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Article:

Covid-19: Implications for Social Housing audit and reporting

22 April 2020

As COVID-19 continues to impact people across the globe, your utmost priority will rightly be the health and wellbeing of your tenants and employees. While this should continue to remain a priority, there are also some implications for your housing association that need consideration, both in the short term and the longer term, to ensure the sustainability of your housing association and, ultimately, the wellbeing of your tenants.

Whilst the FRC has confirmed that Companies House may grant extensions to reporting deadlines to those companies which apply, there is no similar provision in the Housing Regeneration Act 2008 to enable the Regulator of Social Housing to mirror this. There are therefore some issues you may need to consider sooner rather than later, as they could impact on your ability to prepare accounts and the audit reports. This includes the estimation uncertainty in valuations - in particular, whether this situation triggers the need for an impairment review of asset carrying values as measured at 31 March 2020, as well as some going concern assessments. As with all things COVID-19 related, this is a fast moving area. We have therefore set out some of the key areas for consideration and our interpretation of the impact at 22 April 2020 and will update this periodically as relevant guidance, experience and best practice emerges.

There are also some issues arising from COVID-19 that may impact on both your Corporation Tax and VAT positions, which are outlined in our other COVID-19 article here.

This list is not meant to be exhaustive, but highlights the key areas we are already discussing with clients, other advisors and regulators, both within the housing sector and outside of it.

Finally, we are aware that keeping up to date with the latest developments may be more of a challenge for in-house finance staff under current circumstances, with less face to face time with external advisors and the absence of physical seminars. In order to help with this, we are planning to run a number of webinars over the coming weeks to keep you up to date. Details will be published on our COVID-19 hub

, which brings together information and articles around the impact of COVID-19 and the current support available in managing this, and is being updated as the situation evolves.

If you would like to discuss any of these matters further in relation to your own housing association, please contact us.

 

AUDIT AREA  ISSUE

FINANCIAL REPORTING AND AUDIT IMPLICATION

WIDER BUSINESS CONSIDERATIONS

Income

In the current situation, rent arrears in some cases will be inevitable, particularly for those tenants not receiving housing benefit. Whilst these must be dealt with sympathetically, there may be wider-reaching impacts on your organisation which need consideration.

 

Assess the impact on rent arears provision.

 

 

Assess the impact of non-payment on budgets/ business plan, including stress testing.

Ensure housing teams are focusing on these tenants.

Housing Property - completed 

Changes in the external environment as a result of COVID-19 will have an adverse impact on: 

  • the environment in which the registered provider operates and  
  • the expected cash flows from housing properties

potentially triggering the need for an impairment review at 31 March 2020

Assessment needs to be made whether this is an impairment trigger or not.

If it is - determine the recoverable amount (the higher of fair value less costs to sell and value in use). 

If write downs are required, assess the impact on your going concern assessment.   

Consider implications of any material impairment, e.g. covenant breaches. 
Assess the potential impact of any decrease in EUV-SH or other security valuations on business, e.g. the requirement to find additional security; the inability to access funds due to lack of security.   
Housing Property – under construction  As we are all asked to practice social distancing, many construction sites  are temporarily closing and development is pausing.

Capitalisation of interest will need to cease where active development is paused for an extended period. 

Costs, such as site security etc, incurred during this pause will be charged to your Income & Expenses as not directly attributable to bringing the asset into use. 

Assess the impact of additional costs on your going concern assessment. 
 

Consider the impact of: 

  • interest  
  • site security  
  • other costs hitting the Income & Expenses  

on interest cover calculations.

Property developed for sale There may be various issues impacting the property market as a result of the COVID-19 outbreak causing it to weaken. People will be unable to view properties owning to government restrictions and the financial repercussions for many people and organisations will make spending large sums on purchasing property less of a priority.

Reassess the net realisable value of your property. 
Consider whether there is sufficient, appropriate audit evidence to support estimated sales proceeds.

Asset valuations with a material uncertainty clause could lead to a potential emphasis of matter in relation to material uncertainty.

