Component Accounting [Compatibility Mode]
SORP 2010 Update: Component Accounting, IFRS, Impairment and beyond
Component accounting: a beauty or a beast? [date]
Straw poll on component accounting 1. I hate it, largely a waste of time that will add no value to our business 2. I dislike it. There may be some benefits but the cost and effort will be disproportionate 3. I am not sure. I can see it will require a lot of work but there are some benefits 4. I am a fan. I think it will deliver more value than it will cost
Component accounting 1. Overview of requirements 2. Consultation 3. Problems and solutions 4. Impact on covenants 5. Options for HAs 6. Tax issues 7. Examples 8. Preparation 9. Implications
1. Overview of requirements • Para 83 FRS 15 – where the tangible fixed asset comprises two or more major components with substantially different useful economic lives, each component should be accounted for separately for depreciation purposes and depreciated over its individual useful economic life
• Similar text in the SORP
1. For example • Kitchens • Bathrooms • Windows • Roofs • Heating systems • Lifts • Wiring Anything material which has a substantially different useful economic life from the rest of the building
2. Consultation • Conclusions – yes to component accounting – practical issues can be overcome
3. Problems and solutions • Transition (prior year adjustment or re-lifing) – material change to amounts previously capitalised? ð Prior Year Adjustment (PYA)
• Examples (unless immaterial) a) Previously capitalised nothing
ðPYA
b) Previously capitalised large amounts but did not write off replaced assets
ðPYA
c) Previously capitalised ‘improvements’ and depreciated over shorter life
ðPYA
d) Previously incurred only negligible component replacement costs
ðCould relife
3. Problems and solutions (continued) • Historic data – likely to be gaps – work backwards from asset management strategy
• Treatment of grant – – – –
clear treatment of original grant major repair grant should be allocated to components different treatment if high grant levels note that allocated grant is written off when component is replaced
3. Problems and solutions (continued) • Partial implementation (unless immaterial) – capitalisation of improvements with different life from original asset (not compliant with FRS 15) – applying component accounting from a specific implementation date only (not compliant with FRS 15)
• LSVTs – Early stage “cost” of components expected to be replaced; may reasonably be assumed to be £nil
• Homebuy/shared ownership – components are not the Association’s asset therefore do not component account
3. Problems and solutions (continued) • Treatment of depreciation prior to 2000 – can either restate or leave as is
• Capitalisation of staff costs on component replacements – yes, normal rules apply
• Should achieve greater consistency, but – different assumptions – interpretations vary
• Timing – for March year ends, March 2012, but lots to do
4. Impact on interest cover covenants • Property depreciation add back • Accounting estimates less significant • “Smoothing” effect • Reduced ability to “manage” results by varying timing of major repair works
Options for covenant compliance 1. Agree with lender that covenants can be computed using CA numbers –
will significantly reduce the covenant’s impact due to larger depreciation add back
Options for covenant compliance (continued) 2. Continue with old accounting policies (requiring covenants to be computed) –
usually very complex and difficult to do; will progressively become more and more complex each year
Options for covenant compliance (continued) 3. Recalibrate using revised business plan under CA –
not easy to follow the effect of the change
5. Options for HAs • Whether to implement early • Component categories • Useful economic lives • Initial treatment (usually not an option!) • Historic information gaps
5. Simplifying assumptions • Bear in mind materiality • Suggestion: analyse recent improvements first • Often more difficult to identify items previously expensed
5. Simplifying assumptions (continued) • Where there are gaps, we suggest: – Use current asset management strategy – Work backwards from expected replacement date and useful economic life to estimate last replacement date – Use current replacement cost (adjusted for inflation) to derive last replacement cost – Adjust if not replaced since construction
5. Simplifying assumptions (continued) • Bear in mind: – Cost of components built when property is new likely to be lower than cost when replaced (because of extra costs of work set-up and VAT) – Useful economic life of components is not simply per manufacturer's estimates; it should reflect experience, usage, maintenance and asset management – Expect some components to be replaced early, and therefore extra I&E charge (within depreciation, not disposal of fixed assets) – Apply reasonableness test
6. Tax issues on change to component accounting • No change for charitable entities • For non-charitable entities: seek advice and following comments are indicative only! • Previous treatment • Years before change – tax deduction available for significant proportion of replacement components written off to I&E as major repairs, – excluding elements of improvements e.g. extra cupboards in kitchens, extra fittings in bathroom.
