Accounting Update Seminar

Size: px

Start display at page:

Download "Accounting Update Seminar"

Doris Manning
5 years ago
Views:

1 Accounting Update Seminar Presentation by: Peter Herbert, Insight Training Maria Hallows, Partner 24 November 2015

2 Objective To update you on latest thinking regarding key challenges presented by the new UK GAAP in FRS 102 and the related SORP and provide practical guidance on how to address them.

3 Programme Overview of narrative reporting where we re heading. Formats, terminology and disclosures. The primary statements. Property, plant and equipment choices on transition. Other fixed asset issues. Financial instruments non-market rate loans. Classification and treatment of other financial instruments. Multi-employer pension schemes. The auditor s perspective.

The New SORP Applies to all RPs (charitable and non-charitable) Aligns with the new FRS 102 (effective p/c 1/1/15) Unregistered providers apply Charities SORP Almshouses and

4 The New SORP Applies to all RPs (charitable and non-charitable) Aligns with the new FRS 102 (effective p/c 1/1/15) Unregistered providers apply Charities SORP Almshouses and Abbeyfield societies not governed by LTA 1985 apply Charities SORP Where IFRS applies, use this SORP as guidance unless it conflicts FRS 102 and Accounting Direction take precedence

5 Key words. Must Should May Glossary

6 Narrative reporting

7 Key themes OFR - Variable quality blurring of SORP reporting categories. VFM statements - Improvements in light of HCA review (144 letters/14 downgrades). - 1,004 pages from Top 100!! - Benchmarking including ROI. Changes to HCA regulatory framework - Effective 1 April Financial viability. - Register of assets and liabilities. New SORP - Different requirements for RPs with > 5,000 homes. - Less prescriptive than current OFR requirement.

8 FRS 102 Primary Statements Statement of financial position (CA06) Statement of comprehensive income Statement of changes in equity Statement of cash flows Income statement (CA06) Other comprehensive income Statement of income & retained earnings (where only changes to equity = profit, dividends & prior period adjustments)

9 What the SORP says. SOCI Two statement approach prohibited by SORP. Cash flow statement: 3 headings (operating investing financing). Cash & cash equivalents. Exemption for qualifying entities. Statement of changes in equity Like reconciliation of movements in shareholders funds Comparative required

10 Notable disclosures Explicit statements of public benefit entity status. of compliance with SORP and FRS 102. Accounting policies e.g. valuation of investment properties. e.g. accounting treatment for financial instruments. Key areas of judgement and estimation uncertainty Consolidated accounts Legal status and commercial relationship with group entities. Material financial transactions between entities in the group (unless exempt). Related party disclosures Key management personnel compensation. Rent and arrears of tenant Board members. Employee disclosures

11 Accounting Direction Accounting Policies Clear on choices. Details of impairment of assets assessed along with indicators considered. Narrative Reporting Risks, judgements and volatility. VFM clearly signposted to other documents. Explicit statements in Board Report of compliance with Governance and Viability Standards. Notes 2 and 3 Grant amortisation and income. Disposal Proceeds Fund New guidance on disposals from non-profit making to profit making entities. Format for DPF note per AD. Rent arrears Adjustment for NPV.

12 Categorisation of fixed assets Investment property (IP) vs Property Plant and Equipment (PPE) definitions Paragraph 16.2 FRS 102 (An IP is) a property (land or building or part of a building or both) held by the owner or by the lessee under a finance lease to earn rentals or for capital appreciation or both, rather than for: a) Use in the production or supply of goods and services or for administrative purposes; or b) Sale in the ordinary course of business. Paragraph 16.3a FRS 102 Property held primarily for the provision of social benefits (e.g. social housing held by a public benefit entity) shall not be classified as an investment property (IP) and shall be accounted for as property, plant and equipment (PPE).

13 Categorisation of fixed assets Guidance Judgement must be applied in assessing classification of housing properties and whether they are commercial (SORP para 8.9). Questions to consider: Why is the property held what is its intended use? Is property held for social benefit? Is the property operated at below market rent for the benefit of the community? Is the housing association subsidising the property in order to continue providing the service?

14 Classification General needs Shared ownership (rental element) Affordable homes Office accommodation Market rented properties Commercial properties PPE IP

15 Property, plant & Equipment Initial measurement Subsequent measurement OR Cost model Re-valued amount (if FV can be reliably measured) changes usually in OCI Cost (purchase price and directly attributable costs) May include borrowing costs Cost depreciation - impairment FV depreciation impairment Revalue with sufficient regularity to ensure carrying value does not materially differ from fair value SORP requires use of existing use value for social housing (EUV SH)

16 Example An RP chooses to measure its social housing properties at valuation. At the reporting date the housing properties are revalued from 95m to 100M. This increase is made up of a 5M downward revaluation for new properties not previously revalued and an increase in value of the remaining properties of 10M. Grant of 0.75M for the new properties has been received.

