The imminent introduction of new financial reporting standards is likely to have a major impact on the housing sector. Managing the transition from SORP 2010 towards the inclusion of the international standards of FRS 102 will not be without its challenges. However, as has been the case with previous shifts in accounting requirements, the process does not need to be daunting.
To progress, housing providers need to be fully aware of the new legislation, identify its likely implications at a local level and establish whether their financial systems can support the demands of the new era. For most housing providers, the full implementation of FRS 102 may not require a grand redesign. But for everyone, being ready for the new regulations will dictate the need for a proactive and comprehensive programme of preparation, starting now.
What is FRS 102?
FRS 102, which is expected to officially come into force in 2015, is based on the international financial reporting standards for SMEs but has been amended for the UK market. It will change the way accounts are currently prepared under UK GAAP and prompt an overhaul of the format of financial statements and the disclosures required. Moreover, it will change the recognition criteria for various assets and liabilities which in turn will affect how some items are measured. And it will have implications for the treatment of certain gains and losses compared with the current methodology.
Policy and process
International Financial Reporting Standards (IFRS) have already been adopted across various divisions of the public sector, but its introduction into the housing sector continues to be the subject of much discussion. The Financial Reporting Council (FRC) has concluded that the majority of housing providers will be mandated to implement IFRS Tier 2, and published the principles of this tier in FRS 102 in March 2013. Interpretation of FRS 102 for the housing sector will be supported by a new SORP (Statement of Recommended Practice) which aims to provide sector-specific guidance around issues such as social housing and the treatment of grants and pensions. The SORP is currently being reviewed by the SORP working party and an update will be published by the National Housing Federation in March 2014.
The timetable for change, however, already outlines with wide expectation that the transition will officially start in FY2014/15 when housing providers will be expected to complete a ‘comparative’ year. This will comprise a comparison between the current SORP and FRS 102, requiring providers to run both methods in parallel. From FY2015/16, organisations will be expected to adopt FRS 102 as a stand-alone process in anticipation of the first year of full reporting. As a consequence, the most proactive housing providers are currently focused on making sure they are prepared for the transition and ready to do their comparison.
Impact on housing
The new regulations will have a marked impact on the housing sector, not least in the important area of grants. The vast majority of social housing is, of course, underpinned by grants and in some cases local authorities and housing providers have grant funding in excess of 100 per cent of unit value. FRS 102 aims to reduce the balance sheet to a point where it only shows the true value of its properties, with the grant slowly released over time.
Under the new guidelines, grants will be treated in one of two ways. Primarily, under an accrual method, grants will be classified as capital or revenue, with capital grant recognised as income over the economic life of the building and revenue grant recognised as costs. Alternatively, under the performance method, grant will be taken as income when performance criteria specified in the grant conditions are met.
For many housing providers, the transition period is likely to raise eyebrows. Making balance sheet comparisons with prior years will most likely show significantly less grant and substantially higher asset values – and this could appear worrying for smaller housing providers. In Scotland, where many providers are heavily grant-funded, the comparative reports could make for stark readings. However, this is not likely to happen overnight as the release of a grant will take a number of years and in the short term, the variance between 2014 and 2016 will not be huge.
FRS 102 will also create complexities in the reporting of financial instruments, pensions, leases and property classification. For example, with leasing standards set to change, providers will need to classify current leases as either finance leases or operating leases, depending on who owns the risk and reward. Likewise, housing property will become classified as plant property and equipment if used for social purposes or investment property if otherwise. In the latter case, properties will need to be recognised at fair value at each reporting date, once again increasing the likelihood of fluctuation through the I&E. Moreover, FRS 102 now gives providers the opportunity to account at valuation as an accounting policy.
How to proceed
Despite the imminent changes, housing providers should not be daunted by the prospect of FRS 102. The transition period will give them time to adjust to the new way of working and allow alarming fluctuations in comparative balance sheets to be set in a proper long-term perspective.
There are things that housing providers can be doing now to make sure their processes are fit for purpose when the changes arrive. They can prepare the ground by ensuring that their accounting systems are flexible in how they handle data. They will need to be agile enough to allow them to treat the accrual of grants differently – enabling them to be released over longer periods of time.
In addition, systems need to provide clear visibility of reporting so that they can quickly and easily understand the impact of releasing grants over specific time periods. The ability to view the implications of aspects such as depreciation will significantly improve their ability to manage the business from a financial perspective.
Housing providers that are currently reliant on spreadsheets or rigid in-house systems may not be able to handle these requirements easily or effectively. Spreadsheets generally provide insufficient reporting or audit capability. Similarly, in-house systems are often inflexible and give organisations no ability to model or reclassify assets as things change.
The alternative is to take the specialist route. By partnering with trusted providers of asset accounting solutions – with dedicated experience of working in the housing sector – housing providers can benefit from significant productivity and efficiency gains. A specialist partner will not only be able to deliver practical tools that can help save time and provide immediate visibility of real-time accounting implications, but they will also be able to play an important role as a strategic advisor with sector-specific knowledge and experience. Moreover, they will be able to provide unique access to an established user community of peers.
For the housing sector, the move to FRS 102 will not require a grand design. But with the right support, organisations can proactively and easily ensure that their house is in order.
Karen Conneely is group commercial manager at Real Asset Management.