30 August 2011
introduction
The 2010 update to the Statement of Recommended Practice: Accounting by registered social housing providers (“housing SORP”) applies for periods commencing on or after 1 April 2011. Earlier adoption is encouraged.
The areas of change are:
• Component accounting
• Business combinations and treatment of non exchange transactions
Of these the former is likely to have the more widespread immediate effect.
Under component accounting, where an asset is made up of two or more components with substantially different lives each component should be accounted for separately for the purposes of depreciation, replacement and disposal.
Key components could include: kitchens, bathrooms, central heating, lifts, roofs, windows and structure. Under the rigorous application of component accounting, the common existing practice of treating the replacement of a component e.g. fitting new kitchens or bathrooms as an expense will need to cease. Rather assets replaced should be written out and the loss on scrapping them recognised whilst the new assets will be capitalised and depreciated. Some providers will find that adoption of component accounting will mean that assets previously written off will be reinstated by way of a prior period adjustment.
The adoption of component accounting will be a major challenge. In view of this we have prepared a more detailed datasheet.
The three types of combinations
• Mergers which for accounting purposes are defined according to very limited criteria. In such cases, the financial statements aggregate the results, assets and liabilities of the merged bodies at book value. They also present the merged entity as if it had always existed i.e. by including the results of both entities for the entire period and restating the prior period.
• Acquisitions where in substance one entity acquires another in a commercial transaction. Under acquisition accounting the assets and liabilities of the entity acquired are measured at fair value and the difference between fair value and the consideration gives rise to positive or negative goodwill. The acquirer should bring in the results and cashflows of the acquired provider only from the date of acquisition and comparative figures should not be changed.
• Acquisitions arising from non exchange transactions. This common form of acquisition arises where one not for profit business is in substance gifted to another. Under the treatment previously adopted this would frequently give rise to negative goodwill, calculated as the consideration given (nil) less the fair value of the net assets of the acquired providers which would then be amortised.
The update recognises that this latter form of acquisition is not a fair value exchange and hence stipulates that the fair value of the gifted net assets or liabilities should be recognised simply as a gain or loss in the income and expenditure account in the year of the transaction.
For the first time the SORP contains additional technical notes. Whilst these do not carry the authority of the body of the SORP (and are not approved by the Accounting Standards Board) they will be useful as practical assistance. These cover the areas above and also the assessment of impairment of property values.
The changes will have a potentially material impact. Early consideration by providers is therefore strongly advisable.
newsletter sign up
If you would like to be included on our mailing list to receive regular updates,
please take a few minutes to fill in our newsletter
sign up.