Agenda 6
REPORT TO THE FINANCE COMMITTEE ON
FRS 102 AND HOW IT WILL IMPACT ON HCHA.
Author: T Baldwin
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Agenda 6
FRS 102
An Introduction
This report is aimed at informing the Board of Management of HCHA about the impact of FRS 102 on HCHA.
For back ground purposes the Financial Reporting Council (FRC) published Financial Reporting Standard (FRS)
100 "Application of Financial Reporting Requirements' "in November 2012. This outlines the standards that
make up the new financial reporting framework applicable on a mandatory basis for the majority of UK
entities for reporting periods starting on or after 1 January 2015. Housing Associations will be required to
apply FRS 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland" which was
issued in March 2013.
FRS 102 addresses some of the specific reporting issues faced by housing associations and other public benefit
entities, including the basis for recognising government grant, business combinations and the recognition of
income from various sources. The housing SORP (Statement of Recommended Practice) has also been updated
to reflect this new framework.
Housing associations will be required to adopt the new financial reporting regime for accounting periods
starting on or after 1 January 2015, with a comparative balance sheet and opening comparatives requiring
restatement. For HCHA this will mean a 1 October 2014 transition date, a 30 September 2015 comparative
balance sheet and the first FRS 102 compliant accounts being prepared for 30 September 2016.
This report will attempt to set out how we are planning for the transition, what the key areas of impact are
and the suggested action points as well as arming us with sufficient information that might be needed to talk
to lenders and stakeholders.
It does however not cover:



Right to buy
Planned maintenance programme
HCHA’s capacity for development
As we work through these changes other issues may also arise that will need to be considered.
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Agenda 6
Planning for transition
The transition will require time and may create some disruption to the finance function whilst the impact on
the business as a whole must also be considered carefully and a redrafted compliant business plan reflecting
the FRS 102 changes that satisfies our lenders is created.
Planning ahead will enable a smooth transition whilst allowing HCHA to address issues such as negotiating
bank covenants.
The draft timetable is:
June/July 2015
July 2015
September/October
2015
•set timetable and review resources
•consider terms of loans and other instruments
•assess impact of standard on each financial statement item.
•Assess impact of SORP
•ensure systems are in place to gather required information.
•Have discussions with stakeholders if necessary.
•restate comparative financial statements
May 2016
•prepare financial statements under FRS 102
30 September 2016
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Agenda 6
Key areas of impact
The following key areas and issues are considered to be those most relevant to HCHA.
The issue, action to be taken and the potential impact on the financial resources is considered.
Unless otherwise stated, the financial statements will need to be restated retrospectively on transition to
FRS102 and any adjustments will be reflected in the opening balance sheet reserves.
In the first iteration have ranked the issues in order of what I consider to be the highest risk of impact in
financial terms and time and will initially focus on lender covenant compliance.
This order may however change as we work through these key areas and better understanding the overall
impact on the business.
Impact:
•The assessment for each issue below reflects the potential impact on transition to FRS 102 based
on the criteria below and is graded as red- high, yellow-medium or- green low
£:
•Potential impact on the financial statements either in terms of the balance sheet or performance
statement. High reflects a potentially significant impact on the results and/or position for HCHA
Resource:
•Potential impact on resources during the transition process. High reflects areas that may be
complex and/or resource intensive.
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Agenda 6
FRS 102 - issue 1
Potential approach
Housing properties
Property held for social benefit will be
Classified as property, plant and equipment
(PPE), all other housing properties will be
Shown as investment property. Properties such
as student accommodation and commercial units
in larger developments will need to be reviewed
for the appropriate treatment.
Investment property will generally be held at fair
value (not cost) with movements recognised in
the I&E account. The option to hold other
properties (PPE) at cost or valuation is still
available and there is also an option to take revalued amounts as deemed cost on transition.
On first review our assets are all considered to
fall into PPE
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Impact: 
£- High
Resource-High
 confirm the categories of properties
currently held
 understand the definitions within SORP 14
i.e. deemed cost, historical cost, valuation
 review accounting policy of revaluation for
PPE
 calculate impact on balance sheet
 assess impact on covenants
 consider presentation and disclosure
within the financial statements
 consider treatment of how grant is
accounted for (issue 2)
Agenda 6
FRS 102 - issue 2
Potential approach
Social Housing Grant
SHG will be treated as a government grant and
(SHG)
can no longer be off-set against the housing
property cost.
SORP 2014 requires the performance model to be
followed where property is at valuation and the
accruals model where property is at cost. Under
the accruals model, the grant is amortised over
the useful economic life of the related structure
and components of the asset but not against the
land.
SORP 2014 also clarifies the timing of recognising
a liability in respect of recycling grants although
this area is still under debate.
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Impact: 
£- High
Resource-High
 review guidance in SORP for method of
accounting whilst at the same time
consider whether to keep PPE at cost, use
value as deemed cost or move to regular
valuation as this will affect the treatment
of grant.
 calculate impact on balance sheet
 assess impact on covenants
Agenda 6
FRS 102 - issue 3
Potential approach
Financial Instruments
Under FRS102 the treatment of financial
(SHG)
instruments is different to UK GAAP.
There are now two categories of instruments:
 Basic
 Other - or non basic
Other instruments include all derivatives
(forwards, swaps, options) and LOBOs (Lender
Option Borrower Option) are reported at fair
value which could be significantly different from
that of a current amortised cost.
Measuring at fair value will impact net assets and
is likely to introduce more volatility to annual
performance results.
FRS102 does however allow associations to
account for financial instruments under IAS 39 or
IFRS 9. This policy choice may be beneficial to
organisations with certain non-basic instruments
as it could result in reduced volatility.
Volatility in the surplus or deficit may also be
reduced, in appropriate circumstances, by
applying hedge accounting. If this is applied
documentation will need to be prepared to
demonstrate the hedge has been designated,
how the effectiveness will be measured and the
effectiveness tests completed to demonstrate
that it is effective.
On first review we considered all our loans to
fall into the category of Basic, the impact will
therefore be low.
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Impact: 
£- High
Resource-High
 review all financial instrument agreements
to determine the classification they fall
into.
 if necessary consider basis for determining
fair value for any non-basic instruments
e.g. open market value, discounted cash
flows etc
 consider whether applying IFRS 9 could
provide a better result in terms of volatility
where there are non-basic instruments.
 If hedge accounting is being considered
this will need separate consideration and
advice during the transition process.
 consider approach taken by other
registered providers
 discuss with auditors and ask for examples
of good practice from other registered
providers.
Agenda 6
FRS 102 - issue 4
Potential approach
Retirement benefits
Multi-employer schemes such as SHPS (Social
(SHG)
Housing Pension Scheme) can be accounted for
as defined contribution schemes if the share of
assets and liabilities for each entity cannot be
determined.
There will, however, be a need to recognise any
contractual obligations within the pension
scheme. This will include the agreements to pay
additional to fund the deficit commonly referred
to as past service deficit.
This contractual obligation will need to be
included at its net present value.
HCHA is a member of SHPS that is administered
by the Pension Trust.
The Pensions Trust has undertaken some work
with the Scheme Actuary in preparation for FRS
102 and is in the process of developing a tool
that will enable us to calculate the net present
value of the deficit contributions on our defined
benefit pension scheme. It is anticipated that
this will be available in June (as of 29.06.15 it
has not been released) nor have the new
disclosure notes.
For note, as at 30 September 2014 the potential
employer debt payable if HCHA had withdrawn
from SHPS was £1,147,744
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Impact: 
£- High
Resource-Med
 consider what agreements are in place
with the pension fund provider.
 consider impact of additional liability on
the net balance sheet.
 assess overall impact on net incoming
resources, including the unwinding of the
discount and any year on year movements
in the provision.
 consider information from the pension
scheme provider as the next review date
approaches and factor in any expected
increases in obligation into the relevant
forecasts.
 consider the impact of the additional
obligation on bank covenants
 discuss with auditors the “template”
disclosure notes when released by the
Pension Trust in terms of interpretation
and disclosure on our financial statements.
Agenda 6
FRS 102 - issue 5
Potential approach
Impairment
SORP 2014 requires a stepped process when
(SHG)
calculating impairment as outlined below:
If there is an indication of impairment, the
carrying amount of the asset should be compared
to the recoverable amount. If the recoverable
amount is lower than the carrying value an
impairment will need to be recorded.



