SORP and IFRS (or new UK GAAP) Alphabet...

06/12/2012

1

NHF Finance Forums 2012

SORP and IFRS (or new UK GAAP) – Alphabet Soup!

www.pwc.com

PwC

Plans for the session

Part 1 Introduction, background, taking stock

Part 2 Implications for housing sector

Part 3 Where do you go from here?

2

06/12/2012

2

PwC

Part 1 Introduction, background, taking stock

3

PwC

Introduction and background

Plans for convergence of UK GAAP with international standards – talked about for a number of years

Many sectors have already adopted IFRS

- Listed companies

- Health bodies

- Central and local government

There has been significant (long!) debate concerning adoption of IFRS in the housing sector

4

06/12/2012

3

PwC


August 2009 – ASB consultation on Future of UK GAAP

Autumn 2010 – updated consultation, large housing response

January 2012 – “The FRS” consultation released

ASB recognised impact of previous FRSME on housing sector

Proposed accounting

regime

Previous Tier

structure

Current proposals

(January 2012)

Tier 1

EU Adopted IFRS

EU-listed entities

AIM entities

Other publicly

accountable entities

EU-listed entities

AIM entities

Tier 2

The FRS (new UK

GAAP)

Non publicly


Other entities

Tier 3

FRSSE

Small non publicly


Small entities (as

defined by Company

Law)

Housing Associations

If required by Company Law

5

PwC

The IFRS transition timetable for the housing sector – latest position

2014 2015 2016

Transition date Opening IFRS balance sheet

(1 April 14 for March year ends)

Comparative IFRS year end

2014/15 comparatives

First IFRS year end 2015/16 Annual report

(and 2014/15 comparatives)

2014/15 IFRS Comparatives

2015/16 First year of reporting

6

06/12/2012

4

PwC


Role for Statement of Recommended Practices (SORPs’)

- SORPs would still be needed

- Provide supplementary (and sector specific guidance)

e.g. accounting treatment for:

- Leases (Low Cost Home Ownership / shared ownership)

- Treatment of grant

- Pensions (SHPS)

- No transition to IFRS/new UK GAAP allowed for housing until new SORP published

Accounts Directions still have same legal status

7

PwC

Part 2 Implications for housing sector

8

06/12/2012

5

PwC


Key areas of change – “The FRS”

• Statement Format

• Borrowing costs

• Valuation of property, plant and equipment (including housing properties)

• Grants

• Leasing

• Defined Benefit Pension schemes (SHPS)

• Financial Instruments (IFRS 9)

9

PwC

Impact on the housing sector?

Statement Format

• Balance Sheet = Statement of Financial Position

• I&E/P&L = Statement of Comprehensive Income

Statement of Changes in Equity

• Cash flow Statement = Statement of Cash Flows

10

06/12/2012

6

PwC


Statement of Financial Position

• Follow Companies Act format

- except to the extent that these requirements are not permitted by any statutory framework under which non-company entities report (e.g. Accounts Direction?)

• Liabilities should be shown as current unless there is an unconditional right to defer settlement for 12 months or more

11

PwC


Statement of Comprehensive Income

• Can show down to ‘profit or loss’ in a separate income statement

• Other comprehensive income (OCI) = STRGL equivalent

• No exceptional items

12

06/12/2012

7

PwC


Statement of Changes in Equity

• Contain:

- total comprehensive income (split into P&L* and OCI)

- retrospective restatements for policy changes or error corrections*

- dividend payments*

- other distributions

- issues of shares

• If an entity has no OCI, and only the *items, it can add these to P&L as a ‘statement of income and retained earnings’

13

PwC


Statement of Cash Flows

• Presents changes in ‘cash and cash equivalents’

• Three main headings (operating, investing, financing)

14

06/12/2012

8

PwC


Presentation Fairness

• Financial statements shall present fairly the financial position, financial performance and cash flows

• The Companies Act – true and fair view

Fair presentation = true and fair view

Estimates, Errors

• Estimates corrected prospectively

• Errors corrected retrospectively

15

PwC


Capitalisation of borrowing costs

• Previous proposals did not allow capitalisation.

• “The FRS” now allows capitalisation.

• Accounting policy choice – must be applied consistently.

16

06/12/2012

9

PwC


Tangible fixed assets – housing properties

• Previous proposals did not allow valuation

• “The FRS” allows valuation – accounting policy choice.

• Must be applied consistently.

• What about the Valuation basis?

- needs to be an income based model

- EUV-SH meets the definition

- is EUV-SH still the best model?

17

PwC


Property, plant or equipment or investment properties?

Will housing properties meet the definition of investment properties under IFRS? Some types of tenure will....which ones?

• The draft FRS considers concept of ‘held for social benefit’

- if yes – then property, plant or equipment

- if no – then investment property

18

06/12/2012

10

PwC



• Tenure types under consideration?

- general needs

- shared ownership

- market rent

- intermediate rent

- affordable rents

- shared equity

- key worker, student accommodation

- rent to Homebuy

- others?