6. Tax issues on change to component accounting • Year of change – net book value of assets previously written off as repairs, now capitalised – Should be no tax adjustment in year of change – Deferred tax to be considered
6. Tax issues on change to component accounting • Subsequent years – scope for tax deduction is any depreciation charge on component assets that could otherwise be categorised as tax deductible major repairs. – tax deduction spread over many years. Cash flow disadvantage compared to previous treatment of expense to I&E account.
7.
Illustrations
• One property acquired in 2000 for £100,000 (no grant) • Replaced kitchen in 2009 for £5,000 • Replaced bathroom in 2011 for £5,000 • Building life 100 years • For simplicity, assume no grant
Illustrations • Judged kitchens to have 25 year life and bathrooms 20 year life (no other components) • Original split judged to be Land
£40,000
Structure
£52,000
Kitchen
£4,000
Bathroom
£4,000
• How will the numbers be reported in March 2011 financial statements?
Before component accounting • Firstly, let us look at accounting before component accounting changes are made. • Imagine two different scenarios: – aggressive accounting policy (capitalises 100% of major repairs) – conservative accounting policy (capitalises no major repairs)
Aggressive accounting policy Aggressive accounting policy: accumulated depreciation • 12 years at 1% on £60,000 (£7,200) • 3 years at 1% on £5,000 (£150) • 1 year at 1% on £5,000 (£50)
Aggressive accounting policy
Cost Depreciation NBV
Land £000
Buildings £000
Major repairs £000
Total £000
40
60
10
110
-
7.2
0.2
7.4
40
52.8
9.8
102.6
Aggressive accounting policy Depreciation charge • 31 March 2011 1% on £70,000 = £700 • 31 March 2010 1% on £65,000 = £650
Conservative accounting policy Conservative accounting policy: accumulated depreciation • 12 years at 1% on £60,000 (£7,200)
Conservative accounting policy
Cost Depreciation NBV
Land £000
Buildings £000
Major repairs £000
Total £000
40
60
-
100
-
7.2
-
7.2
40
52.8
-
92.8
Conservative accounting policy Depreciation charge • 31 March 2011 and 2010 1% on £60,000 = £600
Under component accounting Now look at what would happen under component accounting: Kitchen: • • • • •
Original cost 9 years depreciation (25 year life) NBV (written off in 2009) New kitchen cost 3 years depreciation (25 year life)
£4,000 £1,440 £2,560 £5000 £600
Under component accounting Bathroom: • Original cost • 11 years depreciation (20 year life) • NBV (written off in 2011) • New bathroom cost • 1 year depreciation (20 year life)
£4,000 £2,200 £1,800 £5000 £250
Under component accounting Structure • Cost • 12 years depreciation • Annual charge
£52,000 £6,240 £520
Under component accounting
Cost Depreciation NBV
Land £000
Structure £000
Kitchen £000
Bathroom £000
Total £000
40
52
5
5
102
-
6.24
0.6
0.25
7.09
40
45.76
4.4
4.75
94.91
Under component accounting Depreciation charge 31 March 2011 – – – –
Structure Kitchen (25 years) Bathroom (20 years) Total
£520 £200 £250 £970
• 31 March 2010 – – – –
Structure Kitchen (25 years) Bathroom (20 years) Total
£520 £200 £200 £920
Summary: impact on Association
Balance sheet
Cost Depreciation
Net assets
Old policy: Old policy: New policy: aggressive conservative Component £ accounting £ £ 110,000
100,000
102,000
(7,400)
(7,200)
(7,090)
102,600
92,800
94,910
Impact on Association Income and expenditure (2011)
Depreciation charge Write off component replacement/ original
Old policy: Old policy: aggressive conservative £
£
New policy: Component accounting £
700
600
970
-
5,000
1,800
700
5,600
2,770
Impact on Association Income and expenditure (2010)
Depreciation charge Write off component replacement/ original
Old policy: Old policy: aggressive conservative £
£
New policy: Component accounting £
650
600
920
-
-
-
650
600
920
Second illustration • Association uses valuations • (oh dear!) • One property completed on 31 March 2011
Before component accounting
• • • •
Land cost Building cost Grant EUV-SH
• 100 year life
£40,000 £60,000 £40,000 £30,000
Before component accounting Balance sheet Housing property Loans
31 March 2011 £000 30 (60)
Net liabilities
(30
I&E reserves
-
Revaluation reserve
(30)
Total reserves
(30)