17 Solution 2016 ( 000) 2015 ( 000) Other income - grant 750 X Operating surplus X X Interest receivable X X Interest payable X X Decrease in valuation of housing properties (5,000) X Surplus for the year X X Unrealised surplus on valuation of housing properties 10,000 X

18 Transfer from I&E reserve to revaluation reserve?

19 Para 35.10d FRS 102 Revaluation as deemed cost A first time adopter may elect to use a previous GAAP revaluation of an item of property, plant and equipment at or before the date of transition to this FRS as its deemed cost at the revaluation date.

20 Para 35.10c FRS 102 Fair value as deemed cost A first time adopter may elect to measure an item of property, plant and equipment on the date of transition to this FRS at its fair value and use that fair value as its deemed cost at that date.

21 Fair Value as deemed cost How do I decide? Who does the valuation? Other FAQs Can I cherry pick? What happens to the historic SHG?

22 Example An RP chooses to stick with previous GAAP valuation as deemed cost. At the transition date the housing properties have EUV-SH of 150m. In July 2015 the valuer has advised a decrease in valuation of 30% is expected as a result of the rent reductions from 2016 onwards. How does this impact the FRS 102 transitional accounts?

23 Other PPE issues Mixed tenure No reference in new SORP to cross subsidy principle Shared ownership Decoupling of grant means depreciation may be needed Annual impairment reviews 50 year rule in FRS 15 no longer applies

24 Investment property - Treatment Initial measurement Subsequent measurement Cost (purchase price and directly attributable costs) Fair value reliably measurable without undue cost or effort Fair value (changes in I&E) Fair value not reliably measurable without undue cost or effort Cost depreciation model

25 Impairment Impair where CV > recoverable amount Recoverable amount = Higher of Fair value less costs to sell Amount obtainable from sale in arm s length transaction EUV-SH could be used to determine fair value Value in use Present value of future cash flows expected to be derived from the asset Use service potential (VIU-SP) depreciated replacement cost Cash flow-driven calculation as practical expedient Calculate for cash generating units (individual schemes)

26 Impairment indicators Contamination or similar issues not identified as part of development planning Change in government policy, regulation or legislation Irreversible change in demand for a property Material reduction in market value of properties Obsolescence of a property The first stage in impairment assessment Not an exhaustive list refer also to FRS 102

27 Impairment Step by step 1. Determine level at which impairment is to be assessed 2. Estimate recoverable amount of asset or cash generating unit 3. Calculate carrying amount (CA) of asset or cash generating unit 4. Compare CA to recoverable amount to determine if an impairment loss has occurred

28 Cash generating unit Smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Cash inflows are inflows of cash and cash equivalents received from parties external to the landlord. In identifying whether cash flows are independent, consider factors such as how management organises business activity or makes operational decisions. SORP considers it remote that a cash generating unit would be all of a social landlord s housing properties.

29 Value in Use Service Potential

30 Depreciation adjustments SORP para 14.9 Social landlords should review the remaining useful economic life, the depreciation (amortisation) method and the residual value of an asset even if no impairment loss is recognised.

31 Financial instruments Definition: A contract giving a financial asset of one enterprise and a financial liability or equity instrument of another. FRS 102 distinction: Basic (Section 11) and Other (Section 12).

32 Accounting policy choice Entities can choose between Applying sections 11 & 12 of FRS 102 in full; or Applying the recognition & measurement provisions of IAS 39 and the disclosure requirements of sections 11 & 12 of FRS 102. Applying the recognition and measurement provisions of IFRS 9 and the disclosure requirements of sections 11 & 12 of FRS 102.

33 Financial instruments - scope Investments in subs, assocs, JVs Rent arrears Accrued revenue Leases Cash Trade creditors Accruals Bank loans Service charge arrears Interest rate swaps Onerous lease provisions Warranty obligations Financial guarantees DB pension schemes Investment in shares Intercompany balances

34 Measurement Basic non financing Basic financing Initial Measurement Transaction price Present value of future payments discounted at mkt rate for similar debt instrument Subsequent Measurement Transaction price less impairment Amortised cost less impairment Other Fair value Fair value

35 Concessionary loans Definition Loans made or received between a public benefit entity or an entity within the public benefit entity group and other party at below the prevailing market rate of interest that are not repayable on demand and are for purposes to further the objectives of the public benefit entity or public benefit entity parent. Intra group Loans between group companies which are made or received at below the prevailing market rate are not concessionary loans unless they have been made or received to further the public benefit entity objectives of the group. For example, a loan made to a subsidiary to assist them during a period of financial difficulty is not a concessionary loan as defined in FRS 102.

