Uk cg reportingand_accountingupdateforregisteredsociallandlords

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Looking Forward – reporting and accountingupdate for Registered Social Landlords

In this issue:

• SORP 2007 – Main issues and implications

• General Determination 2006 – reminder ofdisclosure changes

• Variable service charge reporting – it’s backon the agenda

• Charities Act – implications for RSLs

• Companies Act – timetable for change

• The longer term – IFRS convergence –implications for RSLs

• Pension costs – accounting for SHPS

SORP 2007The exposure draft of the SORP waspublished in summer 2006 and it wasexpected that the final SORP would havebeen published at the end of this month withRSLs encouraged to adopt early in theirMarch 2007 accounts.

However, the proposals, particularly inrespect of shared ownership accounting,have met with significant opposition. It seemsunlikely that the shared ownershipaccounting proposals will be droppedcompletely, but the SORP working party isreviewing the proposals carefully and is likelyto come up with a slightly revisedconsultation draft of the SORP in the nextcouple of months with another ExposureDraft in the autumn. Although the SORP hasnot been issued in final form, a number ofRSLs are already accounting for first tranchesales through the income and expenditureaccount and it is likely that more will beadopt this accounting policy in this year’sfinancial statements.

FRS 18 permits this treatment provided thatthe directors can justify that inclusion of firsttranche sale proceeds in the income andexpenditure account gives a fairer view of theperformance of the RSL rather than theprevious treatment. It should not be simplybecause it would allow the RSL to meet itsdebt covenants or show a surplus rather thana deficit! FRS 18 requires an RSL adoptingthis treatment to disclose the rationale forand fact of the departure from the 2005SORP in their financial statements, and, if thistreatment is adopted for the first time thisyear and the effect is material, to restate theprior year accounts to reflect a change inaccounting policy.

If you are looking to adopt the sharedownership proposals early remember theother accounting implications:

• The proportion of shared ownershipproperties to be sold under a first tranchesale needs to be included within currentassets and an analysis given betweencompleted shared ownership propertiesand those in the course of construction.

• The first tranche sale proceeds need to beincluded within turnover and the relevantproportion of the development costs aswell as marketing and legal costs shouldbe included in cost of sales.

Other key changes in the exposure draft ofthe SORP include the following:

• Accounting for complex developments –where an RSL is involved in cross subsidyschemes, i.e. properties are being built forsale within a development in order tofinance social housing in the same scheme,profits should not be recognised on theproperties for sale if the result would bethat the social housing would be carried ata value in excess of its EUV-SH valuation.However, complications may arise wherethe properties for sale are being developedin one entity within an RSL group but thesocial housing is being recorded in anotherentity. In this instance, particular careneeds to be paid to allocating costsbetween the two entities and potentiallyprofits in the entity selling the propertiesmay need to be eliminated onconsolidation if this results in the socialhousing being held at a value in excess ofEUV-SH in the group accounts.

• Related Party disclosures – the exposuredraft appears to require disclosures whichgo beyond those strictly required by FRS 8.Our response to the exposure draftrecommended that the SORP should notinclude these disclosures. If the HousingCorporation believe that the additionaldisclosures are required then they shouldinstead be included in the next version ofthe General Determination.

March 2007

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Looking Forward – reporting and accounting update for Registered Social Landlords

• Accounting for transfers – the SORPrequires that RSLs consider whether largescale voluntary transfers are actuallytransfers of an undertaking rather than asimple purchase of assets. Key features ofthe former might be that existing staff arebeing transferred together with operatingsystems and other operating assets.The implications are that if the transfer isreally an acquisition of a business ratherthan the acquisition of fixed assets, thenthe assets and liabilities acquired should befair valued and accounted for under FRS 7.