Before component accounting Income & Expenditure account (on an historic cost basis) 31 March 2012 £000 Rent Housing property depreciation
5.0 (0.36)
Other operating cost
(2.4)
Interest costs
(2.4)
Loss
(0.16)
Before component accounting
Estimated split of land and buildings on a valuation basis: 30% : 70%
Before component accounting Income & Expenditure account (on a valuation basis) 31 March 2012 £000 Rent Housing property depreciation
5.0 (0.21)
Other operating cost
(2.4)
Interest costs
(2.4)
Loss
(0.01)
Before component accounting • Difference between £0.36k (depreciation on HC basis ) and £0.21k (depreciation on valuation basis) goes through reserves as a transfer • Assume valuation increased to £32,000 at 31 March 2012
Before component accounting
I&E reserve £000
Revaluation £000
-
(30.00)
Deficit
(0.01)
-
Transfer
(0.15)
0.15
-
2.21
(0.16)
(27.64)
1 April 2011
Revaluation 31 March 2012
Before component accounting Balance sheet
31 March 2012 £000
31 March 2011 £000
Housing property
32
30
Current assets
0.2
-
(60)
(60)
Net liabilities
(27.8)
(30
I&E reserves
(0.16)
-
(27.64)
(30)
27.8
(30)
Loans
Revaluation reserves
After component accounting • Assume we adopt component accounting at 31 March 2011 • For simplicity just have two components (kitchen and bathroom) plus the structure
After component accounting
Cost
Life
Land
40
-
Structure
40
100
Kitchen
10
25
Bathroom
10
20
After component accounting • Assume value of components equal to depreciated historic cost • Assume value of land is 30% of total value
After component accounting Balance sheet Housing property Loans
31 March 2011 £000 30 (60)
Net liabilities
(30
I&E reserves
-
Revaluation reserve
(30)
Total reserves
(30)
After component accounting • In other words, no change
After component accounting Depreciation charge for 31 March 2012 Historic cost Cost £000
Depreciation charge Grant £000 £000
Land
40
20
-
Structure
40
20
0.2
Kitchen
10
-
0.4
Bathroom
10
-
0.5
100
40
1.1
After component accounting Depreciation charge for 31 March 2012 Valuation basis
Depreciation charge Value £000 £000
Land
9
-
Structure
1
0.01
Kitchen
10
0.4
Bathroom
10
0.5
30
0.91
After component accounting Income & Expenditure account (on an historic cost basis) 31 March 2012 £000 Rent
5.0
Housing property depreciation
(1.1)
Other operating costs
(2.4)
Interest costs
(2.4)
Loss
(0.9)
After component accounting Income & Expenditure account (on a valuation basis) 31 March 2012 £000 Rent Housing property depreciation
5.0 (0.91)
Other operating costs
(2.4)
Interest costs
(2.4)
Loss
(0.71)
After component accounting • Difference between £1.1k (depreciation on HC basis) and £0.91k (depreciation on valuation basis) goes through reserves as a transfer • As before, assume valuation increased to £32,000 at 31 March 2012
After component accounting
Reserves
I&E reserve £000
Revaluation £000
-
(30)
Deficit
(0.71)
-
Transfer
(0.19)
0.19
-
2.91
(0.9)
(26.9)
1 April 2011
Revaluation 31 March 2012
After component accounting Balance Sheet
31 March 2012 £000
31 March 2011 £000
Housing property
32
30
Current assets
0.2
-
(60)
(60)
Net liabilities
(27.8)
(30)
I&E reserves
(0.9)
-
(26.9)
(30)
(27.8)
(30)
Loans
Revaluation reserves
After component accounting • Simples • J
Conclusions on impact of component accounting • Higher depreciation charge • Charge recognised when components replaced early • Very different effect depending on pre-component accounting policy on major repairs capitalisation
8. Preparation • Understand principles • Assess information gaps • Prepare project plan (crucial) • Do not underestimate resource requirement • Not just a finance task
8. Preparation (continued) Broadly, three phases: 1. Transition (establishing principles, numbers, data for accounts for a particular year end eg. March 2012) 2. Systems (procedures, IT support, continuing process management accounts) 3. Analysis (challenging outliers, investigation, value for money)
9. Implications • Significant logistical challenge requiring careful planning and allocation of resources • Improved quality of financial reporting (?) • Reduces excessive capitalisation and therefore increases comparability • Could change reported net assets and surpluses significantly (NB impact on covenants) • Enriches quality of debate over asset management • Logistical challenge but longer term benefits (?)
