The FRC recently published their Annual Review of Corporate Reporting for 2016/17. The conclusions are drawn from their monitoring work in the year and from thematic reviews that have been performed on companies incorporated under Companies Act 2006. There are many parallels that can be drawn and lessons to be learned for the Social Housing sector.
The FRC report considers two areas; the financial statements and the strategic report. We have taken the conclusions and recommendations in the report and considered how the findings could apply in the 2018 reporting season for the Social Housing sector.
The FRC commented on a number of specific areas in relation to the financial statements for improvement in 2018. We have noted those that have particular relevance to Social Housing:
Key Judgements & Estimates
The requirement to describe the key judgements and estimates that have been made by management in preparing the financial statements was introduced in the 2016 transition to FRS102. In their work the FRC noted that many companies had given generic disclosures that did not fully explain the specific judgements that had been made and there was a failure to describe where a change in an estimate could have a material impact on future periods.
Some of the key judgements that we have seen have been in relation to classification of financial instruments as basic or ‘other’ and impairment of housing properties, e.g. cash generating units, expected cash flows or depreciated replacement cost calculations.
The descriptions of the estimates and judgements in social housing accounts is an area where there could be more narrative to explain the impact where a change could have a material impact on future results. For example, estimates of forward interest rates or the estimates that have been used in the measurement of a non substantial modification of a financial instrument.
The FRC reviewed the disclosures relating to pension schemes in 20 company’s accounts. Those companies improved their reporting of pension schemes and inclusion of narrative to describe how net liabilities in plans are being reduced. The FRC also noted commentary in the strategic reports in this area.
There are significant changes being discussed relating to the SHPS pension scheme and it is increasingly likely that associations will soon be able to account for their own share of the SHPS scheme assets and liabilities because the Pensions Trust will be able to provide sufficient information for each participant to identify their shares.
At present the disclosures in the financial statements are generally good in relation to SHPS. We believe that inclusion of a description of the proposed changes in the strategic report for 2018 should be considered by associations as the disclosures will be very different.
The FRC recognised that business combinations can result in unusual and complex accounting transactions for entities. The examples that they gave of deferred and contingent consideration are not considerations that we often see in the social housing sector, however, the method by which a combination is undertaken under the Co-operative and Communities Benefit Society legislation can give rise to very different accounting treatments.
We are continuing to see many combinations in the sector. Whilst the vast majority are described as ‘mergers’ the accounting can differ where they don’t meet the criteria for merger accounting as set out in FRS102. Clear narrative around the use of ‘amalgamation’ or ‘transfer of engagement’ process is required when describing any combination.
Strategic reporting – Beyond compliance
The FRC describe nine characteristics of a good strategic report in their report. Changes in Auditing Standards mean that there will be more focus on the information that is produced with your financial statements leading to an opinion on that information.
We have considered the nine characteristics and the points that you should consider when drafting your 2018 strategic report:
The narrative in the strategic report should be consistent with the financial statements so that it tells the story of the results for the year and the balance sheet.
How the money is made
Describe the business model and the key points in the year – both good and bad. Balance is the key.
What worries the Board
Only include in the Strategic report the key risks and uncertainties that concern the Board – be specific and describe the actions that are being taken to address them. Disclosure of insignificant risks can mask the ‘true’ issues.
The use of financial KPIs in the strategic report is commonplace but can they easily be reconciled to the financial statements?.
Cut the clutter
Make sure that the important messages can be understood; avoid repetition; do not include immaterial detail.
Use precise language that is free from jargon, internal management speak or abbreviations. Consider the audience.
Make sure that items are being reported at an appropriate level of aggregation. Tables should be supported by appropriate narrative.
It is inevitable that there are changes in accounting policies or presentation from time to time – make sure these are properly explained.
True and fair
Follow the spirit as well as the letter of all accounting standards.
The full report from the FRC can be found here.