CCH CONFERENCE 2015

FINANCIAL REPORTING- STANDARD 102 & SORP 2014

IMPACT OF OTHER KEY- LEGISLATIVE CHANGES

Kevin Wan ACMA, CGMA – Director of Finance

Paul Beadles ACMA,CGMA – Finance Manager

FORMAT

Introductions FRS 102 SORP 2014 Practical example Grant

Accounting Impact of other legislative

changes Questions /Debate

Introductions

About us

Delegates background / Responsibility for Finance

Any other specific issues of concern delegates would like to debate / cover

Please ask questions as we go along

FRS 102

Based on International Financial Reporting standards ( IFRS) for SME’S

Replaces all current FRS and SSAP’s into a single more compact globalised standard

Already adopted by EU listed companies, UK

Central Government, NHS and L Authorities

Issued by Financial Reporting Council ( FRC) in March 2013 to shift remaining UK Businesses, including Registered Housing Providers to this international style financial reporting

FRS 102

New Terminology i.e. receivables and payables as opposed to Debtors and creditors, Property, Plant and equipment rather than fixed assets

Mainly focused on commercial organisations so accounting requirements difficult to translate to specialist sectors such as housing

Hence led to complete rewrite of the SORP in 2014

ABOUT THE SORP

Applies to all Registered Social Housing Providers

Essential Guidance on accounting standards in sector

UK Accounting Standard setting body - Financial Reporting Council ( FRC) subcontracts development of SORP collectively to : National Housing Fed

: Community Housing Cymru : Scottish Fed of Hsg Assoc’s These form SORP Working party

SORP 2014

16 May 2014 – Inside Housing headline

‘NEW SORP THREAT TO BALANCE SHEETS’

Key Issues : IMPAIRMENT RISK : PENSION DEFICITS : GRANTS : TERMINOLOGY : CONVERSION TO IFRS

SORP 2014 -WHAT DO YOU NEED TO KNOW

Complex Cant ignore it / not optional Competent Accounting support Competent Auditors

SORP 2014 - IFRS

Highly Subjective Not a 5 minute Job Complex to implement and

maintain Don’t assume your auditors

will sort it out

EXAMPLE- GRANT TREATMENT ACCRUAL MODEL

On adoption of FRS102 Government grants must be amortised over life of structure

At 31st March 2014 the following example assumes all components are 10 years old : £10 million scheme

It also assumes all are included in financial statements under the old SORP

GRANT / DEPCN TREATMENT OLD SORP

Component Allocation Grant Accum Depreciated Ann Depcn Usefulof cost Depcn Cost / value Charge economic£'000 £'000 £'000 £'000 £'000 life

Land 4000 2286 0 1714 0structure 3000 1714 129 1157 13 100Kitchen 1000 400 600 40 25Bathroom 1000 400 600 40 25roof 500 167 333 16.7 30boiler 500 250 250 25 20Total 10000 4000 1346 4654 134.7

GRANT / DEPCN TREATMENT NEW SORP - IFRS

Component Allocation Grant Accum Depreciated Ann Depcn Usefulof cost Depcn Cost / value Charge economic£'000 £'000 £'000 £'000 £'000 life

Land 4000 0 0 4000 0structure 3000 0 300 2700 30 100Kitchen 1000 0 400 600 40 25Bathroom 1000 0 400 600 40 25roof 500 0 167 333 16.7 30boiler 500 0 250 250 25 20Total 10000 0 1517 8483 151.7

NEW GRANT TREATMENT – 100 YEARS

Total Accumulated Annual Amortisation Amortisation£'000 £'000 £'000

Government - Grant 4000 400 40

SUMMARY OF IMPACT OF NEW SORP

Net depreciation pre 2014 SORP = £134,700

Net Impact of depreciation charge and Grant Amortisation = £111,700 as we now release more grant

Opening reserve should be adjusted to reflect change in net book value of housing property and reclassification of government grant as deferred income

EXAMPLE-COMPONENT ACCOUNTING

Component Allocation Grant life cumilative depcn Cumilativeof cost depcn in year depcn