SORP 2010 Update: Component Accounting, IFRS, Impairment and beyond
Component accounting: a beauty or a beast? [date]
Component accounting: a beauty or a beast? [date]
Straw poll on component accounting 1. I hate it, largely a waste of time that will add no value to our business 2. I dislike it. There may be some benefits but the cost and effort will be disproportionate 3. I am not sure. I can see it will require a lot of work but there are some benefits 4. I am a fan. I think it will deliver more value than it will cost
Component accounting 1. Overview of requirements 2. Consultation 3. Problems and solutions 4. Impact on covenants 5. Options for HAs 6. Tax issues 7. Examples 8. Preparation 9. Implications
1. Overview of requirements • Para 83 FRS 15 – where the tangible fixed asset comprises two or more major components with substantially different useful economic lives, each component should be accounted for separately for depreciation purposes and depreciated over its individual useful economic life
• Similar text in the SORP
1. For example • Kitchens • Bathrooms • Windows • Roofs • Heating systems • Lifts • Wiring Anything material which has a substantially different useful economic life from the rest of the building
2. Consultation • Conclusions – yes to component accounting – practical issues can be overcome
3. Problems and solutions • Transition (prior year adjustment or re-lifing) – material change to amounts previously capitalised? ð Prior Year Adjustment (PYA)
• Examples (unless immaterial) a) Previously capitalised nothing
ðPYA
b) Previously capitalised large amounts but did not write off replaced assets
ðPYA
c) Previously capitalised ‘improvements’ and depreciated over shorter life
ðPYA
d) Previously incurred only negligible component replacement costs
ðCould relife
3. Problems and solutions (continued) • Historic data – likely to be gaps – work backwards from asset management strategy
• Treatment of grant – – – –
clear treatment of original grant major repair grant should be allocated to components different treatment if high grant levels note that allocated grant is written off when component is replaced
3. Problems and solutions (continued) • Partial implementation (unless immaterial) – capitalisation of improvements with different life from original asset (not compliant with FRS 15) – applying component accounting from a specific implementation date only (not compliant with FRS 15)
• LSVTs – Early stage “cost” of components expected to be replaced; may reasonably be assumed to be £nil
• Homebuy/shared ownership – components are not the Association’s asset therefore do not component account
3. Problems and solutions (continued) • Treatment of depreciation prior to 2000 – can either restate or leave as is
• Capitalisation of staff costs on component replacements – yes, normal rules apply
• Should achieve greater consistency, but – different assumptions – interpretations vary
• Timing – for March year ends, March 2012, but lots to do
4. Impact on interest cover covenants • Property depreciation add back • Accounting estimates less significant • “Smoothing” effect • Reduced ability to “manage” results by varying timing of major repair works
Options for covenant compliance 1. Agree with lender that covenants can be computed using CA numbers –
will significantly reduce the covenant’s impact due to larger depreciation add back
Options for covenant compliance (continued) 2. Continue with old accounting policies (requiring covenants to be computed) –
usually very complex and difficult to do; will progressively become more and more complex each year
Options for covenant compliance (continued) 3. Recalibrate using revised business plan under CA –
not easy to follow the effect of the change
5. Options for HAs • Whether to implement early • Component categories • Useful economic lives • Initial treatment (usually not an option!) • Historic information gaps
5. Simplifying assumptions • Bear in mind materiality • Suggestion: analyse recent improvements first • Often more difficult to identify items previously expensed
5. Simplifying assumptions (continued) • Where there are gaps, we suggest: – Use current asset management strategy – Work backwards from expected replacement date and useful economic life to estimate last replacement date – Use current replacement cost (adjusted for inflation) to derive last replacement cost – Adjust if not replaced since construction
5. Simplifying assumptions (continued) • Bear in mind: – Cost of components built when property is new likely to be lower than cost when replaced (because of extra costs of work set-up and VAT) – Useful economic life of components is not simply per manufacturer's estimates; it should reflect experience, usage, maintenance and asset management – Expect some components to be replaced early, and therefore extra I&E charge (within depreciation, not disposal of fixed assets) – Apply reasonableness test
6. Tax issues on change to component accounting • No change for charitable entities • For non-charitable entities: seek advice and following comments are indicative only! • Previous treatment • Years before change – tax deduction available for significant proportion of replacement components written off to I&E as major repairs, – excluding elements of improvements e.g. extra cupboards in kitchens, extra fittings in bathroom.
