getting ready for the new gaap - beever and struthers · 2014. 11. 13. · 11 beever and struthers...
TRANSCRIPT
Getting Ready for the new GAAP
Peter Herbert and Maria Hallows
November 2014
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Objective
• To update you on the introduction of FRS 102 and
the related SORP and on the latest thinking
regarding implementation issues.
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Programme
• Recap on the revised framework.
• Narrative reporting – where we are and where we’re heading.
• Formats, terminology and disclosures.
• The primary statements.
• Fixed asset classification and valuation.
• Accounting for impairments.
• Grant accounting – different methods and when they’re used.
• Latest thinking on financial instruments.
• Multi-employer pension schemes.
• Specialist areas (e.g. HomeBuy, stock swaps).
• Practical steps when preparing for transition.
• The auditor’s perspective.
The new framework…
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
Now
1.1.15
1.1.15
Now
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The new standards
Standard Deals with
FRS 100 - Application of Financial
Reporting Requirements
• Which standard to apply
• Application of SORPs
• Statement of compliance
• Effective date
FRS 101– Reduced Disclosure
Framework
• List of disclosure exemptions from
full IFRS for ‘qualifying entities’
FRS 102– The FRS applicable in
the UK & RoI (was ‘FRSME’)
• Operational FRS derived from IFRS
for SMEs
• List of disclosure exemptions from
this FRS for ‘qualifying entities’
FRS 103 – Insurance Contracts • New standard for insurance
companies
• Applicable to entities with insurance
contracts applying FRS 102
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FRSs 100-102 - Timeline
2012 2013 2014 2015
Transition
date
Mandatory
adoption;
Comparative
BS
First balance
sheet
(Early
adoption
allowed from
31/12/12)
FRS 100
& 101
issued
FRS 102
issued
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The Housing SORP 2014
• Drafted alongside FRS 102
• Published September 2014
– Major consultation from Nov 2013
• FRC approved
• Relatively short – cross referencing
to FRS 102
• FRS 102 and Accounting Direction
take precedence
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Scope considerations
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
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Key words…
MUST SHOULD
MAY GLOSSARY
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Narrative reporting – where we are
KPIs Governance
Social value
Value for money
Controls Risks
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Beever and Struthers 2014 Annual Review
• KPIs
– Range of financial and performance-based indicators.
– Trend towards disclosure of per unit management costs.
– Chief executive pay per home managed.
• Social value
– OFR disclosures have followed Social Value Act 2012.
• VFM
– Should follow HCA standard.
– Wide variability in approach/level of detail.
– Peer review.
– More focus on operating costs than ROI.
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Example VFM disclosures
Operating surplus Capital deployed Returns (%)
Rented housing £27.9M £674M 4.1
Shared ownership £10.4M £187M 5.6
Market rent (before
3% unrealised
gain)
£3.7M £103M 3.6
Student housing £3.6M £41M 8.8
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The new SORP
• 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.
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The new SORP
• 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.
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)
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What the SORP says…
• 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.
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• Accounting policies – Areas of judgement/estimation uncertainty.
• Statement of compliance – …with SORP and FRS 102.
• Operating lease commitments – Total NOT annual commitments.
• Consolidated accounts – Legal status and commercial relationship with group entities.
• Related party disclosures – Key management personnel compensation.
– Non-disclosure of names becomes possible.
Notable disclosures
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Investment property - definitions
Paragraph 16.2 FRS 102
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.
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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).
Investment Property - Treatment
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)
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PPE or IP?
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Relevant factors
• Is asset held for social benefit?
