Supporting Older People Conference RC14: SORP what happens next? Speakers: Chair: Jonathan Pryor Director Smith and Williamson Philip Brown Technical Senior Manager Baker Tilly Rob Griffiths Executive Director, Group Financial Services Longhurst Group
SORP - What happens next? Philip Brown and Jonathan Pryor Director, Smith & Williamson
Agenda Part 1 1. The FRSME 2. The FRS 3. Timetable 4. 4 BIG issues 5. Capitalisation of interest 6. Property valuation 7. Grant accounting 8. Leasing 9. Investment properties 10. Prior period adjustments
What s in a name? The FRSME has become: The Financial Reporting Standard applicable in the UK and Republic of Ireland Called The FRS
Consultation on The FRS A new consultation period started which will continue until 30 April 2012 Most of the issues in the first Exposure Draft have been resolved for the sector
Implementation date Accounting periods commencing o or after 1 January 2015 Earliest year 31 December 2015 Majority - 31 March 2016 Early adoption permitted subject to the development of the PBE SORP (and RSL SORP)
RSL SORP Timetable SORP Working Party started Dec 2010 Reviewing the FRSME and now The FRS Initial consultation in Oct 2012 on issues Full consultation Spring/Summer 2013 New SORP late 2013
3 Tiered structure removed No longer Tier 1 publicly accountable. So what now? FRSSE if you qualify OR The FRS OR EU adopted IFRS
The 4 big issues in the FRSME Non capitalisation of interest Non valuation of property Grant accounting Financial instruments
Capitalisation of interest An entity may adopt a policy of capitalising borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of the asset.
Borrowing costs The borrowing costs which are directly attributable to the construction are those borrowing costs that would have been avoided if the expenditure on the qualifying asset had not been made. Para 25.2A
Borrowing costs Dos and Don ts Specific borrowing costs should be used Weighted average borrowing cost to be used if no specific borrowing Capitalised amount cannot exceed the cost of borrowing Capitalisation should be suspended during period of inactivity.
Property valuation Choice of cost model or revaluation model Must apply to all of the same class of assets. Held at its fair value less subsequent depreciation and impairment losses
Property valuation Valuations shall be made with sufficient regularity Fair value is usually determined using market based evidence Normally by professionally qualified valuers
Property valuations If there is no market based evidence of fair value, because of the specialised nature of the property... and entity may need to estimate fair value using an income or a depreciated cost approach. Para 17.15D
Grant accounting Grants should be recognised using one of two models: Performance model : or Accruals model Accounting policy choice of one or the other
Performance model Grant with no performance conditions attached is recognised in income when receivable Grant with performance conditions attached is recognised in income only when the performance conditions are met
Accrual model Under this model an RP shall classify grants as: Relating to revenue; or To assets
Accrual model - Revenue Recognise to income on a systematic basis over the periods in which the related costs are recognised Recognise to income immediately if the grant compensates for expenditure or losses in the past or there are no future costs
Accrual model - assets grants relating to assets shall be recognised in the income on a systematic basis over the expected useful life of the asset Treat as deferred income NOT netted off asset
Grossing up the fixed assets Significantly higher property assets in balance sheet Grossing up of grant to liabilities Implications for impairment??? Unlikely
Leases Area of uncertainty at present. SORP Working Party are reviewing typical leases to determine whether they are leases or not (under IFRS) Depending upon the conclusion will depend upon the accounting
Leases Potentially coming within the scope of accounting for leases are: Shared Ownership Low Cost Home Ownership Leasehold Scheme for the Elderly
Accounting for leases by lessors Finance leases will be receivable equal to the net investment in the lease Operating leases will assets subject to operating leases and presented in the financial position accordingly
Shared Ownership The current UK GAAP treatment under the SORP: Two different revenue streams Not recognised in IFRS SORP Working Party are reviewing leases and accounting treatment
Investment properties Definition: Not property held for social benefits P 16.3A Held to earn rentals or for capital appreciation
Investment properties Measured at fair value at each reporting date Changes in fair value recognised in profit or loss. Para 16.7
Prior Period Adjustments Under UK GAAP a PPA occurs when: 1.Change in accounting policy 2.Fundamental error in prior periods
Prior Period Adjustments Under The FRS a PPA occurs on 1.Change in accounting policy 2.Material error in prior years No longer needs to be fundamental.
SORP what happens next? Jonathan Pryor Director, Smith & Williamson Philip Brown, Technical Senior Manager, Baker Tilly 22 March 2012
Disclaimer This seminar is of a general nature and is not a substitute for professional advice. No responsibility can be accepted for the consequences of any action taken or refrained from as a result of what is said.
