STEVE DANBY

LESSONS LEARNT FROM FRS 102

"TO INFINITY… AND BEYOND" (BUZZ LIGHTYEAR)

FRC “Balance consistent principles for accounting with practical solutions”

‘”information is material to the financial statements if its misstatement or omission might reasonably be expected to influence the economic decisions of users of those financial statements”

“if the information is not material, it cannot be useful to a user of the accounts and therefore does not need to be considered further”

Information that is immaterial should not be presented in financial statements as its inclusion could obscure and impair understanding of other material information

TLA, FLA, FLA

1. SOFP2. SOCIR3. SOCI4. OCI5. SOCF6. PPE7. IP8. VIU–SP

4

“Overriding objective is to enable users of accounts to receive:-

• high-quality understandable financial reporting• proportionate to size & complexity & users’

information needs”“The Accounting Council believes that the approach under current FRSs, where derivatives are not recognised, does not adequately reflect the risks arising from financial instruments”

• No mention of fixed rate loans or cancellable embedded hedges or …..

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"BY THE WAY, IS THERE ANYONE ON BOARD WHO KNOWS HOW TO FLY A PLANE?"

Classification

Most loans, rent arrears, intra group balances

Financing -impute market rate for amortised cost

ATP, intra group

Not financingAmort costMost loans

Some loans, interest rate swaps

Fair value

“OH LEON, TELL ME SOMETHING YOU DO LIKE” (JUNE, “GOGGLEBOX”)• Contractual terms that give lender

unilateral option to change terms of contract - Lender Option Borrower Option loans (LOBOs) –“other”

• Cancellable Embedded Hedge (CEH) / Cancellable fixes - hot topic – basic or other ? (53% basic – 47% split non- basic and don't know)

• “fixed rate debt with two-way early redemption indemnity clauses ” –ditto !

EFFECTIVE INTEREST RATE1 Jan 2021; £10k loan ; transaction costs £100; fixed interest £700 / annum payable in arrears, repayable 31 Dec 2025

Year b/fwd SOCI Cash c/fwd

2021 9,900 717 (700) 9,917

2022 9,917 719 (700) 9,936

2023 9,936 720 (700) 9,956

2024 9,956 721 (700) 9,977

2025 9,977 723 (10,700) -

Is the cumulative difference material ?

“YOU CAUSE ME CONFUSION” NEW ORDER

“AGREEMENTS TO PAY”

Small number –small number = ?

BDP =Say 95% of >

90 days = small net arrears

PV of ATP at Wonga rates = small number

“BITS AND PIECES” DAVE CLARK FIVE

Homebuy loan = Concessionary loan

Grant = deferred income

Other examples ?Welsh Housing Partnership ?… others ?

“I DON’T KNOW , I DON’T KNOW” – THE MOONDOGS - IMPOSTERBefore operating surplusOperating surplusBefore surplus for the yearSurplus for the yearIn OCITotal comprehensive incomeSOCIR

1. Amortisation of government grants (over life of structure or structure & components)

2. SHPS remeasurements3. Movements in fair value of investment properties4. Movements in fair value of financial instruments (unless hedge

accounting – then split)5. Actuarial movements on defined benefit pension schemes6. Unrealised surplus on revaluation of PPE7. Gift aid paid

TurnoverOperating costsOther incomeOperating surplusSurplus on disposal of PPE

Interest receivableInterest & financing costsMovements FV of financial instrumentsSurplus before taxTax

Surplus for the year

Actuarial movements on DB pensionChanges in fair value of hedged FI

Total comprehensive income

“WHAT AM I DOING ? I'M TALKING TO AN EMPTY TELEPHONE” (ROBERT DE NIRO “HEAT”)

FRS 102 - additional line items, headings / subtotals when material or “relevant to an understanding of financial performance” – SHPS remeasurement ?

SORP & Welsh Determination require operating surplus; FRS 102 does not

Where should surplus on disposal go ? SORP ?

"GO AHEAD, MAKE MY DAY" (CLINT EASTWOOD)

Implications of:-Higher book value ? Grants to reserves ?

Deemed cost to make easier

for those at valuation

Deemed cost = fair value for any PPE

Valuation – land / structure

Revaluation reserveDepn from transition

Recycling requires

charge to SOCI

Available for selected assets

Surplus on sale

Impairment

ROY SCHEIDER – JAWS

Impairment under FRS 102 ….• Financial instruments at cost

or amortised cost

• Incurred loss (as opposed to expected loss) approach - key characteristic of impairment model of FRS 102

• Individually “insignificant” -impairment either individually or grouped on basis of similar credit risk characteristics

Assess whether indication of impairment

(rent cuts, voids, demolition,

development issues ..)(FRS 11 UEL > 50 yrs)

Recoverable amount = higher

of

Value in use = higher of

Present value of future cash flows

VIU – SP= lower of

DRC (constr)DRC (acquis’n)Fair value less

costs to sell

VIU-SP (Value In Use – Service Potential) for properties held for social benefit - DRC will provide a reasonable estimate of VIU-SP

“MY WIFE... ITS DIFFICULT TO SAY WHAT SHE DOES... SHE SELLS SEASHELLS ON THE SEASHORE” (MILTON JONES)

IMPAIRMENT EXAMPLESLikely impairment “measurable”

VIU = DCF

FVlcts VIU = VIU –SP = DRC (acq)

VIU = VIU –SP = DRC (con)

Comments

General stock – rent cuts – no active market

x

General stock – rent cuts –active market

x

Voids x

Impairment -Demolition & replacement

x

“Land and buildings are separable assets, and an entity shall account for them separately, even when they are acquired together”

“SORP Working Party … conclude that no active local market exists for transaction of similar social housing properties between housing associations ”

LAND EXAMPLESLikely impairment “measurable”

VIU = DCF

FVlcts VIU = VIU – SP = DRC (acq)

VIU = VIU – SP = DRC (con)

Comments

“Speculativelyacquired”

“IP” Intention to generate return ?

