1. Component Accounting Briefing
6 October 2011

2. Background

3. Historic Position Accounting for housing properties:
Prior to accounting period ending 1997/1998 all property assets in registered social landlord’s accounts were capitalised including major repair expenditure and included in the balance sheet

4. Balance Sheet 2011 2010 £’000 TANGIBLE FIXED ASSETS
2011
2010
£’000
TANGIBLE FIXED ASSETS
Housing properties – cost less depreciation
179,378
161,126
Less: Social Housing Grant
(118,129)
(104,433)
Total housing fixed assets
61,249
56,693
Other fixed assets
4,086
3,295
TOTAL FIXED ASSETS 8
65,335
59,988
CURRENT ASSETS
Housing properties for sale 9
1,611
3,166
Debtors 10
2,499
6,524
Cash at bank and in hand 11
21,542
18,145
25,652
27,835
CREDITORS: amounts due within one year 12
(9,288)
(5,826)
NET CURRENT ASSETS
16,364
22,009
TOTAL ASSETS LESS CURRENT LIABILITIES
81,699
81,997
CREDITORS: amounts falling due after more than one year 13
64,185
66,350
CAPITAL AND RESERVES
Share capital – Non Equity 14 -
Acquisition Reserve 16
Income and expenditure account 15
17,514
15,647

5. Historic Position No requirement for depreciating property assets
Depreciation
A method of allocating the cost of a tangible asset over its useful life.
Depreciation is used in accounting to try to match the expense of an asset to the income that the asset helps the company earn
Some registered social landlords account for property at valuation

6. Accounting Requirements for Registered Social Landlords General Determination 1997 and 1998
The requirements of the above determination required all registered social landlords to account for all property assets without the major repairs

7. Accounting Requirements for Registered Social Landlords General Determination 1997 and 1998
Accounts of social landlords reflected this change in 1997/1998 and major repairs previously capitalised were removed from the balance sheet
The principle being that cost of bringing the property to its original standard treated as an income and expenditure cost

8. The General Determination 2000 was announced in Circular R2-04/01: Accounting requirements for registered social landlords
Required social landlords to retrospectively depreciate the building element of housing property assets over its useful life
Required to ascertain the land element of the housing asset to calculate the depreciation charge

9. Grant split between land and buildings
The General Determination 2000 was announced in Circular R2-04/01: Accounting requirements for registered social landlords
Grant split between land and buildings
Useful economic life of buildings based on the judgement of Housing Associations and their Auditors

10. Why Change?

11. Consistency of Accountancy
Globalisation
Borrowing on international markets
UK accounting standards
Adopting of the International Financial Reporting Standards (IFRS)
Consistency of accounting treatment
More clarity of treatment
Better comparability

12. What Is Component Accounting?

13. Overview of requirements
Statement of Recommended Practice (SORP)
Accounting by registered social housing providers Update 2010
“A housing property will always comprise several components with substantially different useful economic lives, each component should be accounting for separately and depreciated over its individual useful economic life”
Similar text in Financial Reporting Standard 15 (FRS15)

14. Overview of requirements
International Accounting Standard 16
“Each significant part of an item of PPE (property plant and equipment) should be depreciated separately”
Therefore for property asset:
Anything material which has a substantially different useful economic life from the rest of the building
Applicable accounting periods beginning 1 April 2011 or earlier

15. Key Steps Identify and agree components to be accounted for
Own records /Asset management strategy
SORP suggested list

16. SORP Example components
Key Steps
SORP Example components
Land
Structure
Roofs
Windows
Lifts
Heating/boiler systems
Kitchens
Bathroom

17. Key Steps Ascertain life assumption for each components
Standard life of components?
Asset management strategy based on own experience
RICS build cost data
Will still have inconsistency between Associations

18. Key Steps
Agree method for allocating original cost to individual components
Costs of individual components may be difficult to identify

19. Estimation techniques
Use own data/records for similar schemes/properties
NHF/Savills national matrix of property component

20. Key Steps
Determine major repair costs (asset replacements) amounts previously written off to income and expenditure account to be reinstated in the balance sheet
How good are the records?

