By Alison Scott | 1 September 2011
The changes to the Housing Revenue Account, though welcome, brought a host of accounting complexities. CIPFA is clarifying these
The significance of the changes to the Housing Revenue Account for accountants has perhaps not been fully appreciated, particularly in the areas of debt and depreciation.
CIPFA is busy updating its guidance for this post-subsidy world. However, it needs to be stressed that not everything is changing. Despite the impression being given in some areas, the HRA will remain a part of the General Fund and all borrowing will still be part of the overall borrowing of the local authority.
The significant changes will be in how the HRA account itself is arrived at. While the Item 8 determination will remain to set out what can and cannot be charged to the HRA and to require the maintenance of an HRA account, it will no longer be an annual determination and will leave much of the ‘how’ to proper accounting practice.
CIPFA consulted in the spring on its initial views as to how debt could be managed between the HRA and the General Fund and how depreciation could provide a replacement for the previous Major Repairs Allowance. It updated its paper at the end of August in the light of responses to the consultation.
In terms of the debt, the end of subsidy will also end the centrally prescribed ‘consolidated rate of interest’ calculation. In its place will come principles for splitting the debt between the HRA and General Fund. It is important to understand that splitting the debt is not about liability – all debt is the debt of the council – but a mechanism to divide the costs of servicing debt between the two funds.
The August paper provides more detail on how the debt cap proposed under self-financing will work in practice. Authorities will be able to pursue a one-, two- or three-pool option for the allocation of debt.
The paper contains worked examples, including how financing relating to short-term investments and borrowing works in practice. Although it provides more detail and clarifies some areas, the principles and proposals remain largely unchanged from the earlier paper.
Of more interest is the development of the proposals for depreciation. First, it is worth acknowledging the scale of the task. For the first time, depreciation might be allowed to hit the bottom line of part of local authority accounts.
Within accounting, depreciation is used to provide a measure of the cost of the economic benefits or service potential embodied in an asset that have been consumed during the accounting period.
International Accounting Standard 16: Accounting for Property, Plant and Equipment is incorporated in the Accounting Code for local authorities. This requires that where an asset can be broken down into identifiable components with different useful lives, those components should be accounted for separately.
The componentised element of depreciation has proved to be less of a challenge under the HRA. The main components should be clearly identified within HRA Business Plans along with their normal lifecycles.
Of more difficulty is the reconciliation of components back to the valuation ‘Existing Use Value as Social Housing’ (EUV-SH) and the identification of the historic cost element within it.
Under depreciation accounting, a transfer is required from the revaluation reserves in respect of unrealised gains/losses. Also causing difficulties is the impact of impairment – downward revaluation – in that it cannot be met from within the revaluation reserve.
In recent years, local authorities have recorded impairments of hundreds of millions of pounds as a result of the discount factor applied to reduce the value of the housing stock to reflect its social use.
The August paper also looked at EUV-SH as a basis for valuation within the HRA. Recent guidance from the Department for Communities and Local Government contains advice on using a discounted cash flow approach to valuation, which would be based on gross values.
This could provide a more stable basis for valuation if instability in the discount factor could be managed. It would tie impairment more closely in to reductions in rental values that have a more real impact on the HRA.
It is likely that a discounted cash flow valuation on gross rental incomes would lead to an increase in valuations.
It should be noted that the bottom line impact of the increase in valuation on depreciation will be offset by a transfer from the Major Repairs Reserve for unrealised gains/losses.
The consultation on the revised proposals runs during September and we would encourage all housing authorities to respond. These are not theoretical accounting concepts being discussed but real-life impacts on the bottom line.
Alison Scott is assistant director for local government at CIPFA
The changes to the Housing Revenue Account, though welcome, brought a host of accounting complexities. CIPFA is clarifying these
The significance of the changes to the Housing Revenue Account for accountants has perhaps not been fully appreciated, particularly in the areas of debt and depreciation.
CIPFA is busy updating its guidance for this post-subsidy world. However, it needs to be stressed that not everything is changing. Despite the impression being given in some areas, the HRA will remain a part of the General Fund and all borrowing will still be part of the overall borrowing of the local authority.
The significant changes will be in how the HRA account itself is arrived at. While the Item 8 determination will remain to set out what can and cannot be charged to the HRA and to require the maintenance of an HRA account, it will no longer be an annual determination and will leave much of the ‘how’ to proper accounting practice.
CIPFA consulted in the spring on its initial views as to how debt could be managed between the HRA and the General Fund and how depreciation could provide a replacement for the previous Major Repairs Allowance. It updated its paper at the end of August in the light of responses to the consultation.
In terms of the debt, the end of subsidy will also end the centrally prescribed ‘consolidated rate of interest’ calculation. In its place will come principles for splitting the debt between the HRA and General Fund. It is important to understand that splitting the debt is not about liability – all debt is the debt of the council – but a mechanism to divide the costs of servicing debt between the two funds.
The August paper provides more detail on how the debt cap proposed under self-financing will work in practice. Authorities will be able to pursue a one-, two- or three-pool option for the allocation of debt.
The paper contains worked examples, including how financing relating to short-term investments and borrowing works in practice. Although it provides more detail and clarifies some areas, the principles and proposals remain largely unchanged from the earlier paper.
Of more interest is the development of the proposals for depreciation. First, it is worth acknowledging the scale of the task. For the first time, depreciation might be allowed to hit the bottom line of part of local authority accounts.
Within accounting, depreciation is used to provide a measure of the cost of the economic benefits or service potential embodied in an asset that have been consumed during the accounting period.
International Accounting Standard 16: Accounting for Property, Plant and Equipment is incorporated in the Accounting Code for local authorities. This requires that where an asset can be broken down into identifiable components with different useful lives, those components should be accounted for separately.
The componentised element of depreciation has proved to be less of a challenge under the HRA. The main components should be clearly identified within HRA Business Plans along with their normal lifecycles.
Of more difficulty is the reconciliation of components back to the valuation ‘Existing Use Value as Social Housing’ (EUV-SH) and the identification of the historic cost element within it.
Under depreciation accounting, a transfer is required from the revaluation reserves in respect of unrealised gains/losses. Also causing difficulties is the impact of impairment – downward revaluation – in that it cannot be met from within the revaluation reserve.
In recent years, local authorities have recorded impairments of hundreds of millions of pounds as a result of the discount factor applied to reduce the value of the housing stock to reflect its social use.
The August paper also looked at EUV-SH as a basis for valuation within the HRA. Recent guidance from the Department for Communities and Local Government contains advice on using a discounted cash flow approach to valuation, which would be based on gross values.
This could provide a more stable basis for valuation if instability in the discount factor could be managed. It would tie impairment more closely in to reductions in rental values that have a more real impact on the HRA.
It is likely that a discounted cash flow valuation on gross rental incomes would lead to an increase in valuations.
It should be noted that the bottom line impact of the increase in valuation on depreciation will be offset by a transfer from the Major Repairs Reserve for unrealised gains/losses.
The consultation on the revised proposals runs during September and we would encourage all housing authorities to respond. These are not theoretical accounting concepts being discussed but real-life impacts on the bottom line.
Alison Scott is assistant director for local government at CIPFA