19

PwC



• Investment properties

- accounted for at valuation

- changes in valuation recognised in profit and loss

- hold at cost if ‘undue cost or effort’ in obtaining valuation

Current position

• SORP working party has assessed tenure types against guidance and will consult on its proposals

20

06/12/2012

11

PwC


Grants

• Current treatment – held against asset, depreciate net asset.

• “The FRS” allows choice of 2 options:

• Performance model

• grant with no conditions is recognised in income when grant is receivable.

• grant with conditions is recognised in income when grant conditions are met

• Accruals model

• classified as either capital or revenue

• capital grants recognised in income over life of asset

• revenue grant recognised in income over related costs for grants intended use

• deferred grant is held as liability and shall not offset the assets

21

PwC


Grants

• FRS 102 gives option to use either performance or accruals method for SHG.

• Key question - Should an option be given to use either performance or accruals method?

• Some examples....

22

06/12/2012

12

PwC


Grants

How would performance method apply to SHG?

• The two proposed approaches to accounting for SHG are either :

1) Take the view that all SHG conditions met and book to I&E as revenue.

2) Conclude that conditions never met so hold all grant as liability until repaid.

If assume conditions never met then the higher depreciation charge mentioned previously will not be offset by income from grant amortisation. Consequently there would be a negative impact on the I&E.

23

PwC


24

Example 1: Performance method (all conditions met) Cost 100 (land 30) Grant 50 UEL 100 years Dr Non-current asset cost 100 Cr Cash 100 Dr Cash 50 Cr Grant income 50 Dr Depreciation expense (100-30)/100 = 0.7 Cr Accumulated Depreciation 0.7 Year 1 I&E impact is ‘surplus’ of (50-0.7) = 49.3 Year 2 I&E impact is ‘deficit’ of 0.7

06/12/2012

13

PwC


25

Example 2: Performance method (conditions not met) Cost 100 (land 30) Grant 50 UEL 100 years Dr Non-current asset cost 100 Cr Cash 100 Dr Cash 50 Cr Deferred Income 50 Dr Depreciation expense 0.7 Cr Accumulated Depreciation 0.7 Year 1 I&E impact is ‘deficit’ of 0.7 Year 2 I&E impact is ‘deficit’ of 0.7

PwC


Grants

How would accruals method apply to SHG?

• Grant should be accounted for as relating to revenue or grant related to an asset.

• Where relates to an asset then recognise in I&E over life of asset.

• Where relates to revenue recognise in I&E over period corresponding to the related costs.

• Where grant is deferred then recognise as deferred income, not net against value of asset.

• Accruals method will result in amortisation of grant to I&E over life of asset thereby offsetting (in part) the increased depreciation charge on the asset mentioned previously.

26

06/12/2012

14

PwC


27

Example 3: Accruals method

Cost 100 (land 30) Grant 50 UEL 100 years Dr Non-current asset cost 100 Cr Case 100 Dr Cash 50 Cr Deferred Income 50 Dr Depreciation expense 0.7 Cr Accumulated Depreciation 0.7 Dr Deferred Income (50/100) = 0.5 Cr Grant income 0.5 Year 1 I&E impact is ‘deficit’ of (0.7-0.5) = 0.2 Year 2 I&E impact is ‘deficit’ of 0.2

PwC


Grants (continued)

Current position

• Sector had £35billion of grant as at 31 March 2011

• Transitional treatment not stipulated in FRS.

• Considering impact on Valuation accounting

• What about RCGF?

• What about timing of grant payments?

28

06/12/2012

15

PwC


Pensions

• Multi-employer scheme e.g. Social Housing Pension Scheme (SHPS)

• Multi employer exemption still holds....

• However, liability linked to past service will require recognition

Current position

• SORP working party will consult on outcome

29

PwC

Leases

• Lease standards changing but not yet included in the FRS

• Finance lease v operating lease

- current leases need to be assessed

- classification based on who owns risks and rewards?

- 90% test removed – now a balance of factors

- leasing future developments – direction of travel is ‘on balance sheet’

Current position

• Not a SORP consultation issue as financial impact deemed to be low (although experience is that resource impact is high).


30

06/12/2012

16

PwC

Financial Instruments

• Very complicated – and changing...

Current position

• Changes to financial instruments standards on the way

• IFRS 9, timing very uncertain as content still under review


31

PwC

Main impact on sector

• Valuation of loans and derivatives that have ‘mark-to-market’ exposure

• Any embedded derivatives in loan / swap agreements, leases, other complex contracts (for example, rental guarantee agreements)

• Impairment of financial assets (rent arrears cannot be based on general provisions)

• Disclosure requirements, onerous and lengthy


32

06/12/2012

17

PwC

What are categories of hedges

Fixed rate assets/liabilities

Assets/liabilities in foreign

currencies

Firm commitments

Variable rate assets/liabilities

Highly probable forecast

transactions

Assets / Liabilities / Firm

Commitments in foreign currencies

Net investments in foreign

operations

Fair Value

Hedge

Cash Flow

Hedge

Net investment

Hedge

Common hedges for housing sector

33

PwC

Simply, what is a cash-flow hedge

Measure hedging instrument at fair value

Effective portion Cash flow

hedge reserve

Profit or loss

Ineffective portion

Strict rules to prove “effectiveness”

Requires mature systems and

documentation

34

06/12/2012

18

PwC

Part 3 Where do we go from here?