indications of impairment include
changes in regulation or market factors,
but does not automatically include the
fact that the fair value i.e. EUV-SH of the
asset may be lower than the cost.
associations must determine the
appropriate level of assessment for the
impairment, based on cash generating
units.
the recoverable amount can be
calculated based on:
o the fair value , usually EUV-SH
o the value in use, being the
discounted cash flows, or
o value in use - service potential,
recognising that the asset may
not be held primarily to generate
cash but is also to provide a
social benefit. The basis for
measurement will usually be
depreciated replacement cost
although other methods might be
acceptable.
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Impact: 
£- Med
Resource-Med
 review carrying value of assets at the
opening balance sheet date.
 consider if there are indicators of
impairment
 review the appropriate levels of
assessment for impairment based on the
cash generating unit. If future
developments include mixed tenure units
particular attention to this may be
required.
 where necessary calculate the impairment
provision as outline in SORP 2014
 assess any impact on covenants
Agenda 6
FRS 102 - issue 6
Potential approach
Financial statement presentation
Based on SORP 2014, the financial statements
(SHG)
consist of:




Statement of comprehensive income
Balance sheet
Statement of cash flows
Accounting notes and policies
The key changes include:





designated reserves are no longer
allowed
SHG is no longer off-set against the cost
of housing properties, but held as
deferred income within creditors
a reduced number of headings on the
face of the cash flow statement
cash flow statement to be reconciled to
the total of cash and cash equivalents
for organisations with >5000 homes SORP
2014 requires a strategic report
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Impact: 
£- Medium
Resource-Med
 review the mapping of the nominal ledger
and account templates to ensure that the
trial balance reflect the changes to the
presentation of the financial statements
 review of all accounting policies to ensure
that they are both FRS 102 and SORP 2014
compliant
 prepare a set of skeleton accounts in
advance of the first year end in sufficient
time to allow input from the Finance
Committee, Board of Management and
Senior Management Team and in order to
obtain any information that is not readily
available.
 consider any applicable impact of changes
on bank covenants and communicate any
changes to stakeholders.
Agenda 6
FRS 102 - issue 7
Potential approach
Creditors
Additional liabilities may be required for short
(SHG)
term employee benefits such as holiday pay
accruals for holiday not taken at the financial
year end.
Where the financial year end is not in line with
the holiday year, as is the case of HCHA,
additional calculations and provisions will be
required.
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Impact: 



£- Low
Resource-Low
review current systems to ensure that
information on any unused holiday
can be captured
consider aligning the holiday and
financial year ends and any impact on
HR
a calculation for the opening balance
sheet at the date of transition will be
required.
Agenda 6
FRS 102 - issue 8
Potential approach
Leased Assets
Under FRS 102 there are two types of lease:
(SHG)

Examples:



“the lease transfers ownership of the
asset to the lessee by the end of the
lease term”
“the lessee has the option to purchase
the assets at a price that is expected to
be sufficiently lower that the fair value at
the date the option becomes exercisable
for it to be reasonably certain, at the
inception of the lease, that the option
will be exercised”.
“at the inception of the lease the present
value of the minimum lease payments
amounts to at least substantially all of
the fair value of the leased asset”.
Operating lease:
Where all the risks and rewards
incidental to ownership are not
transferred.
Examples:



£- Medium
Resource-Med
Finance lease:
Where all the risks and rewards
incidental to ownership are transferred.