• Reason/purpose for holding
asset
• Earn rentals
• Capital appreciation
• Both
• Production/supply of goods
• Admin purposes
• Sale in ordinary course of
business
Non-relevant factors
• Overarching organisational
objectives
• Purpose for which housing
property profits are applied
(e.g. profits from market rented
housing reinvested in social
housing)
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Classification
PPE IP
General needs √
Shared ownership (rental element) √
Affordable homes √
Office accommodation √
Market rented properties √
Commercial properties √
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Scenarios
1. An RP rents out commercial property at below market rent.
2. A parent RP rents a property to its own subsidiary.
3. An RP has its headquarters in a desirable London suburb where property prices are high and growing.
4. An RP rents out two of its five floors to another company.
5. A community centre within a housing development is regularly hired out to local businesses and community groups.
Property, plant & equipment
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
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Example
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.
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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
Transfer from I&E reserve
to revaluation reserve?
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Impairment Impair where CV > 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’
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Impairment indicators
28 28
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
Not an exhaustive list – refer also to FRS 102
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
Step by step
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Cash generating unit
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
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Value in Use – Service Potential
VIU SP =
Depreciated replacement cost (DSC)
Most economic cost required for the entity to replace the service potential of an asset
Lowest cost of constructing or buying a replacement asset which replaces the service potential
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Example
A development is made up of 10 x 2 bed properties and 10
x 3 bed properties. Total scheme cost £2.1M and £200K
received as grant. 50 year life.
Cost of construction = £90K per property (2 bed); £120K per
property (3 bed). Previously acquired land = £100K.
Two years later a change in legislation results in a new
requirement in respect of size of rental properties such that
3 bed properties can no longer be rented out.
3 bed properties can be rented as 2 bed properties.
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33
Carrying amount of 3 bed development
£000
Land cost 50
Building cost
Less depreciation
Less unamortised grant (96)
Carrying amount
34
Recoverable amount of 3 bed development
Fair value less costs to sell (£000)
Total 500
Depreciated replacement cost (£000)
Total land 50
Total buildings
Less depreciation
Total
Double entry?
35
Depreciation adjustments
36
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’.
Treatment of grants
Initial
measurement
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Recognition in SOCI
Performance
model
Accruals
model
Recognise in income
as specified future
performance
conditions are met
Recognise in SOCI
on systematic basis
over periods in which
entity recognises
related costs
Fair value of assets
received/receivable
Use for revalued
assets
OR
Use for non-revalued
assets
Do not deduct from fixed asset
Do not deduct from fixed
asset
Grant example
• On 1 April 2015 an RP purchases a property asset for £200K. It receives a grant of £150K.
• Assume land element =£ 60K; structure element = £120K (UEL: 100 years); other components = £20K (average UEL 10 years).
• What would the impact on I&E be in year one applying:
a) Current SORP.
b) New SORP / FRS 102 – accruals method
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Solution
Old SORP
£
New SORP
£
I&E:
Depreciation 2,200 dr
Grant income -
Grant amortisation -
Net impact (Dr/(Cr)) 2,200 dr
Recognition of grant
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Over EUL of
structure (NOT
land and
structure)
Over EUL of
structure and
components
(excluding
land) on pro-
rata basis
OR
No linkage to land
Financial instruments
• 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).
• Recognition and measurement principles of IAS
39/IFRS 9 can be used instead.
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Financial instruments – scoping issues
Investments in subs,
assocs, JVs Rent arears
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
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Measurement
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
Para 11.9 (revised)
Returns to the holder are:
A fixed amount.
Positive fixed rate or positive variable rate.
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.
Changes in levies applied by central bank or arising from changes in relevant tax or law.
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Para 11.9 (revised)
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.
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.
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Scenarios
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. Fixed rate loan – bank has option to periodically
reprice the fixed rate; if exercised the borrower has the
option to repay without penalty.
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Scenarios
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.
Derecognition of loan
48
When loan
extinguished
When terms
substantially modified
• >10% shift in cash flows
discounted using the
original rate?
• Assuming obligations
discharged, cancelled or
expired
Scenarios….
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£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?
Agreements to pay - example
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?
50
Issues
Basic or other?
PV of future payments discounted at market
rate
Financing? Adjust on transition?
