South West Finance Conferencedoc.housing.org.uk.s3.amazonaws.com/Presentations... · South West Finance Conference International Financial Reporting Standards (IFRS) . ... 09/12/2011

South West Finance Conference

International Financial Reporting Standards (IFRS)

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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 government

- Local government

There has been significant debate concerning adoption in the housing sector

IFRS - the final countdown

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Plans for the session

Part 1 Background, context and principles

Part 2 Implications for housing

Part 3 Where do you go from here?


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The IFRS transition timetable for the housing sector – hot off the press!


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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 IFRS reporting

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Accounting Standards Board published consultation in August 2009 on the Future of UK GAAP – and again in Autumn 2010


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• Housing associations – where do they fit?

• Two consultations in 2011

- Future of UK GAAP

- Public benefit entity standard

• Significant response from the housing sector to the proposals.

• What’s the current position?


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Public benefit entity standard?

In the consultation paper a public benefit entity was defined as:

‘An entity whose principal objective is not the generation of profit’. A more detailed definition, reflecting what are perhaps the two main characteristics of such entities, is ‘an entity that is organised and operated primarily for community or social benefit whose funders and other resource providers do not receive any financial return from the organisation and any surpluses are applied to support the objectives of the entity.’


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Proposal to develop a ‘public benefit entity standard’ as part of the convergence of UK GAAP to IFRS

Role for Statement of Recommended Practices (SORPs’)

- Expected that SORPs would still be needed

- Providing supplementary (and sector specific guidance) e.g. accounting for shared/co ownership


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Public benefit entity standard – what will it cover?

Specific issues relevant to the public benefit entity sector, for example:

- Revenue from non exchange transactions

- Valuation and impairment of non cash generating assets

- Business combinations

Proposal is to merge this standard into the Tier 2 Standard – currently known as the FRSME


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Impact on the housing sector?

Future of UK GAAP proposals

IFRS for SMEs

- Simplified version of IFRS

- More complex options removed

- Not just for small and medium sized entities – no size criteria

EU adopted IFRS

- Publicly accountable – what does this mean?

- Listed debt or equity

Tier 1 or Tier 2?


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Future of UK GAAP proposals

• Proposal is to cease the publicly accountable test

• Only those entities required by law will be required to adopt full IFRS (Tier 1)

• Therefore housing sector in Tier 2 (FRSME)

• Option to move to Tier 1 remains


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Why is IFRS an issue for the housing sector?

- Differences in full IFRS and particularly FRSME which will have a significant impact on housing associations....


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Capitalisation of borrowing costs

• Under Tier 1 – borrowing costs must be capitalised where borrowing has been used to fund the construction of an asset

• Under Tier 2 – borrowing costs must be expensed (no option to capitalise)

• What is the impact on business plan capacity, funding requirements?

Current position

• Capitalisation is now likely to be prescribed e.g. should capitalise


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Tangible fixed assets – housing properties

• Under Tier 1 – assets can be held at cost OR valuation

Valuation: EUV-SH versus Market Value?

• Under Tier 2 – assets must be held at cost – no option to revalue assets

• Impact on loan arrangements and covenants?

Current position

• Valuation option is likely to be allowed


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Tangible fixed assets – investment properties?

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

• No requirement for arms length rental charge under IFRS....

• IFRS does not preclude rental to elsewhere in a Group

• Investment properties

- accounted for at valuation

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

Current position

• SORP working party assessing tenure types against guidance and will consult on outcome


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Grants

• Under Tier 1 – capital grants can be offset against the value of the asset or recorded gross on the balance sheet (depending on conditions)

• Under Tier 2 – all grants are recognised when receivable and conditions have been met – no netting off of capital grants against fixed assets

• More grants recognised in the income and expenditure account? Volatility in reported results?


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Grants (continued)

Current position

• Grant accounting focus of significant debate within the ASB

• A number of options are being considered:

- amortisation to the I&E over life, depreciate gross, presentation as now

- amortisation to the I&E on receipt, depreciate gross

- amortisation to the I&E, depreciate gross, presentation as deferred income (creditors)


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Leases

• Finance lease v operating lease

- who owns risks and rewards?

- 90% test removed

- Tier 1: Split land and building element of lease

- Buildings element more likely to be a finance lease

A lot of work to identify leases....impact on results?