21. Key Steps
5. Determine accumulated depreciation on major repairs (previously expensed amounts) to be reinstated in the balance sheet

22. Key Steps 6. Determine grant treatment
Initially land and building structure in proportion to respective costs
Then allocate to all components proportionately
Major repair grant should be allocated against the relevant components

23. Key Steps
7. Calculate prior period adjustment – day one of comparative period
I & E March 2012 – new basis
I & E March 2011 – restate on new basis
Prior period adjustment prior to 1 April 2010
Impact will depend on prior treatment

24. Key Steps
8. Set up or amend accounting systems to deal with new cost, grant and depreciation assumptions
Asset management software
Spreadsheets
Can system cope?

25. Summary / Outcome Historical data Treatment of grant Likely to be gaps
Work backwards from the asset:
Age of asset and how much life remaining
Treatment of grant
Clear treatment of original grant
Major repair grant should be allocated to components

26. Summary / Outcome Transition (Prior year adjustment) Examples
Previously capitalised nothing
Major repairs back to the balance sheet
Additional depreciation due to revised components life

27. Summary / Outcome Homebuy/shared ownership
Components are not the Association’s asset therefore do not component account
Service charge items are not included in component accounting e.g. lift equipment
Early replacement of asset impact on the results as the component and the related accumulated depreciation is written off

28. Summary / Outcome Should achieve greater consistency, but
Different assumptions and interpretations vary:
Components division of original costs
Life estimations not consistent
Some Associations account for property assets at valuation
Greater volatility in balance sheet values and income and expenditure accounts due to variation in property values

29. Conclusions on impact of component accounting
Very different effect depending on pre-component accounting policy on major repairs capitalisation
Increases comparability as all Associations required to account for the components and therefore capitalisation policy similar
Could change reported net assets and surpluses significantly

30. How the balance sheet and operating statement is affected by the changes

31. Example One property acquired in 2000 for £100,000 (no grant)
Replaced kitchen in 2009 for £5,000
Replaced bathroom in 2011 for £5,000
Building life 100 years
For simplicity, assume no grant

32. Example
Judged kitchens to have 25 year life and bathrooms 20 year life (no other components)
Original split judged to be
Land £40,000
Structure £52,000
Kitchen £4,000
Bathroom £4,000
How will the numbers be reported in March 2011 financial statements?

33. Before component accounting
Firstly, let us look at accounting before component accounting changes are made whereby the accounting policy is that no major repairs are capitalised

34. Example Pre component accounts: accumulated depreciation
12 years at 1% on £60,000
(£7,200)

35. Example Land Buildings Major repairs Total £000 Cost 40 60 - 100
Depreciation
7.2
NBV
52.8
92.8

36. Example Under component accounting Kitchen: Original cost £4,000
9 years depreciation (25 year life) £1,440
NBV (written off in 2009) £2,560
New kitchen cost £5,000
3 years depreciation (25 year life) £600

37. Example Under component accounting Bathroom: Original cost £4,000
11 years depreciation (20 year life) £2,200
NBV (written off in 2011) £1,800
New bathroom cost £5,000
1 year depreciation (20 year life) £250

38. Example Under component accounting Structure: Cost £52,000
12 years depreciation £6,240
Annual charge £520

39. Example Land Structure Kitchen Bathroom Total £000 Cost 40 52 5 102
Depreciation -
6.24
0.6
0.25
7.09
NBV
45.76
4.4
4.75
94.91

40. Example Depreciation charge 31 March 2011 Structure £520
Kitchen (25 years) £200
Bathroom (20 years) £250
Total £970
31 March 2010
Bathroom (20 years) £200
Total £920

41. Example Summary: impact on Association Balance sheet Old policy:
New policy:
Component accounting
Cost
100,000
102,000
Depreciation
(7,200)
(7,090)
Net Assets
92,800
94,910

42. Example Income and expenditure (2011) Old policy: New policy:
Component accounting
Depreciation charge
600
970
Write off component replacement / original
5,000
1,800
5,600
2,770

43. Example Income and expenditure (2010) Old policy: New policy:
Component accounting
Depreciation charge
600
920
Write off component replacement / original -

44. Summary Impact of Component Accounting
Higher depreciation charge
- Assets spread over shorter lives
- Asset renewals now capitalised
Charge recognised when components replaced early
Replaced components capitalised not expensed
Prior year adjustment to reserves