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Transition adjustments
52
FRS 102 para 35.9a
For financial assets and liabilities that would have been derecognised under this FRS in a transaction that took
place before the date of transition, but that were not recognised under an entity’s previous accounting
framework, an entity may choose:
(1) to derecognise them on adoption of this FRS; or
(2) to continue to recognise them until disposed of or settled.
Multi-employer pension schemes
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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
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.
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Example
• 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.
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Solution
• Year 1
Dr Opening reserves
Cr Pension liability
Dr Interest payable
Dr Pension liability
Cr Cash
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Solution (continued)
• Year 2
Dr Interest payable [(£500K-£75K) x 5%] £ 21,000
Dr Pension liability £ 59,000
Cr Cash £ 80,000
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Solution
2015-16
£000
2016-17
£000
Reserves
Prior year adjustment
I&E
Interest payable
Past service cost
58
• Option to just record amount received and adjust to reflect interest accrued
Loan
(concessionary loan)
• Recognise as deferred income in SOFP
• Reclassify to recycled capital grant liability on redemption
Grant
HomeBuy
59
• Assets transferred at fair value
• No additional value attributed to grant transferred – disclose contingent liability
Stock swaps
• 3rd party prepaid to undertake work; agreement with same 3rd party to undertake work
• No offset of assets/liabilities or income/expenditure allowed
VAT shelters
Other specialist areas
60
Practical challenges
1. Gathering information.
2. Identifying and valuing investment properties.
3. Re-evaluating impairment.
4. Identifying non-basic financial instruments.
5. Identifying and calculating pension commitments.
6. Calculating transitional adjustments re-grant.
7. Considering transitional exemptions.
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Not allowed Optional
(Main provisions)
Derecognition of financial assets &
liabilities
Business combinations
Hedge accounting Share-based payment transactions
Accounting estimates Fair value or revaluation as deemed
cost of fixed asset
Discontinued operations Dormant companies
Measuring non-controlling interests Lease incentives
Impracticability – catch all
Exceptions and exemptions to retrospective
application
62
FRS 102 para 35.9c
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’
Transition adjustments
63
Processes, systems & people
Processes
• Policies & procedures
• Controls
• Valuations
• Management reporting
• Budgeting
Systems
• New accounting systems – including training?
• Data gaps
• Updated chart of accounts
• New procedures
People
• Training and knowledge embedding
• Project management
• Resources and skills to manage change
• Corporate governance
• Communication with stakeholders
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The auditor’s perspective
Getting to grips with the
new rules
Providing you with the help
you need
Ethical considerations
Materiality
66
The auditor’s perspective
Misstatement risks
Transition adjustments –
impact on three balance sheets!!
‘Undue cost and effort’
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Objective
• Update you on imminent changes to UK GAAP in FRS 102 and the
related SORP and what steps RPs should take to prepare for their
implementation.
Getting Ready for the new GAAP
www.insight-training.biz
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SOLUTIONS
69
Transfer from I&E reserve
to revaluation reserve?
£4.25M
70
71
Carrying amount of 3 bed development
£000
Land cost 50
Building cost 1,200
Less depreciation (48)
Less amortised grant (96)
Carrying amount 1,106
72
Recoverable amount of 3 bed development
Fair value less costs to sell (£000)
Total 500
Depreciated replacement cost (£000)
Total land 50
Total buildings 900
Less depreciation (36)
Total 914
Double entry?
Dr Operating costs £192K
Cr PPE £192K
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Solution
Old SORP
£
New SORP
£
I&E:
Depreciation 2,200 dr 3,200 dr
Grant income - -
Grant amortisation - 1,500 cr
Net impact (Dr/(Cr)) 2,200 dr 1,700 dr
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Financial instruments -scope
Investment s in subs,
assocs, JVs Rent arears
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
Multi-employer pension scheme
• 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
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Multi-employer pension scheme
2015-16
£000
2016-17
£000
Reserves
Prior year adjustment 500 -
I&E
Interest payable
25 21
Past service cost
- -
25 21
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