Impact: 
Office lease
Properties leased form other landlords to
provide social housing
Properties owned by HCHA where we
allow other charitable or social landlords
to use them for particular purposes.
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

review lease arrangements to
determine treatment.
calculate any delayed recognition of
lease incentives for any leases
contracted after the transition date of
September 2014.
Agenda 6
FRS 102 - issue 9
Potential approach
Debtors
There is no significant impact on transition
(SHG)
However, any extended credit arrangements such
as repayment plans for rental arrears will need to
be discounted to the net present value using an
appropriate market rate of interest
Impact: 




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£- Low
Resource-High
consider existing arrangements and
whether or not they may be material.
if material determine the market rate
of interest to be applied to the net
present value calculation
consider good practice
review arrears and rent setting policy
for possible inclusion of interest
payable on unpaid debt.
Agenda 6
FRS 102 - issue 10
Improvements to properties - under stock
transfer agreements
(SHG)
Under FRS 102 the related assets and liabilities
under such agreements are now required to be
shown gross on the balance sheet and can no
longer be offset
Potential approach
Impact: 


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£- Low
Resource-Low
review current arrangements in place
and whether or not there is any
implication for historical transfers
and determine the measurement
basis for the asset and liability at cost
or fair value
Agenda 6
FRS 102 - issue 11
Potential approach
Related party and remuneration disclosures
The definition of a related party includes key
(SHG)
management personnel.
An additional disclosure is therefore required for
the total remuneration for all personnel
responsible for the management of the
organisation.
Disclosures are also required for tenant board
members, including the amount of rent charged
and any arrear balances they may hold at the
year end.
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Impact: 


£- Low
Resource-Low
review information held about related
party transactions for any missing
information.
consider the impact of additional
disclosures relating to remuneration
on stakeholders, and in particular the
tenant board members.
Agenda 6
FRS 102 - issue 12
Business combinations, goodwill and other
intangible assets.
Potential approach
Impact: 
£- Low
Resource-Low
(SHG)
Under FRS 102 the reporting of business
combinations is largely unchanged but there
are some key differences as follows:


a business combination remains the
acquisition of an identifiable business.
This is accounted for by the purchase
method (essentially the same as the
acquisition method).
the fair value of the cost incurred to
acquire the business is measured.
There are two areas in this that
remain unchanged from current UK
GAAP but differ from the treatment
applied under FRS 102:o the direct costs of the
acquisition are added to the
cost of the acquisition instead
of being immediately
expensed: and
o if part of the consideration is
variable (contingent
consideration), any
adjustments to the actual
consideration paid are taken
as amendments to the
purchase consideration.
On acquisition the fair value of the
assets and liabilities are then
measured. There are two key
differences under FRS 102 on how this
will apply:
o deferred tax will be recognised
on fair value adjustments
made to assets or liabilities
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




review information received as part of
Transfer of Engagement of HRHA to
determine if it is a merger or business
combination
assess the fair value and costs of
acquisition.
consider if there are indicators of
impairment and review the
appropriate levels of assessment for
impairment based on the cash
generating unit.
where necessary calculate the
impairment provision as outline in
SORP 2014
assess any impact on covenants
Agenda 6
FRS 102 - issue 12
Business combinations, goodwill and other
intangible assets continued:
(SHG)
o goodwill remains the
difference between the fair
value of the consideration and
the assets and liabilities
acquired.
Goodwill always has a finite life and is
amortised over its useful life. If this cannot be
reliably estimated the life is limited to a
maximum of 5 years.
(SHG)
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Potential approach
Impact: 
£- Low
Resource-Low
Agenda 6
FRS 102 - issue 13
Potential approach
Research and development (R&D):
The accounting treatment for R&D costs is
(SHG)
Impact:
£- Low
Resource-Low
largely unchanged.
Research costs are expensed as they are
incurred.
Development costs can be capitalised if the
following can be demonstrated:




Assess systems currently in place
can deliver the required
measurement
The project is technically feasible
The asset is expected to generate
future economic benefits
The costs of development can be
reliably measured
Conclusion:
There are clearly other areas within SORP 2014 and FRS 102 that may have an impact on the future activities
of HCHA and gaps may be identified in areas that we have not initially considered. We will continue to take a
realistic and pragmatic approach to this and may wish to will seek guidance from our auditors to:



Develop a route map that supports our needs and identifies any gaps in our checklist against what
they would consider to be the expected impacts relevant to HCHA.
Raise awareness of the accounting changes from FRS 102 with our internal and external stakeholders
Support us during the transition process using a suite of practical tools that they have available
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