1. Financial instruments 2. Fixed asset additions 3. Deferred tax 4. Pensions 5. Land options 6. The new Direction
Financial instruments (sections 11 and 12) Most complex requirements in the FRED
Which instruments lie within Section 11 and Section 12 respectively? Section 11 covers basic financial instruments Section 12 covers those that are not basic ( other ) There are a list of conditions that have to be met for an instrument to be basic
Basic A debt instrument is basic if one of the following is true: a) Returns to the holder are: i. A fixed amount ii. A fixed rate of return over the instrument s life iii. A variable return that, throughout the instrument s life, is equal to a single quoted interest rate (eg. LIBOR) iv. A combination provided all are positive and in addition each of the following is true
Basic (continued) b) There is no contractual provision that could result in the holder losing principal or interest attributable to current or prior periods c) Contractual provisions to prepay are not contingent on future events d) There are no other conditional returns or repayment provisions
Other some examples Interest rate swap Options and forward contracts RPI linked loans
Initial measurement under Sections 11 and 12 Basic If not a financing transaction transaction price If a financing transaction present value of future payments discounted at a market rate of interest for a similar debt instrument It therefore is important to establish whether the transaction is a financing transaction An example is where payment is deferred beyond the normal business terms or is financed at a rate of interest that is not market rate
Initial measurement under Sections 11 and 12 Other fair value Transaction costs are not included
Subsequent measurement Basic Debt instrument at amortised cost using the effective interest method Debt instruments that are current assets or liabilities are undiscounted (net of impairment) unless a financing transaction
Subsequent measurement (continued) Basic If a financing transaction, measure at present value of future payments discounted at a market rate of interest for a similar debt instrument Investments at fair value with movements recognised in I&E account (unless unable to measure reliably)
Subsequent measurement (continued) Other Fair value with movements recognised in the I&E account (except for equity investments which cannot be measured reliably)
Hedging If specified criteria are met, an entity may designate a hedging relationship and a hedged item in such a way as to qualify for hedge accounting Hedge accounting permits the gain or loss on the hedging instrument and hedged item to be recognised in the I&E account at the same time Very complex rules Be careful about testing and hedge ineffectiveness
Fixed asset additions (section 17) New name: Property, Plant and Equipment Component accounting: essentially the same as now If the major components of an item of PPE have significantly different patterns of consumption of economic benefits, an entity shall allocate the initial cost of the asset to its major components and depreciate each such component separately over its useful life However capitalisation of improvements is different
FRS 15 Subsequent expenditure should be capitalised where the subsequent expenditure provides an enhancement of the economic benefits of the tangible fixed asset in excess of the previously assessed standard of performance.
FRED 48 An entity shall add to the carrying amount of an item of PPE the costs of replacing part of such an item when that cost is incurred if the replacement part is expected to provide incremental future benefits to the entity. The carrying amount of those parts that are replaced is derecognised.
Deferred tax (section 29) Only affects a few Associations; those that are noncharitable or have non-charitable subsidiaries But those Associations that are affected may find the impact to be very significant
FRS 19 Deferred tax should be recognised in respect of all timing differences that have originated but not reversed by the balance sheet date. but
FRS 19 Deferred tax should not be recognised on timing differences arising when non-monetary assets are reduced or sold if, on the basis of all available evidence, it is more likely than not that the taxable gain will be rolled over, being charged to tax only if and when the assets into which the gain has been rolled over are sold
Section 29 Deferred tax shall be recognised in respect of all timing differences at the balance sheet date.. Timing differences are differences between taxable profits and the income and expense as stated in the financial statements (whether in P&L or OCI) that arise from the inclusion of gains and losses in tax assessments in periods different from those in which they are recognised in financial statements
Deferred tax So: for non-charitable entities a different treatment of deferred tax for property revaluations
Pensions (section 28) Different calculation method; impacts negatively on the I&E if expected returns on assets increase Group plans under common control must be recognised in individual accounts No change for SHPS
Land options No specific guidance on accounting treatment under UK GAAP Possibly in housing properties at lower of cost and net realisable value Possibly in debtors (as a prepayment) also at lower of cost and NRV Under FRED 48 will be treated as a financial instrument at fair value
Draft Direction Consultation period closed on 6 March Some quite challenging responses suggesting simplification and focus on disclosure Outcome unclear
Summary Overview of the timetable and purpose of the SORP re-write Highlighted the key issues in FRED 48 which will drive the SORP re-write Commented briefly on the draft Direction
SORP what happens next? Jonathan Pryor Director, Smith & Williamson Philip Brown, Technical Senior Manager, Baker Tilly 22 March 2012