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21 Dec 11
Ending centrally prescribed rules for the Housing Revenue Account means coming up with new ones. Depreciation and components are still tricky
By Alison Scott | 1 January 2012

Ending centrally prescribed rules for the Housing Revenue Account means coming up with new ones. Depreciation and components are still tricky


A few short months from the start of the self-financing Housing Revenue Account and the removal of a prescribed statutory framework has thrown up a few problems. While few will mourn the end of the Consolidated Rate of Interest for charging debt costs to the HRA, the loss of the centrally prescribed Major Repairs Allowance is a different matter.

CIPFA has consulted twice on proposals for calculating the depreciation charge to be applied to the self-financing HRA. Judging by the responses, this is definitely a matter of concern for some local authorities.

Many of the 50 most recent responses are very detailed and ask about the next steps. So it is timely, with the changeover taking effect on April 1, to consider the issues with depreciation.

First, it’s worth spelling out that no changes are required to the Accounting Code to actually implement self-financing. The code already requires depreciation accounting and componentisation. But currently legislation allows depreciation to be reversed out of the accounts leaving the MRA as the charge that falls on the HRA. Under the revised legislation, this reversal will be optional for the first five years, allowing depreciation to be applied.

For depreciation accounting itself, the charge will continue to be charged to the Comprehensive Income and Expenditure Statement but there will be no reversal out of this charge. Depreciation will need to be split between the depreciation element related to historic cost (or cost as at April 1, 2007 when revaluation accounting was introduced) and depreciation arising as a result of revaluation. The element relating to revaluation will be reversed out in the statement using unrealised gains/losses.

Componentisation has caused considerable debate, with many interpreting the example given in our first consultation as the way forward.

It is important to remember that there is no single solution and it is up to each authority to determine the level of componentisation required. Examples we have seen range from half a dozen components identified for each dwelling, through an approach based on major programmes for the stock as a whole, to treatment of dwellings as a single component.

Local Authority Accounting Panel Bulletin 86 provides further advice on determining components and the Finance Advisory Network also has a useful rough guide.

In terms of the Major Repairs Reserve, the intention is to maintain the capital/revenue split that exists in local authority accounting. To this end, the Department for Communities and Local Government will use regulations to transfer accumulated depreciation into the MRR where it will be ring-fenced to be used for repayment of debt or capital and maintenance expenditure.

Discussions are taking place with the DCLG on using a wider definition of maintenance to ensure that authorities have the flexibility they need for effective asset management. It should also be noted that authorities will still be able to make additional voluntary contributions to the MRR, for example where their asset management plans suggest greater provision will be needed to meet future maintenance costs.

On valuation, in order to introduce the proposed revised Discounted Cash-Flow approach, it is suggested that CIPFA works with the DCLG to amend the Existing Use Value – Social Housing guidance. This would remain the basis of valuation, with a revised DCF approach as a method within it. We need to ensure that the DCF valuation approach within the EUV-SH guidance works with a component based depreciation charge.

The advantage of using the existing EUV-SH basis of valuation is it would provide maximum flexibility for authorities, allowing them to continue to use the adjusted market value approach.

In addition, it would allow differential approaches to be used within the UK and would not require any changes to the Accounting Code.

For CIPFA, the next steps are to issue a LAAP Bulletin. We will also be working with the Royal Institution of Chartered Surveyors and the DCLG to amend the valuation guidance.

Alison Scott is assistant director for local government at CIPFA
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