35

PwC

Conclusions and what next?

Conclusions (at this stage!)....

Issue Position

Borrowing Costs Choice allowed

Valuation Choice allowed

Investment properties Tenure types – consultation on

which ones qualify as IPS

Grant Accounting policy change –

what’s the impact?

Pensions Past service cost recognition

Leases Detailed exercise but low impact

Financial Instruments Changing, volatile – waiting for

IFRS 9

36

06/12/2012

19

PwC

Conclusions and what next?

What next?

• Final FRS planned to be published January 2013

• IFRS 9 timing uncertain

• “SORP consultation planned for February 2013

• Republished IFRS/new UK GAAP SORP – March 2014.

37

PwC

Practical challenges that arise under IFRS include:

• Communication strategy • Training strategy • Project Management support • Resource / skills to manage

the change • Corporate governance • Embedding knowledge –

new policies and processes

• Accounting and consolidation systems enhancement

• Data gaps • New systems required • Update chart of accounts • New procedures • Training

• Accounting policies & procedures

• Updated & new controls • New valuations • Impairment modelling • Increase data collection • Management reporting • Budgeting process

Practical Implications of IFRS conversion

PROCESS SYSTEMS PEOPLE

38

06/12/2012

20

PwC

A successful conversion model

Phase 3

Embed Change

Phase 1

Impact

Assessment

Phase 2

2.1 Project Set-Up

2.2 Component Evaluation

& Issues Resolution

2.3 Initial

Conversion

Financial and Accounting

Operations and Resources

Systems

39

PwC

Phase 1: Impact assessment

Objectives

• Identify the principal issues, created by transition to IFRS, which require further investigation;

• Identify the broad implications of such issues – these may be grouped into impact on financial results, processes, systems and people; and

• Formulate a high level IFRS implementation plan for the next stage of the overall project.

Phase 1 – Impact assessment

Conduct desktop review

High level diagnostic

sessions

Report findings & develop implementation

plan

Phase 1.1 Phase 1.2 Phase 1.3

40

06/12/2012

21

PwC

Next steps

• Establish if there is a training need?

• Get an impact assessment.

• Produce a detailed implementation plan.

• Make decisions on appropriate project governance.

• Allocate appropriate resource to the team

• Communicate :

- Internally and

- Externally

41

Contacts

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP UK its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. © 2012 PricewaterhouseCoopers LLP UK. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers LLP UK which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

Phil Cliftlands Director [email protected] 020 7804 0527

Guy Flynn Senior Manager [email protected] 07590 352 454

06/12/2012

22

PwC

Jargon buster – financial instruments

Terminology Meaning

Amortised cost = Initial recognition amount

- principal payments

+/- discounted amortisation

- any impairment (financial asset)

Swap (basic) Interest payments exchanged are based on two different floating rate indices.

Cash flow hedge A hedge of the exposure to variability in cash flows that:

- is attributable to a particular risk of asset or liability (e.g. future interest payments on

variable rate debt) or a highly probable forecast transaction; and

- could affect profit or loss.

Derivative financial

instrument

Swaps, futures, forwards, which create rights and obligations that have the effect of transferring

between the parties to the instrument, one or more of the financial risks inherent in an

underlying primary financial instrument.

Effective interest method Method of calculating the amortised cost of a financial asset or a financial liability (or

group of financial assets or financial liabilities) and of allocating the interest income or expense

over the relevant period.

Financial asset Any asset that is cash, or contractual right to receive cash (eg, rental debtors)

Financial liability Any liability that is cash (loan), or contractual right to exchange or settle obligations with

financial assets.


43

PwC

Jargon buster – financial instruments

Terminology Meaning

Embedded derivative Derivative instrument that is embedded in another contract – the “host contract”. The host

contract might be a debt or equity instrument, a lease, an insurance contract or a sales or

purchase contract. Embedded derivative is part of a host contract (a clause or section) which

causes the cash flows from that contract to be modified, based on a specified variable such as

interest rate, security price, commodity price, foreign exchange rate, index of prices or rates or

other variable. Embedded derivatives will have to be identified, separated and marked-to-

market through the income statement where the economic risks and characteristics of the

embedded derivatives are not “closely related” to those of the host contract.

“Closely related” An embedded derivative that modifies a contracts inherent risk (such as a fixed or floating

interest rate swap) would be considered closely related. Conversely, an embedded derivative

that changes the nature of the risks of a contract is not closely related.

Closely related: Inflation linked contracts if not leveraged.

Not closely related: Option to extend the remaining term of a debt instrument at a fixed rate.

Mark-to-Market Refers to the valuation of positions or exposure at current market value as opposed to cost. In

the detail, mark-to-market is the daily adjustment of open positions to reflect profits and losses

resulting from price movements occurring.

Callable instrument An instrument that gives the issuer the right to call it back from the holder (that is, to terminate

the instrument).


44

SORP and IFRS (or new UK GAAP) Alphabet...

Documents

Transcript of SORP and IFRS (or new UK GAAP) Alphabet...