Jackie Oakes outlines the potential substantial changes to financial reporting for the RP sector currently under consideration by the Accounting Standards Board.
There has been a considerable amount of commentary in articles and conferences on the potential substantial changes to RP financial reporting that are likely to emanate from the move towards IFRS. The sector responded amazingly well to the recently completed consultation on the draft changes. As a result, some very significant and positive changes are likely to be made. The Accounting Standards Board (ASB) is yet to formally report back, but there is no doubt that they have been considering the responses made by the sector with considerable care and in some cases, some concern. This article therefore only provides an outline of what may happen next and readers should be aware that this is subject to change given this is a moving position. There were arguably seven major areas of concern within the original proposals.
1. Capitalised interest
The original proposals would have led to capitalisation being barred, with restatement of previously capitalised interest into expense. It seems certain now that the ASB will reverse this and either permit or possibly require interest to be capitalised.
2. Valuations of housing properties
The original proposals would have prevented future valuation movements from being reflected in the accounts, although there were transitional provisions that permitted existing valuations to be "frozen". Again, it seems certain now that the ASB will permit valuations to be used, although we will need to watch the precise phrasing carefully to ensure that the various types of valuation applied within the sector are not inappropriately restricted.
3. Cost
The original proposals were likely to lead to substantial transitional costs for the sector. There are no specific indications from the ASB as to its response to this point, but it has signalled that it also has concerns and will be considering this point further.
4. Recognition of grant in the income and expenditure account
The original proposals required grant to be shown gross and implied that there would be no necessary correlation between the recognition within the income and expenditure (I&E) account of the grant and the underlying expenditure. Although the requirements for depreciation were similar, it was proposed grant would be recognised in the I&E account once the performance conditions were met. At this stage, it is unclear how the ASB will respond to the concerns expressed on this point, but we understand that it is trying to devise an appropriate model by which the I&E can legitimately be more in line.
5. Grant grossed up
The original proposals would have prohibited the netting off of grant on the balance sheet, as is presently the case within the housing association sector. We are expecting this to remain the case and that netting off will be barred. This clearly will have profound implications for the sector with up to £40bn of grant being shown within creditors, subject to the point above on whether some of the balance can be treated as income. The Statement of Recommended Practice (SORP) working party is considering this point pending the outcome of the ASB's deliberations and therefore more guidance should be available in the coming months.
6. Financial instruments
The original proposals would have revolutionised accounting for this area. This remains very much the expectation. Please see the separate article on this subject on the next page.
7. Inconsistency in requirements for those RPs with listed bonds
The original proposals envisaged classifying RPs with listed bonds differently from other RPs. This would require them to produce financial statements in accordance with full EU adopted IFRS rather than the simplified and modified version, financial reporting standard for medium-sized entities (FRSME). The ASB have indicated that this will no longer be the case, except possibly for entities with listed bonds that also happen to be Companies Act entities. We are not aware of any association that falls into both of these categories, but it might still be a problem for a very small number.
The ASB is expected to issue a revised draft of the FRSME in early 2012 for consultation. It will be important for the sector to review this in-depth to ensure that any further concerns are highlighted and discussed with the ASB. We will be monitoring the position carefully.
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.