Consider the impact of delayed sales on cash flow forecasts and your going concern assessment. 

Consider the impact of delayed sales on cash flow forecasts and borrowing requirements.

Consider the impact of impairment and/or modified audit report on loan covenants.

Investment properties Owing to a weakening of the property market, investment property valuations at 31 March 2020 will likely be caveated - as there is less certainty in the valuation than would normally be the case - or not provided at all.

Discuss with your valuers the basis of valuation at 31 March. Will they include narrative about uncertainty?

Consider the narrative required in relation to estimates and judgments if there is material uncertainty content in your valuation report.

Consider whether there is sufficient, appropriate audit evidence to support values. 

Consider the impact of impairment and/or modified audit report on loan covenants.
Pension valuation  Pension valuations will be affected by the impact of events on the stock market, other asset valuations and changes to discount rates.

Consider whether there is sufficient, appropriate audit evidence to support asset valuations and the other estimates and judgements in actuarial reports.

Consider the narrative required in relation to estimates and judgments if there is a material uncertainty caveat.

Assess the impact on covenant compliance if pension movements, due to changes in actuarial assumptions, are not carved out. 

Consider the impact on cash flow forecasts and going concern assessment.

Stress test business plans to assess the impact of any significant increase in pension liability and future contribution levels.
Derivatives

The effects of COVID-19 on market conditions could have a significant impact on the credit risk of your organisation or that of the counterparty.

Changes in credit risk will have an effect on the valuation of the interest rate swaps.

Ensure that credit risk is taken into account as part of the valuations performed on derivative values as at 31 March 2020.

Assess the impact on covenant compliance if derivative valuation movements are not carved out. 

Determine whether movements in derivative values affect covenant compliance and, if they do, the impact this has.

Going Concern

 

 

 

 

 

In an uncertain environment where business continuity plans have been activated, forecasting future cash flows with any degree of certainty will be challenging.

 

 

 

 

Prepare robust stress testing for each entity in the group on a standalone basis. Include some ‘worst case scenarios’ that bring in multiple challenges to cash flows, to test whether or not the plan would break. 

Consider whether the level of uncertainty around cash inflows (e.g. rent collection, timing of property sales) vs committed outgoings (e.g. salaries, rents payable) means there is material uncertainty over going concern that should be flagged to users of the accounts.

As left.

It is expected that many audit reports will have some modification in relation to going concern.

 

 

 

 

 

 

 

Where you are of the view that this is not appropriate, your documentation of your consideration should contain sufficient information to challenge this position. This way, you will provide well thought-through documentation that supports your going concern assessment and conclusion. 

For subsidiary entities, any support from elsewhere within the group would have to have a legal basis (support letters alone are unlikely be enough).           

As left.

 

 

 

 

 

 

 

 

There is potential for a risk of cross default. If one entity has an emphasis of matter relating to going concern, assess whether that impacts loan covenants for others in the group. As left.

Stock 

 

 

 

 

 

 

 

 

 

A year end stock take is normally performed but, as people practice social distancing and we are told by the government to stay at home where possible, this either cannot be performed or attended by your staff/our staff.

 

 

 

 

 

 

Consider whether counts already conducted can be rolled forward.

Consider whether a count at a later date could be rolled back. 

Consider whether lack of a stock count would lead to a limitation of scope in the audit opinion of the stock holding entity and at group level (a limitation of scope is a qualified audit opinion). 

Assess impact of modified audit opinion on loan covenant compliance and going concern assessment.

As left.

Overall control environment

 

 

Changes to key controls in your financial reporting environment may be necessary in response to your staff now working remotely from home.

 

 

Document changes to your control environment and share these with your auditors.

Prepare for your auditors to revisit their testing of the design and implementation and, where applicable, operating effectiveness of controls for the period from when staff commenced working from home to the date we commence the audit.

Consider increased risk of cyber fraud and remind staff of the need to remain vigilant and aware.

Subsequent events

Material events after the balance sheet may require additional disclosures.

Consider material events that occur after the balance sheet date and assess whether they require additional disclosure.

 

 

View our COVID-19 hub