Housing Corporation – AccountingRequirements for Registered SocialLandlords – April 2006 The Housing Corporation issued a newGeneral Determination in April 2006. This willbe first year that RSLs will have to adopt thenew disclosure requirements although manyvoluntarily gave these disclosures in their2006 financial statements. As a reminder, themain changes are as follows:

• more analysis is required in ‘note 3’ for‘other costs’ where these other costsrepresent more than 5% of total operatingcosts;

• the disclosure requirements for SupportingPeople income have been amendedalthough the detail proposed in theconsultation draft of the Determinationhas been much reduced;

• separate disclosure is required in the fixedasset note of additions to completedproperties, differentiating between work tocompleted properties acquired and worksto existing properties;

• there are new disclosure requirements forshowing the movement on the disposalproceeds fund and the Recycled Grantfund in order to ‘show greatertransparency’ of how these funds are used;

• payments to directors need to includeboard members (where remunerated).Separate disclosure needs to be madebetween amounts paid to executive staffmembers and those who are not;

• further details are required of proposedfinancing for capital commitmentsindicating amount of grant, agreed loans,loans under negotiation, property salesand other sources of funding; and

• some disclosure requirements have beenremoved including the Chief Executive’spension arrangements, average number ofemployees (but not the FTE disclosure),disclosure of RSF (now abolished), andaverage number of days taken to paypurchase invoices.

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The most significant of the changes is theadditional fixed asset addition disclosures.This, coupled with the 2005 SORPrequirements on accounting for expenditureon existing properties will make any‘aggressive’ capitalisation of major repairexpenditure very clear to readers of theaccounts. For those RSLs who have adoptedcomponent accounting it will be importantfor them to draw readers’ attention to theiraccounting policy as there is a danger thatreaders may wrongly interpret high levels ofmajor repair expenditure being capitalised asevidence that the RSL is being imprudent inits accounting policies.

Service Charge accounting andreportingThe Commonhold and Leasehold Reform Act2002 introduced a requirement for fuller andmore consistent reporting of variable servicecharges to tenants and leaseholders,together with new provisions for the holdingof service charge payers’ monies. TheGovernment’s initial proposals for accountingand reporting on service charge statementswere particularly onerous and werewithdrawn after the initial consultation.

The Department for Communities and LocalGovernment has been working on newproposals and we understand that these aredue to be published for consultation shortly.An audit of individual service charges isunlikely to be required although anaccountant’s report will be needed for eachservice charge scheme. There will also be aprescribed format for the service chargestatement, setting out the minimumdisclosure required. We understand thatthere may be some minor concessions forRSLs but overall the new reporting regime islikely to add significant cost to most RSLs.In particular, the implications of the newreporting regime need to be carefullyconsidered at an early stage to ensuresystems and processes can generate therequired information, including potentialchanges to the split of charges in the trialbalance. It is likely that the earliest applicationdate will be for years beginning on or after1April 2008.

Charities ActThe new Charities Act was passed inNovember and its various provisions willcome into force over a staggered timetable.One of the main areas of contention is thenew proposals for the public benefit test.The Charities Commissions published theirdetailed proposals for consultation earlier thismonth and whilst at first glance it is difficultto envisage a social housing charity havingproblems meeting the provisions of the new

test, it is well worthwhile formally reviewingthe proposals to ensure that there are noadverse implications for some of the entitieswithin your Group.

The concept of an exempt charity has goneand charitable RSLs will need to comply in fullwith charity law. It is yet to be seen how theHousing Corporation intends to carry out itsrole as regulator on behalf of the CharitiesCommission for the sector. It is possible thatthe Housing Corporation will look to introduceadditional disclosure requirements in order toassist their monitoring of the sector.

Companies Act 2006The provisions of new Companies Act willimpact most companies within RSL groupsgoing forward. Key areas of substantialchange in the Act include:

• Directors’ duties and derivative claims.

• Shareholder rights.

• Electronic communications.

• Business Review for quoted companies.

• De-regulation of private companies.

• Limitations on directors’ and auditors’liability.

The deregulatory provisions of the Act will bewelcomed by RSLs with many corporatesubsidiaries. However, some work will beneeded to take advantage of these as manyof them will require changes to articles ofassociation. For a useful summary of the newprovisions and answers to commonly askedquestions please consult the Deloittepublication “CompAct – Q&As on the 2006Companies Act” which can be found atwww.deloitte.co.uk/corporategovernance

There has also been a degree of confusion asto the extent to which recent changes to theold Companies Act 1985 affect Industrial andProvident Societies. Company directors’reports for financial years beginning on orafter 1 April 2005 must include a statementthat, in the case of each person who is adirector at the time when the directors’report is approved:

• so far as the director is aware, there is norelevant audit information of which theauditors are unaware; and

• they have taken all the steps that theyought to have taken as a director to makethemselves aware of any relevant auditinformation and to establish that thecompany’s auditors are aware of thatinformation.