6. Tax issues on change to component accounting • Year of change – net book value of assets previously written off as repairs, now capitalised – Should be no tax adjustment in year of change – Deferred tax to be considered
6. Tax issues on change to component accounting • Subsequent years – scope for tax deduction is any depreciation charge on component assets that could otherwise be categorised as tax deductible major repairs. – tax deduction spread over many years. Cash flow disadvantage compared to previous treatment of expense to I&E account.
7.
Illustrations
• One property acquired in 2000 for £100,000 (no grant) • Replaced kitchen in 2009 for £5,000 • Replaced bathroom in 2011 for £5,000 • Building life 100 years • For simplicity, assume no grant
Illustrations • Judged kitchens to have 25 year life and bathrooms 20 year life (no other components) • Original split judged to be Land
£40,000
Structure
£52,000
Kitchen
£4,000
Bathroom
£4,000
• How will the numbers be reported in March 2011 financial statements?
Before component accounting • Firstly, let us look at accounting before component accounting changes are made. • Imagine two different scenarios: – aggressive accounting policy (capitalises 100% of major repairs) – conservative accounting policy (capitalises no major repairs)
Aggressive accounting policy Aggressive accounting policy: accumulated depreciation • 12 years at 1% on £60,000 (£7,200) • 3 years at 1% on £5,000 (£150) • 1 year at 1% on £5,000 (£50)
Aggressive accounting policy
Cost Depreciation NBV
Land £000
Buildings £000
Major repairs £000
Total £000
40
60
10
110
-
7.2
0.2
7.4
40
52.8
9.8
102.6
Aggressive accounting policy Depreciation charge • 31 March 2011 1% on £70,000 = £700 • 31 March 2010 1% on £65,000 = £650
Conservative accounting policy Conservative accounting policy: accumulated depreciation • 12 years at 1% on £60,000 (£7,200)
Conservative accounting policy
Cost Depreciation NBV
Land £000
Buildings £000
Major repairs £000
Total £000
40
60
-
100
-
7.2
-
7.2
40
52.8
-
92.8
Conservative accounting policy Depreciation charge • 31 March 2011 and 2010 1% on £60,000 = £600
Under component accounting Now look at what would happen under component accounting: Kitchen: • • • • •
Original cost 9 years depreciation (25 year life) NBV (written off in 2009) New kitchen cost 3 years depreciation (25 year life)
£4,000 £1,440 £2,560 £5000 £600
Under component accounting Bathroom: • Original cost • 11 years depreciation (20 year life) • NBV (written off in 2011) • New bathroom cost • 1 year depreciation (20 year life)
£4,000 £2,200 £1,800 £5000 £250
Under component accounting Structure • Cost • 12 years depreciation • Annual charge
£52,000 £6,240 £520
Under component accounting
Cost Depreciation NBV
Land £000
Structure £000
Kitchen £000
Bathroom £000
Total £000
40
52
5
5
102
-
6.24
0.6
0.25
7.09
40
45.76
4.4
4.75
94.91
Under component accounting Depreciation charge 31 March 2011 – – – –
Structure Kitchen (25 years) Bathroom (20 years) Total
£520 £200 £250 £970
• 31 March 2010 – – – –
Structure Kitchen (25 years) Bathroom (20 years) Total
£520 £200 £200 £920
Summary: impact on Association
Balance sheet
Cost Depreciation
Net assets
Old policy: Old policy: New policy: aggressive conservative Component £ accounting £ £ 110,000
100,000
102,000
(7,400)
(7,200)
(7,090)
102,600
92,800
94,910
Impact on Association Income and expenditure (2011)
Depreciation charge Write off component replacement/ original
Old policy: Old policy: aggressive conservative £
£
New policy: Component accounting £
700
600
970
-
5,000
1,800
700
5,600
2,770
Impact on Association Income and expenditure (2010)
Depreciation charge Write off component replacement/ original
Old policy: Old policy: aggressive conservative £
£
New policy: Component accounting £
650
600
920
-
-
-
650
600
920
Second illustration • Association uses valuations • (oh dear!) • One property completed on 31 March 2011
Before component accounting
• • • •
Land cost Building cost Grant EUV-SH
• 100 year life
£40,000 £60,000 £40,000 £30,000
Before component accounting Balance sheet Housing property Loans
31 March 2011 £000 30 (60)
Net liabilities
(30
I&E reserves
-
Revaluation reserve
(30)
Total reserves
(30)
Before component accounting Income & Expenditure account (on an historic cost basis) 31 March 2012 £000 Rent Housing property depreciation
