Social Housing SORP Consultation

Repairs responsibility – new shared ownership model

Following the amendments to the shared ownership model in the Affordable Homes Programme 2021 to 2026, this proposed treatment of the repair’s responsibility was subject to a 12-week consultation in 2023. With no significant observations raised, the accounting treatment has been reflected in SORP paragraphs 9.15 to 9.25.

Right to shared ownership

Following the introduction of this requirement, this proposed treatment was subject to a 12-week consultation in 2023. This aligns with the existing 'right to buy' treatment of categorisation. With no significant observations raised in the consultation, the accounting treatment has been reflected in SORP paragraphs 6.62 to 6.63.

Narrative reporting

Where there are over 5,000 homes in management, Chapter 4 of the extant SORP requires social landlords to prepare a Strategic Report. For greater transparency and consistency among large providers, the proposed update sees this figure reduced to 1,000, bringing an additional 84 providers in scope in England.

To avoid confusion with the Strategic Report requirements of the Companies Act 2006, the SORP has renamed the narrative report as the ‘Annual Report’.

Financial instruments and joint ventures

Due to lack of specificity in application to social landlords, Chapter 6 and Chapter 7 of the extant SORP, focusing on financial instruments and joint ventures respectively, have been removed. The working party have instead elected to reference the relevant sections of FRS 102 in Chapter 18 Other accounting requirements.

Housing properties

To align more closely with Chapters 16 and 17 of FRS 102, the structure of Chapter 6 of the SORP has been refreshed to provide clarity and consistency in accounting treatment of the areas below.

• Clarification of the accounting treatment of land acquired for mixed-tenure development schemes.
• Clarification of what constitutes 'net disposal proceeds' for the purpose of derecognition of assets in accordance with paragraph 17.30 of FRS 102 regarding costs associated with continuing to service a revenue contract that can’t be terminated prior to disposal (such as costs of alternative accommodation following decant).
• Moved the section on Stock Transactions from Chapter 17, Specialised Activities of the extant SORP, to the Housing Properties chapter, as this more closely aligns with the nature of the transactions. The SORP working party have taken the opportunity to revisit the accounting treatment of grants in stock transactions between registered providers with the proposal to treat grant transferred consistently with grant originally received (covered in more detail below).
• Added a new section on ‘Regeneration schemes’ as the SORP working party recognised that there is an increase in regeneration in the sector and inconsistencies in accounting treatment had been noted.
• Added a new section on ‘Exchange of assets’. This section is aimed at clarifying the point at which the derecognition of the exchanged asset is made in the financial statements again due to inconsistencies being identified in the sector.
• Provided clarification on the capitalisation of certain costs and enhanced the definition of incremental future benefits. This was particularly necessary to address the increase in costs associated with environmental sustainability.

Stock transactions – grants

FRS 102 defines a government grant as 'Government assistance in the form of a transfer of resources to an entity in return for past or future compliance with specified conditions relating to the operating activities of the entity.'

Where social housing is acquired from another social landlord, the funder may agree for the funding to transfer with the housing properties to the acquiring social landlord. As a result, the social landlord disposing of the housing properties is released from its obligation to repay or recycle the grant funding, and the acquiring social landlord takes on an obligation to repay or recycle the grant funding if those properties are sold or no longer used as social housing in the future.

It is therefore considered appropriate to account for any grant associated with an acquired housing property (where the funder has given consent for the grant to transfer to the recipient) as if the recipient entity had originally received the grant themselves. Accounting treatment would therefore follow accounting treatment in Section 24 Government Grants of FRS 102 and Chapter 11 Grants of the SORP, and this has been noted in paragraphs 6.74 and 6.75 of the chapter on housing properties.

This will bring the grant into the primary statements and remove the contingent liability.

Regeneration schemes

The extant SORP did not provide definitive accounting treatment for regeneration schemes. Complexities arise with the definition and treatment of a demolition (treated as a disposal and therefore derecognised accordingly) prior to the rebuild of an improved asset. The treatment of such can have a significant impact on loan covenants such as interest cover or EBITDA/EBITDA-MRI. This is further complicated by component accounting and the need for social landlords to estimate the split between components (typically, at a minimum, the land, the structure, the roof, the windows and the kitchens/bathrooms) for existing assets.

The SORP working party considered it appropriate for the decision by a social landlord to proceed with a regeneration scheme to trigger a reassessment of the residual value or useful life of the housing asset under paragraph 17.19 of FRS 102. For example, if the building is due to be demolished in two years' time, then a shortening of the useful life would be expected, and the net book value of the asset would be depreciated over the two years (being the remaining useful economic life), and therefore the value of the asset at demolition would equate to the land value only.

As a result, accelerated depreciation would be recognised in the statement of comprehensive income. It is noted that this would not impact on EBITDA / EBITDA-MRI.

Exchange of assets

Additional guidance has been produced to bring clarity to such transactions and to set guidance on the correct accounting treatment in SORP paragraphs 6.68 to 6.75.

Impairment

While there are no substantial changes to impairment resulting from the updates to FRS 102, with the growth of Right-to-Buy, Right to Acquire and Right to Shared Ownership, it has been considered necessary to revise the guidance in the Housing SORP on these matters specifically, to bring further clarity to the impairment consideration.

Provisions

Chapter 9 of the Housing SORP has been updated to provide further clarity in respect of recognising provisions for non-compliance with laws and regulations in relation to property assets.

Capitalisation

Social landlords are making substantial investments in their existing housing assets to comply with regulatory requirements and meet sustainability goals. These investments include both the installation of new components and the replacement of existing ones. Replacements are often necessary to meet updated regulations or sustainability objectives, even when the property already has a similar component. This surge in investment has led to inconsistencies in how these costs are accounted for, prompting the Housing SORP working party to propose clearer guidance.

To address this, the new SORP incorporates direct extracts from FRS 102, specifically paragraphs 17.6 and 17.7, to reinforce the principles around recognising replacement components. Additionally, new wording is proposed to clarify the treatment of incidental costs during construction or development. For example, costs such as temporary accommodation for tenants or fire safety waking watch which are not considered essential to bringing the asset to its intended condition and should therefore be expensed in the Statement of Comprehensive Income.

The guidance on assessing future economic benefits has also been updated. Works to housing properties should only be capitalised if they provide incremental future benefits. These benefits may include increased rental income; reduced maintenance costs; extended property life and, additionally, in the new SORP, ‘enhanced environmental outcomes aligned with social purpose objectives (such as decarbonisation)’.

The SORP highlights that the costs of the components being replaced must be derecognised in accordance with the relevant accounting standards.

Employee benefits

Chapter 13 has been updated to incorporate disclosure requirements in relation to employee benefits (which currently exist within the various Accounting Directions and Determinations) and align these with the Charity SORP, in particular those regarding the remuneration of key management personnel and salary bandings for employees earning >£60,000.

How we can help you

We have been living and breathing the SORP changes for over a year now and would be very happy to talk further about the changes or support you in your transition. Please get in touch for advice specific to your organisation.