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Some RSLs have asked whether the requirementis strictly relevant to their organisation, giventhat they are incorporated under the Industrialand Provident Societies Acts; others havequestioned what their directors need to doin order to be able to make the statement.The requirements are only binding on entitiesincorporated under the Companies Act andare therefore not strictly required by thosewhich are Industrial and Provident Societies.However, RSLs may see such a statement asrepresenting good governance and aretherefore encouraged to make the disclosure.RSL boards should not take this disclosurelightly however and need to carefullyconsider what additional reassurances theyshould seek in order to feel confident thatthey can make this disclosure. In our lastissue of ‘Corporate Governance Update’ weset out some suggestions for the steps thatDirectors should take and a copy of this canbe found on the corporate governancesection of our website athttp://www.deloitte.co.uk/corporategovernance

Financial reporting in the longer termAfter a flurry of activity over the last threeyears things have gone rather quiet, with theASB deciding there will be no new standardsbefore 2009. They are carefully reviewingtheir options for future accounting standardsand are considering introducing a three tierapproach to standards:

• Full IFRS compliance for quoted companiesand public interest entities. The term “publicinterest entity” has not been defined but islikely to include RSLs with quoted debt.

• A middle band of entities – these might belarge private companies, or other mediumsized organisations. The idea here is thatthey might be subject to a regime of ‘IFRSminus’ or ‘FRSSE plus’. This may will takethe form of the recently issued exposuredraft International Financial ReportingStandard for Small and Medium-Sizedentities which includes both simplermeasurement and disclosure requirementsthan full IFRS.

A final IASB standard is expected in mid-2008, at which point the EU may wellallow individual member states to adopt itfor all entities other than those for whomfull IFRS compliance is required.

• The FRSSE – similar to the current Financialreporting standard for small entities.

The Statement of Accounting Principles –Interpretation for Public Benefit Entitiesis still being considered by the AccountingStandards Board. This is an AccountingStandards Board project which has beengoing on for some time now since the firstconsultation draft appeared back in 2005.The idea behind it was to set out somecommon principles for all public benefitentities so that accounting across the sectorscould be more consistent. Probably thegreatest area of difference is how capitalgrants are accounted for. Under the currentSORPs, charities take capital grants as incomeat the stage they become entitled to it. Incontrast, an RSL would treat the grant as adeduction from fixed assets and a universitywould carry the grant on the balance sheetas deferred income amortised over the life ofthe asset which it funded.

The RSL sector is very against the proposalthat the charity treatment be adopted for allpublic benefit entities, believing that it willdistort the income and expenditure account.There are also significant complications ofadopting such a policy in practice – if thegrant is taken through Income andexpenditure account you are likely to sufferimpairment of the property which the grantfunded. Shared ownership properties geteven more complicated – if an RSL believesshared ownership properties will bestaircased there is an argument that relatedgrants will have to be repaid and thereforeshowing the grant as a liability is moreappropriate.

Our feeling is that this change may not comein for some time, if at all. The Statement ofPrinciples is not an accounting standard andSSAP 4 – accounting for government grantswill still be in force, so it is difficult to seehow RSLs could be forced down the path oftaking capital grants to revenue in the shortterm. The ASB intend to review SSAP 4 at thesame time as the equivalent IASB project,which will not be in the short term, and thistherefore has to be an area which will needto be kept under review.

It is still very difficult to predict what theInternational Financial ReportingStandards (‘IFRS’) regime will look like after2009, which aspects of IFRS are likely to beincorporated into UK accounting standardsand particularly those in the ‘middle way’band. There are one or two standards andprojects which are of particular interest toRSLs and could make a big difference to RSLaccounting. These include:

• IAS 40 – accounting for investmentproperties. The definition of investmentproperties in IAS 40 is slightly different tothat of the current UK accountingstandard. On the face of it, it could meanthat an RSL’s properties would fit into thisdefinition, with the result that RSLs couldhave the option of carrying properties atvaluation with no requirement fordepreciation. This might make life simpler,but it could make interpretation of an RSL’sresults even more difficult as gains andlosses on revaluation would be takendirectly to income and expenditure accountwith surpluses and asset values fluctuatingsignificantly between accounting periods.