Development programme or no specific intended use

PPE - delivered according to plan = no impairment.Mixed tenure developments – allocation to elements appropriate to tenure types

FRS 102 IP QUIZPPE or IP ?

1. Student accommodation

2. General needs accommodation

3. Key worker accommodation (e.g. nurses)

4. Land for social housing development

5. Shared ownership

6. Office part used; part let

7. Affordable rent

8. Care Homes

9. Garages

10. Intra-group rented offices

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“AND YOU MAY ASK YOURSELF AM I RIGHT? ...AM I WRONG?” (DAVID BYRNE, TALKING HEADS, “ONCE IN A LIFETIME”)

“I GOT NO REASON IT’S ALL TOO MUCH”SEX PISTOLS “PRETTY VACANT”

FAIR VALUE

Valuation technique

should make maximum use

of market inputs

Objective of using valuation technique

is to estimate transaction price on

measurement date in arm's length

exchange motivated by normal business

considerationsAsset = amount realised from

disposal Liability = amount it would cost to settle

Acquisitions, Financial

Instruments, Investment Property,

PPE,Pension assets etc.

“NOBODY’S RIGHT IF EVERYBODY’S WRONG” STEPHEN STILLS, BUFFALO SPRINGFIELD, “FOR WHAT IT’S WORTH”

Quoted prices = readily & regularly available & represent actual & regularly occurring market transactions on an arm's length basis.Active market has:-• Homogeneous traded items;• Willing buyers & sellers

normally found at any time; and

• Prices available to the public

Quoted prices in an active market – unlikely for HAs for

PPE or IP but used for pension assets

Recent transaction of an identical asset

Valuation Technique

DISCLOSURES

Judgements in applying accounting policies with most significant effecti.e. understand how accounting policies have been appliede.g. impairment

Key sources of estimation uncertainty at reporting date with significant risk of causing material adjustment to carrying amounts of assets & liabilities within next financial yeare.g. provisions, recoverable amounts, DB pension liabilities, fair values

"Always remember that you're unique, just like everybody else"

Item or information ?

Materialitem ?

Disclose appropriately

No further action

Material information ?

Disclose in notes

No further action

“Oddball” “Kelly’s Heroes”

"YOU TALKIN' TO ME?" (ROBERT DE NIRO - TAXI DRIVER)

2016£’000

2015£’000

Provision at start of periodUnwinding of the discount factor (interest expense)

Deficit contribution paidRemeasurements - impact of any change in assumptions

Remeasurements - amendments to the contribution schedule

Provision at end of period

Discount rates significantly lower than usual DB because of shorter period of liability

Have sunk further since Brexit !

Group DB including SHPSWhere does liability sit ?Contractual agreement or stated policy ? Informal ?

STATEMENT OF CASH FLOWSNet cash flow from operating activities 1,538 Net cash flow from op. act. 6,889

Returns on investment … 582Taxation (2,922)

Cash flows from investing activities 1,486 Capital expenditure (1,525)Management of liquid resources (450)

Cash flows from financing activities 57 Financing 5Net increase / (decrease) in cash & cash equivalents 3,081 Increase in cash 2,631

Cash & cash equivalents b/fwd (1,482) Cash b/fwd (1,742)

Cash & cash equivalents c/fwd 1,589 Cash c/fwd 889

CASH FLOW STATEMENT

Where has it been difficult ?

“"INFAMY, INFAMY, THEY'VE ALL GOT IT IN FOR ME!" (KENNETH WILLIAMS - CARRY ON CLEO)

• An exemption is available from preparing a statement of cash flows under FRS 102 for a ‘qualifying entity’

• Where parent prepares publicly available consolidated financial statements

• Determination - every RSL at subsidiary & group level shall include …

• Welsh Determination requires additional disclosure of “free cashflows”

• Where does operating cash flows ‘reconciliation’ start ?

• FRS 102 requires ‘profit or loss’ is adjusted • not specifying a disclosure requirement but

IAS 7 illustrative example begins with profit before tax

• ‘profit or loss’ in FRS 102 = ‘total income less expenses, excluding OCI’

• Not absolutely definitive but…25

Copy illustrative accounts

Add to previous

year

Fear so err on side of caution

Comply with

everything

Copy others

“Rip it up and start again”“Rip it Up”Edwyn CollinsOrange Juice, 1982

THAT’S ALL FOLKS !

Date

"The trouble with quotes on the Internet is that it's difficult to determine whether or not they are genuine." Abraham Lincoln

“I can't tell where the journey will end. But I know where to start”Aloe Blacc, Avicii “Wake me up”, 2013