The SORP 2008 has now been issued. Jo Brewer discusses it in light of the contentious changes made to shared ownership accounting.
(SORP) 2008 replaces the SORP 2005 update and has been completely rewritten. It incorporates changes to Financial Reporting Standards (FRS) and other accounting practices since the 2005 update.
The SORP 2008 is applicable for accounting periods beginning on or after 1 April 2008, although, as always, early adoption is encouraged.
Key Amendments To The SORP
The main changes to the SORP relate to:
- shared ownership
- mixed tenure development
- negative land transfers
- onerous contracts
- sub market price land acquisitions
- related parties
- stock transfers
- valuations.
The most significant changes relate to accounting for shared ownership and mixed tenure developments. These are often linked.
The SORP 2008 requires associations to include costs relating to first tranche sales as current assets within work in progress and to recognise any profit or loss on disposals within trading profit, i.e. proceeds included as turnover and costs included in the cost of sales.
Costs relating to second and subsequent tranches will continue to be recognised as fixed assets (although the amount may need to be amended to reflect the change in treatment of the first tranche). Any profit or loss on disposal of second and subsequent tranches will also continue to be included after operating profit as fixed asset disposals. There are no changes to the grant regime and therefore grants will continue to be netted off against fixed asset costs.
In reality, the assumptions made in the development appraisal on first tranche disposals change by the time the development is completed. Therefore, what should you do during construction and what happens if the estimate changes?
To record the costs initially, you should apply a best estimate, typically the development appraisal estimate, of first tranche sales. If the initial estimate changes, you should adjust it accordingly so that at each accounting period end the accounts reflect the latest estimate.
However, it is quite common for shared ownership properties to be included as part of a mixed tenure scheme. Where this is the case, to complicate matters further, there are other issues to consider. With any mixed tenure scheme, if one part is in deficit and the other part is in profit, you should reduce the profit by the amount of the deficit, i.e. you should only reflect the overall profit in the accounts.
How Are Group Structures Affected?
There are further complications with group structures. Different elements of a scheme can be developed and reported within different entities within a group. It is fairly common for a scheme involving shared ownership, general needs and outright sales to be developed in two or even three entities. In this instance, on an individual entity basis, the performance of each element of the scheme will be reflected in isolation. However, on a group basis, the development will be assessed as one and performance reported as such.
Changes In Accounting Treatment
The changes in the ways ownership accounting and mixed tenure developments are treated should be accounted for as a prior year adjustment, unless the restatement would not be material.
It is clear that accounting for shared ownership and mixed tenure developments will be complex. Additional guidance will inevitably emerge over time.
Although an element of pragmatism may be required, we recommend that detailed planning is performed and advice sought where necessary.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