• Another area that could signal change isaccounting for leases. Currentaccounting standards differentiatebetween operating leases (where thelessee does not have the majority of risksand rewards) which are not recognised onthe balance sheets and finance leases(where the opposite is true). The IASB’sinitial thinking for their lease accountingproject is that interests in assets acquiredunder operating leases should be valuedand shown on the balance sheet. This isgoing to be particularly relevant for thosesocial landlords who rent temporaryhousing under short leases. A discussionpaper is expected in 2008.

• IAS does not recognise mergeraccounting believing that allcombinations consist of one partyeffectively taking over another –something that many RSLs would dispute.


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International Public Sector AccountingStandards are used in some countries forpublic sector accounting and adopt theconcepts of IFRSs for public sector purposes.Adoption in this country is probably someway off and in any respect, some of thesestandards are not suitable for RegisteredSocial Landlords, given the ‘half way house’status of the sector. However, they may wellinfluence SORP setters and some of the conceptsmay well surface in the sector in the future.

Accounting for Pension CostsThe ASB has recently issued two documentsrelating to pensions:

• Firstly, an amendment to FRS 17Retirement benefits which aligns thedisclosures required for defined benefitschemes not taking advantage of themulti-employer exemption with those inthe equivalent IAS 19 Employee Benefits,as well as requiring that bid-price (ratherthan mid-price) is used for quoted securities.The amendment is applicable for periodscommencing on or after 6 April 2007although the ASB encourage early adoption.

• Secondly, the ASB has published aReporting Statement: RetirementBenefits – Disclosures. This statement isbest practice only, not an accountingstandard and as such has no effective date.It recommends disclosure in six areas:the relationship between the entity andtrustees/managers of the defined benefitscheme; the principal assumptions used tomeasure scheme liabilities; the sensitivity ofthe principal assumptions used to measurethe scheme liabilities; how the liabilitiesarising from defined benefit schemes aremeasured; the future funding obligationsin relation to defined benefit scheme; andthe nature and extent of the risks arisingfrom financial instruments held by thedefined benefit scheme. One significantrecommendation is that in disclosing theassumptions details of the mortality tablesused should be given.

For those RSLs who are members of theSocial Housing Pension Scheme (‘SHPS’),the impact of FRS 17 has not been significant.As a multi-employer scheme where the assets

and liabilities of the scheme cannot beattributed on a reliable basis to individualmembers, RSLs have been able to continue toaccount for their contributions as if they werecontributing to a money purchase scheme i.e.contributions are taken directly to the incomeand expenditure account. This fairly relaxedsituation was in danger of being upset lastyear, when SHPS notified employer membersof the total cost they would incur if theywithdrew from the scheme. This seemed toimply that SHPS were able to allocate assetsand liabilities to individual members butfurther investigation showed this not to bethe case. However, a number of RSLs havedisclosed the penalty amount as a note totheir financial statements under ‘contingentliabilities’. Our view is that, whilst this may beone of the risks recommended for disclosureby the best practice Reporting Statement, thisis not required for a true and fair view unlessthere is a real prospect of the RSLwithdrawing from the Scheme and triggeringthe exit penalty, an outcome which in mostcases will be remote.

Wales and the WestAndrew Martyn-JohnsTel: 07785 331512Email: [email protected]

London and the South EastNigel JohnsonTel: 01727 839000 Email: [email protected]

MidlandsJane WhitlockTel: 0121 632 6000 Email: [email protected]

North WestTony FarnworthTel: 0161 455 8546 Email: [email protected]

North EastPaul WilliamsonTel: 0191 261 4111 Email: [email protected]

ScotlandDavid BellTel: 0141 204 2800 Email: [email protected]

SouthToby WrightTel: 023 8033 3124Email: [email protected]

ContactsFor further information on any of the above, please contact:

