Accounting Update Seminar - Beever and · PDF fileNovember 2015 Presentation by: Peter...
Transcript of Accounting Update Seminar - Beever and · PDF fileNovember 2015 Presentation by: Peter...
November 2015
Presentation by:
Peter Herbert, Insight Training
Maria Hallows, Partner
Accounting Update Seminar
• 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.
Objective
ACCOUNTING UPDATE
• Recap on the revised framework.
• Narrative reporting – where we are and where we’re heading.
• Formats, terminology and disclosures.
• The primary statements.
• Property, plant and equipment – choices on transition.
• Grant accounting.
• 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.
Programme
ACCOUNTING UPDATE
Listed groups IFRS in consolidated accounts
Everybody else! FRS 101/102
Small private
companies
Micro-entities
FRSSE (effective Jan 2015)
Micro entities legislation
P/C
Since 2005
1.1.2015
1.1.2015
Since 2013
The new framework…
ACCOUNTING UPDATE
2012 2013 2014 2015
Transition
date
Mandatory
adoption;
Comparative
BS
FRS 100
& 101
issued
FRS 102
issued
First balance
sheet
(Early
adoption
allowed from
31/12/12)
FRSs100 -102 Timeline
ACCOUNTING UPDATE
Applies to all RPs (charitable and non-charitable)
RPs apply this SORP, not Charities SORP
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.
Scope considerations
ACCOUNTING UPDATE
OFR
- Variable quality – blurring of SORP reporting categories.
Welfare reform
- Extensive coverage.
- Top 100 felt impact of reforms had been well managed.
Governance
- Consideration of downgrades – where relevant.
- 6 of 14 related to Board Member governance.
Internal control statements
- Annual review of effectiveness required.
- Temptation to ‘copy’ Housing Association Circular 07/07.
Beever and Struthers –
Annual Review 2015
ACCOUNTING UPDATE
Overall
- Improvements in light of HCA review (144 letters/14 downgrades).
- 1,004 pages from Top 100!!
- Annual accounts and website cross references.
Self assessment
- Many RPs attempt to define what VFM means.
Targets
- Some set targets – presumably comparison v actual next year?
Comparative data
- Benchmarking to peers.
- G15 or Global 100 or named peers.
- Lack of comparability – current v prior year data?
Value for Money
Statements
ACCOUNTING UPDATE
Effective 1 April 2015 New framework
Focus on effective risk management Governance
Robust stress-testing of business plans Financial viability
Proposed requirement for consent dropped On lending plans
Register required – need to understand potential impact of new liabilities
Assets and liabilities
HCA changes to Regulatory
Framework
ACCOUNTING UPDATE
Understanding of risks/expertise to manage Diversification strategies
Managing conflicts of interest Group structures
Maintaining compliance across groups Parental responsibility
Social housing assets must not be put at risk Non registered parents
Annual statement from the Board Compliance
HCA changes to Regulatory
Framework
Register required – need to understand
potential impact of new liabilities Assets and liabilities
ACCOUNTING UPDATE
Objectives
• Provide information on social landlord and insight into main objectives/strategies
and principal risks.
• Complement, supplement and provide context for related financial information.
> 5,000 homes
• Detailed requirements – Report of the Board & Strategic Report.
• Relaxation where subsidiary within a group.
• Less prescriptive than current OFR requirement.
< 5,000 homes
• Good practice to include commentary – commensurate with size of business.
The new SORP
ACCOUNTING UPDATE
Statement on internal controls
• Not required – but considered best practice.
Statement of board responsibilities
• Required by SORP.
Other relevant regulation
• Take on board when drafting (e.g.) Strategic Report - CA06.
The new SORP
ACCOUNTING UPDATE
FRS 102 –
Primary Statements
Statement of
comprehensive
income
Statement of
financial position
(CA06)
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)
ACCOUNTING UPDATE
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
What the SORP says….
ACCOUNTING UPDATE
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
Notable disclosures
ACCOUNTING UPDATE
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
Accounting Direction
ACCOUNTING UPDATE
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 shall not be classified as
an investment property (IP) and shall be accounted for as property, plant and
equipment (PPE).
Categorisation of fixed
assets
ACCOUNTING UPDATE
Categorisation of fixed
assets
ACCOUNTING UPDATE
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?
PPE IP
General needs √
Shared ownership (rental element) √
Affordable homes √
Office accommodation √
Market rented properties √
Commercial properties √
Classification
ACCOUNTING UPDATE
Initial
measurement
Subsequent measurement
Cost model
Revalued amount (if FV can be
reliably measured) – changes
usually in OCI
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)
Cost (purchase
price and directly
attributable costs)
May include
borrowing costs
OR
Property, plant &
Equipment
ACCOUNTING UPDATE
• 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.
Example
ACCOUNTING UPDATE
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
ACCOUNTING UPDATE
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’
Para 35.10d FRS 102
ACCOUNTING UPDATE
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’
Para 35.10c FRS 102
ACCOUNTING UPDATE
How do I decide? Who does the valuation?
Can I ‘cherry pick’? What happens to the historic SHG?
Other FAQs
Fair Value as deemed
cost
ACCOUNTING UPDATE
• 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?
Example
ACCOUNTING UPDATE
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
Other PPE issues
ACCOUNTING UPDATE
Initial measurement
Subsequent measurement
Fair value reliably
measureable
without undue cost
or effort
Fair value not
reliably
measureable
without undue cost
or effort
Fair value
(changes in I&E)
Cost –
depreciation
model
Cost (purchase price
and directly attributable
costs)
Investment property -
Treatment
ACCOUNTING UPDATE
Impair where CV > recoverable amount
Recoverable amount = Higher of
Fair value less costs to sell
Calculate for ‘cash generating units’ (individual schemes)
• 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’
Impairment
ACCOUNTING UPDATE
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
Impairment indicators
Not an exhaustive list – refer also to FRS 102
ACCOUNTING UPDATE
The first stage in impairment assessment
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
Impairment
Step by step
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
Cash generating unit
ACCOUNTING UPDATE
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’
Depreciation
adjustments
ACCOUNTING UPDATE
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).
Financial instruments
ACCOUNTING UPDATE
• 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.
Entities can choose between
Accounting policy choice
ACCOUNTING UPDATE
Investment s 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
Financial instruments
- scope
ACCOUNTING UPDATE
Initial Measurement Subsequent Measurement
Basic non
financing Transaction price
Transaction price less
impairment
Basic financing
Present value of future
payments discounted at mkt
rate for similar debt instrument
Amortised cost less
impairment
Other Fair value Fair value
Measurement
ACCOUNTING UPDATE
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.
Concessionary loans
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 34.93 to PBE
34.97 of FRS 102.
Consistency
• The same accounting treatment must be applied for concessionary loans made
and received by a social landlord.
Concessionary loans
Accounting treatment
• 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%.
Non-market rate loans
ACCOUNTING UPDATE
On balance sheet at amortised cost – discount future payments using market
rate for similar debt instrument
£6M ÷ 1.053 = £5.18M
Non-market rate loans
ACCOUNTING UPDATE
Year b/f
£000
Interest charged
(@5%)
£000
Cash paid
£000
Balance
c/f
£000
2015 5,183
(6,000/1.053)
259 - 5,442
2016 5,442
272 - 5,714
2017 5,714
286 (6,000) -
Non-market rate loans
ACCOUNTING UPDATE
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.
Latest thinking
ACCOUNTING UPDATE
Notice period?
Who gives notice to who?
Materiality of discounting
Basic or other? Para 11.9
Key considerations for
RPs
ACCOUNTING UPDATE
• 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.
Para 11.9 (revised)
ACCOUNTING UPDATE
• 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.
Para 11.9 (revised)
ACCOUNTING UPDATE
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 reprice the fixed rate; if
exercised the borrower has the option to repay without penalty.
3. £10M 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.
Scenarios
ACCOUNTING UPDATE
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
Financial Instruments
Typical in Sector
Basic or Other?
• 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.
Example – ‘other’ loans
ACCOUNTING UPDATE
Solution
ACCOUNTING UPDATE
Year 1
Dr SOCI £300K
Cr Cash £300K
Dr Cash £10M
Cr Loan £10M
Dr SOCI £500K
Cr Loan £500K
• Cancellable fixes and LOBOS at amortised cost not FVTPL
Applying IFRS 9
• Greater complexity re-bad debt provisions
• Investment accounting more complex
• Concessionary loan treatment not available (e.g.
Homebuy)
Pros
Cons
ACCOUNTING UPDATE
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.
Interest rate swaps
ACCOUNTING UPDATE
When loan extinguished When terms substantially modified
>10% shift in cash flows discounted
using the original rate?
Assuming obligations
discharged, cancelled or expired
Derecognition of loan
ACCOUNTING UPDATE
£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?
Scenarios…
ACCOUNTING UPDATE
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 be:
1. Under existing GAAP.
2. Under new GAAP?
Agreements to pay -
example
ACCOUNTING UPDATE
Basic or other?
PV of future payments discounted at market
rate
Financing? Adjust on transition?
Issues
ACCOUNTING UPDATE
Paragraph 28.11A
Where an entity participates in a defined benefit plan which is a multi-employer
plan that in accordance with paragraph 28.11 is accounted for as if it were a
defined contribution plan, and it has entered into an agreement with the multi-
employer 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 28.13 and 28.13A.
Multi-employer pension
schemes
ACCOUNTING UPDATE
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 28.17. The unwinding
of the discount shall be recognised as a finance cost in profit or loss in the period
it arises.
Multi-employer pension
schemes
ACCOUNTING UPDATE
• 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.
Example
ACCOUNTING UPDATE
Year 1
Dr Opening reserves
Cr Pension liability
Dr Interest payable
Dr Pension liability
Cr Cash
Solution
ACCOUNTING UPDATE
Year 2
Dr Interest payable [(£500K-£75K) x 5%] £21,000
Dr Pension liability £59,000
Cr Cash £80,000
Solution (continued)
ACCOUNTING UPDATE
• 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).
Example (continued)
How do we account for the increase and in which accounting period?
ACCOUNTING UPDATE
• 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.
Solution (continued)
ACCOUNTING UPDATE
• 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.
Holiday pay accruals
How is the required holiday pay accrual calculated on transition to FRS 102?
ACCOUNTING UPDATE
Employment terms –
carry forward?
Offset of
prepayments?
Historical trends (are
b/f amounts actually
taken?)
(Corp’n Tax
implications)
Holiday pay accruals
ACCOUNTING UPDATE
Holiday year ends
Immaterial? Prove it
Getting to grips with the new rules
Providing you with the help you need
Ethical considerations
Materiality
The auditor’s perspective
ACCOUNTING UPDATE
Misstatement risks
Transition adjustments – impact on three balance
sheets!!
‘Undue cost and effort’
The auditor’s perspective
ACCOUNTING UPDATE
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.
What can you
remember?
ACCOUNTING UPDATE
Multi-employer pension
scheme
ACCOUNTING UPDATE
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
Rory O’Caroll, Partner
e. rory.o’[email protected]
t. 00 44 203 478 8401
Maria Hallows, Partner
t. 00 44 161 838 1862
Sue Hutchinson, Partner
t. 00 44 161 838 1869
Contact us