5.0 (0.36)
Other operating cost
(2.4)
Interest costs
(2.4)
Loss
(0.16)
Before component accounting
Estimated split of land and buildings on a valuation basis: 30% : 70%
Before component accounting Income & Expenditure account (on a valuation basis) 31 March 2012 £000 Rent Housing property depreciation
5.0 (0.21)
Other operating cost
(2.4)
Interest costs
(2.4)
Loss
(0.01)
Before component accounting • Difference between £0.36k (depreciation on HC basis ) and £0.21k (depreciation on valuation basis) goes through reserves as a transfer • Assume valuation increased to £32,000 at 31 March 2012
Before component accounting
I&E reserve £000
Revaluation £000
-
(30.00)
Deficit
(0.01)
-
Transfer
(0.15)
0.15
-
2.21
(0.16)
(27.64)
1 April 2011
Revaluation 31 March 2012
Before component accounting Balance sheet
31 March 2012 £000
31 March 2011 £000
Housing property
32
30
Current assets
0.2
-
(60)
(60)
Net liabilities
(27.8)
(30
I&E reserves
(0.16)
-
(27.64)
(30)
27.8
(30)
Loans
Revaluation reserves
After component accounting • Assume we adopt component accounting at 31 March 2011 • For simplicity just have two components (kitchen and bathroom) plus the structure
After component accounting
Cost
Life
Land
40
-
Structure
40
100
Kitchen
10
25
Bathroom
10
20
After component accounting • Assume value of components equal to depreciated historic cost • Assume value of land is 30% of total value
After component accounting Balance sheet Housing property Loans
31 March 2011 £000 30 (60)
Net liabilities
(30
I&E reserves
-
Revaluation reserve
(30)
Total reserves
(30)
After component accounting • In other words, no change
After component accounting Depreciation charge for 31 March 2012 Historic cost Cost £000
Depreciation charge Grant £000 £000
Land
40
20
-
Structure
40
20
0.2
Kitchen
10
-
0.4
Bathroom
10
-
0.5
100
40
1.1
After component accounting Depreciation charge for 31 March 2012 Valuation basis
Depreciation charge Value £000 £000
Land
9
-
Structure
1
0.01
Kitchen
10
0.4
Bathroom
10
0.5
30
0.91
After component accounting Income & Expenditure account (on an historic cost basis) 31 March 2012 £000 Rent
5.0
Housing property depreciation
(1.1)
Other operating costs
(2.4)
Interest costs
(2.4)
Loss
(0.9)
After component accounting Income & Expenditure account (on a valuation basis) 31 March 2012 £000 Rent Housing property depreciation
5.0 (0.91)
Other operating costs
(2.4)
Interest costs
(2.4)
Loss
(0.71)
After component accounting • Difference between £1.1k (depreciation on HC basis) and £0.91k (depreciation on valuation basis) goes through reserves as a transfer • As before, assume valuation increased to £32,000 at 31 March 2012
After component accounting
Reserves
I&E reserve £000
Revaluation £000
-
(30)
Deficit
(0.71)
-
Transfer
(0.19)
0.19
-
2.91
(0.9)
(26.9)
1 April 2011
Revaluation 31 March 2012
After component accounting Balance Sheet
31 March 2012 £000
31 March 2011 £000
Housing property
32
30
Current assets
0.2
-
(60)
(60)
Net liabilities
(27.8)
(30)
I&E reserves
(0.9)
-
(26.9)
(30)
(27.8)
(30)
Loans
Revaluation reserves
After component accounting • Simples • J
Conclusions on impact of component accounting • Higher depreciation charge • Charge recognised when components replaced early • Very different effect depending on pre-component accounting policy on major repairs capitalisation
8. Preparation • Understand principles • Assess information gaps • Prepare project plan (crucial) • Do not underestimate resource requirement • Not just a finance task
8. Preparation (continued) Broadly, three phases: 1. Transition (establishing principles, numbers, data for accounts for a particular year end eg. March 2012) 2. Systems (procedures, IT support, continuing process management accounts) 3. Analysis (challenging outliers, investigation, value for money)
9. Implications • Significant logistical challenge requiring careful planning and allocation of resources • Improved quality of financial reporting (?) • Reduces excessive capitalisation and therefore increases comparability • Could change reported net assets and surpluses significantly (NB impact on covenants) • Enriches quality of debate over asset management • Logistical challenge but longer term benefits (?)
SORP 2010 Update: Component Accounting, IFRS, Impairment and beyond
Component accounting: a beauty or a beast? [date]