Current position

• SORP working party considering typical leases in the sector against guidance and will consult on outcome


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SORP FRSME IFRS

RPSHs not presently applying FRS 26 and FRS 29

FRS 4 FRS 5

s.11 s.12

IAS 32 IAS 39 IFRS 7

RPSHs presently applying FRS 26 and FRS 29

FRS 25 FRS 26 FRS 29

s.11 s.12

IAS 32 IAS 39 IFRS 7


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Financial Instruments

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Financial instruments – FRSME

• A financial instrument is any contract that gives rise to both a financial asset of one entity and a financial liability or equity instrument of another entity. A financial instrument is recognised when the entity becomes a party to its contractual provisions.

• The IFRS for SMEs splits the financial instruments requirements into two sections

• Management has a choice of either applying the provisions of sections 11 and 12 of the IFRS for SMEs or applying the recognition and measurement provisions of IAS 39, but the disclosure requirements of the IFRS for SMEs.


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Financial instruments – Considerations

• Initial measurement

• Subsequent measurement

• Impairment of financial instruments measured at cost or amortised cost

• Derecognition of financial assets

• Derecognition of financial liabilities


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Hedge accounting – “basic” means basic

• An entity may establish a hedging relationship and apply hedge accounting.

• This means that the gain or loss related to the hedged risks on the hedged item and hedging instrument are recognised in profit or loss at the same time.

A hedging instrument:

• Can take form of an interest rate swap, a foreign currency swap, a foreign currency or commodity forward exchange contract that is expected to be highly effective in offsetting the risk designated as the hedged risk.

• Involves a party external to the entity.

• Has a notional amount equal to the designated amount of the principal or notional amount of the hedged item.

• Has a specified maturity date no later than the maturity of the item being hedged.

• Has no pre-payment, early termination or extension facilities.


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Qualifying for hedge accounting

• Documents at the inception of the hedge the relationship between designated hedging instruments and hedged items;

• Identifies the risk hedged as:

- an interest rate risk;

- a foreign exchange rate in a firm commitment or a highly probable forecast transaction, or in a net investment in a foreign operation; or

- a price risk of a commodity; and

• Expects the hedging instrument to be highly effective in offsetting the designated hedged risk.


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Impact on te housing sector?

Financial instruments: key benefits of FRSME vs Full IFRS

• Hedge accounting more restricted, but also simpler

• Impairment of financial assets is similar

• No requirements for embedded derivatives

• Simpler disclosures

Current position

• SORP working party developing a technical note on financial instruments, including detailed examples, and will consult on outcome

• Housing associations should review existing financial instruments and hedging relationships to understand exposure to mark to market


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Associates and joint ventures

• Wider definition under IFRS than current UK GAAP

Business combinations and goodwill

• Changes to the SORP make it more consistent with IFRS e.g. negative goodwill to I&E

Segmental reporting

• Requirement to report revenues in line with those as seen by the ‘Chief Operating Decision Maker’


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Related Parties

• Increased disclosure, no group exemption

Consolidation

• No exemption under IFRS for small groups

Cash flow statement

• No exemption for groups

Financial Performance

• Material error prior year adjusted rather than where fundamental


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Conclusions (at this stage!)....

• A HAs in Tier 2 (?) – some concessions appear to have been won but not confirmed yet

• Housing associations can opt to adopt Tier 1 – is there a driver to do so? Too onerous?

• Significant disclosure requirements under Tier 1....

• SORP will provide supplementary guidance but has to follow UK GAAP principles.


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Practical challenges that arise under IFRS include:


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• 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

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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


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Phase 1: Impact assessment


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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

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Lessons learned – part 1

1. Start planning early to avoid surprises;

2. Involve all areas of the organisation in the initial impact analysis;

3. Identify those areas that will affect your opening balance sheet and ensure that you understand the impact;

4. Identify and free up the right skilled resource – people with suitable knowledge are scarce

5. Train your finance team early in the process

Implementing IFRS


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Lessons learned – part 2

6. Ensure those charged with governance understand the issues and challenges of transition;

7. Establish a process to capture data;

8. Consider potential systems/process issues and requirements;

9. Communicate with your stakeholders – communication helps prevent negative responses;

10. Do not assume IFRS is similar to UK GAAP - similar is not the

same, and don’t believe the sound bites either!

Implementing IFRS


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Structure the project team

Implementing IFRS


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Project Management Team

Project Manager

Steve Drake Accounting

Steering role

Project Teams

Technical team

Disclosure

Leases

PFI

Tangible assets

Systems Reporting

Units Training

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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


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Questions?

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