36 Concessionary loans Accounting treatment Options Apply the recognition, measurement and disclosure requirements of Section 11 of FRS 102, Basic Financial Instruments, or Section 12 of FRS 102, Other Financial Instrument Issues; or Recognise the loan in the Statement of Financial Position at the amount paid or received and, in subsequent years, adjust the carrying amount to reflect any accrued interest payable or receivable. To the extent that the loan is irrecoverable, recognise an impairment loss in income and expenditure. Follow the presentation and disclosure requirements in paragraphs PBE to PBE of FRS 102. Consistency The same accounting treatment must be applied for concessionary loans made and received by a social landlord.

37 Non-market rate loans Company C borrows 6M from another company interest-free. It will make a bullet repayment in 3 years time. A market interest rate for a similar debt instrument is 5%.

38 Non-market rate loans On balance sheet at amortised cost discount future payments using market rate for similar debt instrument 6M = 5.18M

39 Non-market rate loans Year b/f 000 Interest charged 000 Cash paid 000 Balance c/f ,183 (6,000/1.05 3) 259-5, , , , (6,000) -

40 Latest thinking Need to discount Only if unconditional right to defer. Loan agreement vs comfort letter. Financing shortfall Interest income or expense reversing as interest expense or income in profit and loss as the discount unwinds. Capital contribution Increase in cost of investment in parent s books; capital reserve in subsidiary s books. Unwinding of discount - to profit and loss account as above.

41 Key considerations for RPs Notice period? Who gives notice to who? Materiality of discounting Basic or other? Para 11.9

42 Para 11.9 (revised) Returns to the holder are: A fixed amount; Positive fixed rate or positive variable rate; or Combination of positive or negative fixed rate and positive variable rate. Contract may provide for repayments to be linked to a single observable index of general price inflation provided not leveraged. Contract may provide for determinable variation of return to the holder provided not contingent on future events other than: Change of contractual variable rate; Protect holder against credit deterioration of issuer; or Changes in levies applied by central bank or arising from changes in relevant tax or law.

43 Para 11.9 (revised) There is no contractual provision that could, by its terms, result in the holder losing principal/interest. Contractual provisions that permit issuer (borrower) to prepay a debt or permit the holder (lender) to put it back before maturity are not contingent on future events other than to protect: the holder against the credit deterioration of the issuer; or the holder or issuer against changes in levies applied by a central bank or arising from changes in relevant tax or law. Contractual provisions may permit the extension of the term of the debt instrument, provided the above criteria are met.

44 Scenarios 1. Loan with interest based on LIBOR plus 50 basis points plus option for borrower to convert either to RPI plus 80 basis points or to fix in exchange for a fee. 2. Loan which gives the bank the option to periodically re-price the fixed rate; if exercised the borrower has the option to repay without penalty M floating rate loan with exercised option to fix via an embedded swap plus a separate option to repay the underlying loan early with penalty. 4. Loan with differential interest charge linked to the level of reported surplus.

45 Financial Instruments Typical in Sector 1. Vanilla loan 2. LOBO Lender Option Borrower Option 3. Stand alone swap 4. Listed bond 5. CEH - Cancellable Embedded Hedge 6. Intercompany loans 7. Rent arrears Basic or Other?

46 Example other loans An RP borrows 10m. A 300k arrangement fee is incurred. The loan does not meet the definition of a basic loan under FRS 102. The fair value of the loan at the first reporting date is 10.5m. The fair value of the loan at the next reporting date is 9.6m.

47 Solution Year 1 Dr SOCI 300K Cr Cash 300K Dr Cash 10M Cr Loan 10M Dr SOCI 500K Cr Loan 500K

48 Solution Year 2 Dr Loan 900K Cr SOCI 900K

49 Applying IFRS 9 (Cancellable fixes) and LOBOS at amortised cost not FVTPL. Pros Greater complexity, ie - bad debt provisions. Investment accounting more complex. Concessionary loan treatment not available (e.g. Homebuy). Cons

50 Interest rate swaps Fair value hedge Swap at fair value. Gain or loss on swap through income statement. Hedging gain or loss added to or deducted from carrying value of loan and recognised in income statement. Cash flow hedge Swap at fair value. Gain or loss on swap through reserves to the extent the hedge is effective. Gain or loss through income statement to the extent the hedge is ineffective.

51 Derecognition of loan When loan extinguished When terms substantially modified Assuming obligations discharged, cancelled or expired >10% shift in cash flows discounted using the original rate?

