supine auditors, will be much more transparent under component accounting.
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.