Land 35000 21540 0structure 30000 18460 100 1039 115 1154Kitchen 6000 20 1200 300 1500Bathroom 3000 30 900 100 1000Electrical 5000 40 1125 125 1250heating 5000 30 1500 167 1667boiler 3000 15 1800 200 2000windows 6000 30 1800 200 2000roof 8000 70 1029 114 1143Total 101000 40000 10393 1321 11714

IMPACT OF KEY LEGISLATIVE CHANGES

Regulatory Changes

Impact of Budget announcements

HCA : REGULATING THE STANDARDS

Co-regulation

Primary objective protect social Housing assets

Success or failure of Provider , squarely at the feet of its Governance and Leadership

Emphasis on Proactively managing the economic standards

HCA : ECONOMIC STANDARDS

Governance and Viability, Value for Money and Rent

Organisations are Financially viable and properly managed and deliver their functions in an efficient and economic manner

Investment in social housing achieves value for money

IMPACT OF SUMMER BUDGET

Social Housing Rents Rents for social housing will be

reduced by 1% a year for four years in a departure from the existing arrangements which allow annual increases of CPI (inflation) plus 1% per annum.

IMPACT : LESS INCOME

Rent reduction impact 119 units31/03/16 31/03/17 31/03/18 31/03/19 31/03/20 Total

Gross rent 500,344

Pre budget Assumed CPI +1 % 507,849 523,085 538,777 554,940

CPI Projected 0.5% 2% 2% 2%

Total Annual Increase pre budget 10 year settlement 7,505 15,235 15,693 16,163

Cumilative rent loss 7,505 22,741 38,433 54,596 123,275

IMPACT OF NEW POST BUDGET SETTLEMENT OF 1 % REDUCTION

1 % reduction new post budget settlement 495,341 490,387 485,483 480,628

Total annual reduction on 1 % decrease in rents -5,003 -4,953 -4,904 -4,855 -19,716

Cumilative rent loss -5,003 -9,957 -14,861 -19,716 -49,537

Reduction in Rental Income 12,509 32,697 53,294 74,312 172,812

IMPACT OF SUMMER BUDGET

Social Housing Tenants on Higher Incomes

The Government is to consult on proposals to require households in social housing earning over £40k in London / £30k outside to pay market or near-market rents. Legislation or regulations to achieve this are likely to be controversial and complex

IMPACT : More complex Administration

IMPACT OF SUMMER BUDGET

Working Age Benefits

A number of benefits, including tax credits will be frozen for four years from 2016/17. This will effectively reduce the incomes of many of tenants effected in real terms.

IMPACT : Rents more difficult to collect

IMPACT OF SUMMER BUDGET Tax Credits and Universal Credit

The amount of tax credits and Universal Credit payable to people in lower-paid employment will be cut and support through Child Tax Credit will be limited to two children for children born from April 2017.

IMPACT : Rent more difficult to collect

IMPACT OF SUMMER BUDGET

The Benefit Cap The overall total benefits that

households can receive will reduce from £26,000 to £23,000 in London and £20,000 outside of London . The cap is implemented by cutting Housing Benefit for those affected and particularly impacts on larger families.

IMPACT : Rent more difficult to collect

IMPACT OF SUMMER BUDGET

Housing Benefit for 18 – 21 Year Olds

Housing support for some 18 to 21 year olds is to be withdrawn.

IMPACT : Rent Collection / Lettings

OTHER CHANGES

Right to Buy Pensions Living Wage Insurance Premium Tax FCA Small companies

compensation limit to reduce from £85k to £75k

SUMMARY OF FINANCIAL IMPACT

Rental Income squeezed Voids Bad debts Legal costs Rent collection costs Tenancy administration Loan covenants harder to meet Treasury Management riskier

NON FINANCE : WHAT YOU NEED TO KNOW

Are you making a surplus Do you have positive working capital Are there any overdue debtors and

creditors Are Loans being repaid correctly Do you have adequate cash backed

reserves Clean audit report

Any Questions ???

Does your Co-op need help ?

Please don’t hesitate to get in touch if you would like some further advice and support

Email kevin.wan@nwhousing.org.uk Phone 0151 726 2229 Website www.nwhousing.org.uk