52 Scenarios 1M loan paying interest annually at 5% (market rate) with all capital repaid at the end of 10 years. New loan agreed at the end of year 5 to increase interest rate to 7% but capital repaid over 20 years. Substantial modification? 1M loan paying interest annually at 5% (market rate) with all capital repaid at the end of 10 years. After 5 years borrower exercises option to swap floating rate for fixed rate. Substantial modification?

53 Agreements to pay - example A tenant has a rental of 100 per week. The tenant is 1,000 in arrears. The RP and the tenant agree a schedule of payments of 2 per week on top of the 100 per week already due to remedy the arrears over a 500 week period. What the accounting treatment would be: 1. Under existing GAAP. 2. Under new GAAP?

54 Issues Basic or other? PV of future payments discounted at market rate Financing? Adjust on transition?

55 Multi-employer pension schemes Paragraph 28.11A Where an entity participates in a defined benefit plan which is a multi-employer plan that in accordance with paragraph is accounted for as if it were a defined contribution plan, and it has entered into an agreement with the multiemployer plan that determines how it will fund a deficit, the entity shall recognise a liability for the contributions payable that arise from the agreement (to the extent that they relate to the deficit) and the resulting expense in profit or loss in accordance with paragraphs and 28.13A.

56 Multi-employer pension schemes Paragraph 28.13A When contributions to a defined contribution plan (or a defined benefit plan which, in accordance with paragraph 28.11, is accounted for as a defined contribution plan) are not expected to be settled wholly within 12 months after the end of the accounting period in which the employees render the related service, the liability shall be measured at the present value of the contributions payable using the discount rate specified in paragraph The unwinding of the discount shall be recognised as a finance cost in profit or loss in the period it arises.

57 Example On implementation of FRS 102, an RP has discounted obligations in respect of past service to pay to SHPS of 500K (applying 5% discount rate). Payments of 100K and 80K are made in 2015 and 2016 respectively.

58 Multi-employer pension scheme Year 1 Dr Opening reserves 500,000 Cr Pension liability 500,000 Dr Interest payable ( 500K x 5%) 25,000 Dr Pension liability 75,000 Cr Cash 100,000

59 Solution (continued) Year 2 Dr Interest payable [( 500K- 75K) x 5%] 21,000 Dr Pension liability 59,000 Cr Cash 80,000

60 Example (continued) In July 2015 you have been notified of the outcome of the triennial valuation. This increases the deficit payments from 1 April 2016 onwards. The discounted obligation in respect of past service to pay to SHPS now totals 800K (applying a 5% discount rate). How do we account for the increase and in which accounting period?

61 Solution (continued) In 2016 additional to a similar entry to the ones already described, we then have: - Dr Income and expenditure account - Operating costs 434k - Cr Pension liability 434k Clearly an impact in the year where any additional contributions are confirmed i.e. 31 March 2016.

62 Holiday pay accruals Employees of entity A are permitted 24 days annual leave. The holiday year commences on 1 April. Company A s financial year end is 31 December. The average employee salary is 20K. How is the required holiday pay accrual calculated on transition to FRS 102?

63 Holiday pay accruals Holiday year ends Employment terms carry forward? Historical trends (are b/f amounts actually taken?) Immaterial? Prove it Offset of prepayments? (Corp n Tax implications)

64 ICAEW Tech 16/14 BL

65 The auditor s perspective Getting to grips with the new rules Providing you with the help you need Ethical considerations Materiality

66 The auditor s perspective Misstatement risks Transition adjustments impact on three balance sheets!! Undue cost and effort

67 Thank you for attending. Please complete and return your feedback form.

68 Contact us Chris Porritt, Senior Partner e. rory.o t David Hunter, Partner e. t Maria Hallows, Partner e. t Sue Hutchinson, Partner e. t

69 Solutions

70 What can you remember? 1. Terminology Stock, net realisable value, minority interests 2. Property assets Historic cost Revalued amounts (EUV SH) Fair value as deemed cost 3. Basic loans Amortised cost 4. PBE concessionary loans Loan at below prevailing market rate, not repayable on demand and for purposes of furthering the objective of the PBE or PBE parent. 5. Transaction costs Netted off against loan same under FRS 102.

71 Transfer from I&E reserve to revaluation reserve? 4.25M

72 Financial instruments - scope Investments in subs, assocs, JVs Rent arrears Accrued revenue Leases Cash Trade creditors Accruals Bank loans Service charge arrears Interest rate swaps Onerous lease provisions Warranty obligations Financial guarantees DB pension schemes Investment in shares Intercompany balances

NHF Finance Forums 2012

www.pwc.com NHF Finance Forums 2012 SORP and IFRS (or new UK GAAP) Alphabet Soup! Plans for the session Part 1 Part 2 Part 3 Introduction, background, taking stock Implications for housing sector Where