Periodic Review of FRS102

Most housing associations follow UK Generally Accepted Accounting Practice (GAAP), FRS 102. The Financial Reporting Council (FRC) reviews FRS 102 on a periodic basis and has recently commenced this process.

Currently the FRC is seeking views from stakeholders on areas that might be considered as part of the review. Stakeholders will have the opportunity to provide their views until 31 October 2021.

Any changes to accounting standards that are proposed as a result of the periodic review will be subject to public consultation. This is not expected to happen before 2022 and the effective date for any amendments is currently expected to be 1 January 2024.

In addition to stakeholder feedback, the review will consider recent developments in financial reporting, such as changes in International Financial Reporting Standards, and relevant developments in the wider reporting framework.

During the last periodic review, where changes were effective from 1 January 2019, the FRC highlighted that some IFRS standards would be reviewed as part of the next periodic review. Those included IFRS 9 Financial Instruments, IFRS 15 Revenue from Contracts with Customers and IFRS 16 leases.

The Housing SORP Working Party has been looking at IFRS 16 in detail as this is the area that could have the most significant impact for housing associations.

IFRS 16 - Leases

IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases. Currently under UK GAAP, FRS 102 Section 20 states that a contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

Lessor accounting

The key principles of IFRS 16 in respect of recognition and measurement of leases for a lessor are similar to what is currently outlined in FRS 102, whereby the lessor classifies each of its leases as either an operating lease or a finance lease. The majority of housing association leases in this respect will be considered to be operating leases.

Shared ownership leases are accounted for in accordance with the Housing SORP as this is a sector specific transaction. As part of the FRS 102 review, the Housing SORP Working Party are reviewing the current accounting treatment for shared ownership and would welcome any feedback from housing associations or stakeholders on whether they consider this appropriate or whether there are any suggestions for alternative treatment. To provide feedback please contact Crowe.

Lessee accounting

When the International Accounting Standards Board (IASB) launched IFRS 16, its chairman, Hans Hoogervorst, said that “these new accounting requirements bring lease accounting into the 21st century, ending the guesswork involved when calculating a company’s often substantial lease obligations. The new Standard will provide much needed transparency on companies’ lease assets and liabilities, meaning that off balance sheet lease financing is no longer lurking in the shadows. It will also improve comparability between companies that lease and those that borrow to buy.”

IFRS 16 brings all leases onto the balance sheet, with just some limited exemptions for low value asset leases under $5,000 or leases with a short term, under 12 months. In the 2020 global accounts, the total aggregated amount of future obligations under operating leases was disclosed at £1.9bn. Therefore, bringing operating lease commitments onto the balance sheet could have a significant impact for the sector.

At the commencement of the lease, a right of use asset and a lease liability needs to be recognised. However, the challenge for many housing associations will be identifying all their contracts that are either a lease or contain a lease, and establishing the lease term and cost. Housing associations may also face challenges in establishing systems to manage the data, as this accounting treatment is more complex than currently.

The sector should consider how this may impact on loan covenants and how investors and stakeholders will view the changes. Currently the Statement of Comprehensive Income (SOCI) will recognise the lease cost as the cash outflow of rental. However, under IFRS 16 this will be replaced by depreciation of the lease asset (at a constant rate) and the finance cost, which will decrease as the liability decreases over the lease term. The net impact is a decreasing charge to the SOCI over the lease term. Effectively costs are front loaded which impacts on results in early years.

We will be running a number of consultation events with the Housing SORP Working Party in the coming months to further outline the potential impacts of this change to lease accounting, and seek feedback from housing associations.