2007 SORP - What To Expect.The 2007 SORP SORP Statement of Recommended Practice SORP Start of Regular Production (General Motors) SORP Statement Of Requirement Preliminary SORP Stock Option Replacement Program consultation phase has just ended. Whereas the previous updates in 2002 and 2005 were well received, it is going to be much harder to predict the reaction to this draft. Our expectation is that significant changes will be made to the phrasing of the 2007 SORP, but not to the actual substance. If this expectation holds, the document is going to have a dramatic impact on the financial position of many RSLs. Given the low levels of surplus reported by the sector, relatively small changes to the accounting treatment will have a dramatic impact on the bottom line. The most significant changes that we expect to be implemented are as follows. Shared ownership accounting The draft SORP suggests that the costs of the first tranche Tranche One of several related securities offered at the same time. Tranches from the same offering usually have different risk, reward, and/or maturity characteristics. tranche A class of bonds. disposal should be included in current assets Current Assets Appearing on a company's balance sheet, it represents cash, accounts receivable, inventory, marketable securities, prepaid expenses, and other assets that can be converted to cash within one year. and a profit or loss incurred on disposal. This is very different from the present treatment of deducting the net proceeds Net Proceeds The amount received after all costs are deducted from the sale of a piece of property or security. Notes: In the case of an investor selling a security, net proceeds represent the proceeds from the sale minus any trading costs (i.e. commissions). from the carrying value Carrying Value Also know as "book value," it is a company's total assets minus intangible assets and liabilities, such as debt. Notes: This is different than market value, as it can be higher or lower depending on the circumstances. of the property, and may lead to earlier recognition of profit or loss, depending on the type of scheme. The major concerns include whether earlier recognition of profit is prudent, and a number of worrying corporation tax implications. However, under the proposed new accounting treatment of mixed scheme accounting, earlier recognition of profit is not recognised if the shared ownership component is subsidising other parts of the scheme. Mixed scheme accounting The accounting treatment should be based on the overall financial position of the scheme rather than on the financial standing of the individual elements. Unfortunately, this is not clearly explained in the draft SORP and the wording needs to be more comprehensible com·pre·hen·si·ble adj. Readily comprehended or understood; intelligible. [Latin compreh . The intention is best illustrated by an example. Imagine a scheme in which half of the properties are to be sold outright and half are for general needs. The overall cost is [pounds sterling]20 million with a grant of [pounds sterling]2 million. The properties for sale realise [pounds sterling]12 million and the EUV-SH EUV-SH Existing Use Value as Social Housing of the general needs properties is [pounds sterling]7 million. Under 'normal' accounting, assuming that the sold properties cost the same as the general needs properties, a surplus of [pounds sterling]2 million on the disposal would be recorded ([pounds sterling]12 million proceeds less costs of [pounds sterling]10 million). The general needs properties would be recorded at cost ([pounds sterling]10 million) less the grant ([pounds sterling]2 million). Although the net cost is [pounds sterling]1 million higher than the EUV-SH, no impairment Impairment 1. A reduction in a company's stated capital. 2. The total capital that is less than the par value of the company's capital stock. Notes: 1. This is usually reduced because of poorly estimated losses or gains. 2. provision would be made, assuming that the occupancy was high, on the basis that this was a scheme that had gone to plan and was fulfilling the objectives of the RSL RSL - RAISE Specification Language . In effect, it is a planned impairment and thus no provision is required. However, under the proposals in the draft 2007 SORP, the treatment would be very different. The general needs properties would be recorded so that the net book value was EUV-SH, i.e. a cost of [pounds sterling]9 million and a grant of [pounds sterling]2 million. Consequently, the cost of sale of the properties sold would increase to [pounds sterling]11 million, reducing the surplus to just [pounds sterling]1 million. Onerous contracts ONEROUS CONTRACT, civil law. One made for a consideration given or promised, however small. Civ. Code of Lo. art. 1767. The expanded commentary in the draft SORP envisages that there may be situations where commitments to provide public benefits might create onerous contracts. However, the commentary does not provide any guidance on when this might occur or how it should be accounted for. One scenario where this might apply is in relation to commitments given to tenants, leaseholders and local authorities during the transfer of local authority housing stock to RSLs. Sometimes these commitments are so specific that the RSL is unable to avoid the expenditure. Does this create a liability? Unfortunately, the SORP does not make this clear. Stock transfers The draft SORP confirms that in some circumstances CIRCUMSTANCES, evidence. The particulars which accompany a fact. 2. The facts proved are either possible or impossible, ordinary and probable, or extraordinary and improbable, recent or ancient; they may have happened near us, or afar off; they are public or , it is not just housing properties that are being transferred but actual businesses. In these situations, a different method of accounting for the transfer must be applied. This method involves deriving fair values for the assets and liabilities acquired, and recognising any difference between these and the fair value of the purchase price as 'goodwill'. In some cases, the goodwill amounts will be substantial. Component accounting The draft SORP further encourages component accounting in certain circumstances, but makes it clear that it cannot be used selectively. This amendment will most probably result in some controversy, as there are many RSLs which are currently not compliant with these proposals. A leading RSL's adopted accounting policies are used to illustrate this. Housing Association X capitalises expenditure on replacing windows, kitchens and bathrooms, and depreciates this expenditure over 15 years. Implicitly, X does not expense previously capitalised amounts to the replaced item, e.g. the windows installed when the property was first constructed. It also does not depreciate depreciate v. in accounting, to reduce the value of an asset each year theoretically on the basis that the assets (such as equipment, vehicles or structures) will eventually become obsolete, worn out and of little value. (See: depreciation) components for new schemes separately over the 15 years. However, the draft SORP requires all or nothing. All the windows, kitchens and bathrooms would need to be separated for all of the RSL's housing properties, and individually depreciated Depreciated may refer to:
Noun 1. capitalisation - writing in capital letters capitalization writing - letters or symbols that are written or imprinted on a surface to represent the sounds or words of a language; "he turned the paper of an improvement to a property. In a number of cases this change in treatment will have a catastrophic effect on the reported results. At this stage, it could be argued that there is little RSLs can do since the final content of the SORP is not known. However, it is clear that these proposed changes will affect many RSLs and therefore early planning will be essential for the final SORP publication in March 2007. In particular, some RSLs will see a significant impact on their reported results and covenant compliance. The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Mr Jonathan Jonathan (jŏn`əthən) [short for Jehonathan, Heb.,=Yahweh has given]. 1 In the Bible, Saul's son and David's friend, both killed at the battle of Mt. Gilboa. David showed kindness to his son Mephibosheth. Pryor Pryor is a surname, which can refer to:
Smith & Williamson 25 Moorgate London EC2R 6AY UNITED KINGDOM Tel: 207131 4000 Fax: 207131 4029 E-mail: info@smith.williamson.co.uk URL URL in full Uniform Resource Locator Address of a resource on the Internet. The resource can be any type of file stored on a server, such as a Web page, a text file, a graphics file, or an application program. : www.smith.williamson.co.uk Click Here for related articles (c) Mondaq Ltd, 2006 - Tel. +44 (0)20 8544 8300 - http://www.mondaq.com |
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