Component Accounting Briefing
6 October 2011
1
Background
2
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
3
Balance Sheet
TANGIBLE FIXED ASSETS
Housing properties – cost less depreciation
Less: Social Housing Grant
Total housing fixed assets
Other fixed assets
2011
£’000
2010
£’000
179,378
(118,129)
61,249
4,086
161,126
(104,433)
56,693
3,295
TOTAL FIXED ASSETS
8
65,335
59,988
CURRENT ASSETS
Housing properties for sale
Debtors
Cash at bank and in hand
9
10
11
1,611
2,499
21,542
25,652
3,166
6,524
18,145
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
Acquisition Reserve
Income and expenditure account
14
16
15
17,514
15,647
81,699
81,997
4
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
5
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
6
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
7
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
8
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
9
Why Change?
10
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
11
What Is Component Accounting?
12
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)
13
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
14
Key Steps
1. Identify and agree components to be
accounted for
– Own records /Asset management strategy
– SORP suggested list
15
Key Steps
SORP Example components
•
•
•
•
•
•
•
•
Land
Structure
Roofs
Windows
Lifts
Heating/boiler systems
Kitchens
Bathroom
16
Key Steps
2. 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
17
Key Steps
3. Agree method for allocating original cost to
individual components
– Costs of individual components may be difficult to
identify
18
Estimation techniques
• Use own data/records for similar
schemes/properties
• NHF/Savills national matrix of property
component
19
Key Steps
4. 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?
20
Key Steps
5. Determine accumulated depreciation on
major repairs (previously expensed amounts) to
be reinstated in the balance sheet
21
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
22
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
23
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?
24
Summary / Outcome
• Historical data
– 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
25
Summary / Outcome
• Transition (Prior year adjustment)
Examples
– Previously capitalised nothing
– Major repairs back to the balance sheet
– Additional depreciation due to revised
components life
26
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
27
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
28
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
29
How the balance sheet and
operating statement is affected by
the changes
30
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
31
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?
32
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
33
Example
Pre component accounts: accumulated
depreciation
• 12 years at 1% on £60,000
(£7,200)
34
Example
Cost
Depreciation
NBV
Land
£000
40
40
Buildings Major repairs
£000
£000
60
7.2
52.8
-
Total
£000
100
7.2
92.8
35
Example
Under component accounting
Kitchen:
•
•
•
•
•
Original cost
9 years depreciation (25 year life)
NBV (written off in 2009)
New kitchen cost
3 years depreciation (25 year life)
£4,000
£1,440
£2,560
£5,000
£600
36
Example
Under component accounting
Bathroom:
•
•
•
•
•
Original cost
11 years depreciation (20 year life)
NBV (written off in 2011)
New bathroom cost
1 year depreciation (20 year life)
£4,000
£2,200
£1,800
£5,000
£250
37
Example
Under component accounting
Structure:
• Cost
• 12 years depreciation
• Annual charge
£52,000
£6,240
£520
38
Example
Cost
Depreciation
NBV
Land
£000
40
40
Structure Kitchen Bathroom
£000
£000
£000
52
5
5
6.24
0.6
0.25
45.76
4.4
4.75
Total
£000
102
7.09
94.91
39
Example
Depreciation charge
31 March 2011
‒ Structure
‒ Kitchen (25 years)
‒ Bathroom (20 years)
‒ Total
31 March 2010
‒ Structure
‒ Kitchen (25 years)
‒ Bathroom (20 years)
‒ Total
£520
£200
£250
£970
£520
£200
£200
£920
40
Example
Summary: impact on Association
Balance sheet
Cost
Depreciation
Net Assets
Old policy:
£
100,000
(7,200)
New policy:
Component
accounting
£
102,000
(7,090)
92,800
94,910
41
Example
Income and expenditure
(2011)
Depreciation charge
Write off component replacement /
original
Old policy:
£
600
5,000
New policy:
Component
accounting
£
970
1,800
5,600
2,770
42
Example
Income and expenditure
(2010)
Depreciation charge
Write off component replacement /
original
Old policy:
£
600
-
New policy:
Component
accounting
£
920
-
600
920
43
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
44