Download FRS 102 for leaders – in plain English Financial Reporting Standard

FRS 102 for leaders – in
plain English

Financial Reporting Standard 102 (FRS 102) heralds the biggest change in
UK financial reporting for a generation.

FRS 102 sweeps aside existing accounting rules, moving to a framework
based more on standardised, international rules for accounting periods starting
on or after 1 January 2015.

The Housing Statement of Recommended Practice (SORP) was issued
2014 to provide essential guidance for finance directors to interpret FRS 102
in a social housing setting.

However, FRS 102 offers housing associations a series of accounting choices
that can have a significant impact on the measure of performance balances
and net balances. For example:
- allocation of capital grant and the method used to calculate depreciation
- the extent to which items are written off as revenue expenditure or
capitalised in the balance sheet and
- perhaps most significant of all, the policies selected to account for
financial instruments - accounting for restructured loans could create
some significant differences.

Furthermore, the accounting policies selected could make it challenging for
unsophisticated readers of housing association accounts to draw comparisons
either:
- between different housing associations or
- prior year performances.

The challenge for leadership teams will be to understand whether the
application of FRS 102 will impact on stakeholder perceptions of the
business, and if so how best to manage those perceptions.

Audit committees will need to look beneath the headline numbers to
understand what is happening in the business and what the numbers are
saying to ensure that any changes are not being masked by changes in
accounting policy.

One constant is that cash is king, which puts the relevance of non-cash
accounting changes into some context. For boards, cashflow reporting will
become much more important, particularly where surpluses rise as a result of
the move to adopt FRS 102.

Banks too need to make sense of these changes to ensure that housing
associations continue to comply with loan covenants.

Because of the advent of FRS 102, lenders and housing associations have
been, and are, busily renegotiating loan covenants to recalibrate loan
covenants for consistency with FRS 102 accounts which appear so very
different.

Housing associations which have not already done so, may need at some
point to reformat budgets and management accounts for consistency with the
FRS 102 audited accounts as well, in time, regulatory financial returns
should housing regulators remodel them for consistency with FRS 102.

For more detailed guidance on these changes or on housing finance for
non-experts more generally, refer to the Federation’s publication Finance
Demystified.