General accounting principles apply to the preparation of accounts in the social housing sector, regardless of whether the entity is a housing association or not. This means that all accounts must meet the requirements of Financial Reporting Standards (FRSs) issued by the Financial Reporting Council (FRC). These standards are part of UK GAAP.
Financial Reporting Standards FRS 100, FRS 101, FRS 102, FRS 103, FRS 104 and FRS 105 were issued by the FRC to apply to financial years beginning on or after 1 January 2015, and replaced all previous FRSs, SSAPs and UITFs. They form the standards for UK GAAP, which is more aligned with International Financial Reporting Standards (IFRSs).
The standard with the greatest bearing on the housing sector is FRS 102: The Financial Reporting Standard applicable in the UK and Republic of Ireland. It introduced the following four primary statements with the corresponding nomenclature:
- Statement of Financial Position (SOFP)
- Statement of Comprehensive Income (SOCI)
- Statement of Cash Flows
- Statement of Changes in Reserves.
FRS 102 prescribes the appropriate layout of each of the above statements, however the titles may be amended.
A Triennial Review of FRS 102 was issued by the FRC in March 2017, with a consultation period during 2017. Draft amendments to FRS 102 were published in FRED 67 and FRED 68. Amendments were finalised in December 2017. It is effective for periods commencing on or after 1 January 2019. Early adoption is allowed, but the amendments must either be adopted in their entirety or not at all, aside from two areas which can be adopted individually: directors’ loans and the tax treatment of gift aid payments.
Gift aid payments
As set out in a technical release issued by ICAEW (Tech 16/14BL), donation payments made by a subsidiary company to its parent charity are considered to be distributions, and therefore subsidiary companies must not pay more to the charity than the level of profits available for distribution, even if the taxable profit is higher.
Dividends are accrued when the shareholder’s right to receive payment is established. In the case of a gift aid payment made within a charitable group, income is accrued when the gift aid payment is payable to the parent charity under a legal obligation. FRS 102 requires a legal obligation for the subsidiary to make a payment to the parent to exist, for example by entering into a deed of covenant, in order for the expected gift aid payment to be recognised at the reporting date.
There has been inconsistency in the way that payments from subsidiaries to parents have been accounted for, as they are treated as distributions from an accounting point of view and donations from a tax point of view.
This has been addressed by the FRC in the amendments to FRS 102, which states the following:
- The tax effects of any gift aid payment likely to be made in the nine months after the reporting date should be taken into account at the reporting date.
- The tax effects of the gift aid payment should be recognised in profit or loss.
- The gift aid payment should not be accrued at the reporting date, unless a deed of covenant is in place and should be recognised through the statement of changes in equity rather than the statement of comprehensive income.
Multi-employer plans and state plans are classified either as defined contribution plans or defined benefit plans, depending on the basis of the terms of the plan. However, if sufficient information is not available to use defined benefit accounting for a multi-employer plan that is a defined benefit plan, an entity shall account for the plan as if it was a defined contribution plan.
An example of a multi-employer pension scheme for which sufficient information is not available to use defined benefit accounting is the growth plan, also administered by TPT Retirement Solutions.
For defined benefit multi-employer schemes that are accounted for as defined contribution schemes, there may be a contractual arrangement to meet the past service deficit between the scheme and the housing association. Where there is such an arrangement, the housing association must recognise a liability for the net present value of the contributions payable in the statement of financial position (SOFP) with movements charged in the SOCI.
Another common pension scheme among housing providers is the Social Housing Pension Scheme (SHPS), administered by TPT Retirement Solutions.
Historically, TPT Retirement Solutions has not been able to provide sufficient information for each social landlord’s share of SHPS to allow defined benefit accounting to be applied.
However, following a number of changes made to TPT’s systems and processes, a method was devised to calculate each employer’s share of the assets and liabilities; this figure is now included in the statement of financial position.
In the year of initial recognition, the guidance in FRED 71 paragraph 4 (FRS 102 paragraph 28.11B) states that the difference between the deficit funding liability and the net defined benefit deficit for SHPS should be recognised in other comprehensive income. This adjustment was to be applied from 1 April 2018.
Defined benefit pension accounting should be used going forward. This is where an entity recognises a net asset/liability for its obligations under defined benefit plans net of plan assets, and accounts for the movement of this net asset/liability each year.
The SORP Working Party considered this guidance and how it should be applied to SHPS. As a result, the four federations – National Housing Federation, the Scottish Federation of Housing Associations, Community Housing Cymru and the Northern Irish Federation of Housing Associations – have issued a guidance document for housing associations.