FRS 102 the Housing SORP and cancellable swaps

FRS 102, the Housing SORP and cancellable swaps Wednesday 8 October 2014

Context • Financial instruments accounting is probably the most challenging single area of accounting in FRS 102 • Unfamiliar and changing terminology and lots of rules • Easy to make mistakes, which can be very sizeable

Accounting policy choices • Choice of applying measurement and recognition rules in – sections 11 and 12 of FRS 102; or – IAS 39; or – IFRS 9 and IAS 39 • Follow disclosure requirements of FRS 102 regardless (fewer than full IFRS)

FRS 102 • Section 11 – basic • Section 12 – non-basic or ‘other’ • Rule based definitions of which instrument falls into which section • Over-simplifying but. . Section 11 = measurement at cost Section 12 = measurement at fair value

What does the housing SORP say? • Very little! • Refers you back to FRS 102 • Nothing specific about financial instruments in the housing sector

Scope of sections 11/12 Investments in subs, associates, or JV’s Section 9, 14, 15 Rent arrears Accrued revenue Leases Cash Deposits Trade creditors Contingent consideration Accruals Bank loans Other loans Service charge arrears Interest rate swap Defined benefit pension scheme Onerous lease Section 20 Section 21 Section 28 Warranty obligation Financial guarantees Investments in listed shares Intercompany balances Grants Section 24 Section 21

LOBOS • Lender Options/Borrower Option • FRC view in supplementary guidance to FRS 102 as follows: “After detailed consideration the Accounting Council advises that a loan cannot be classified as basic if it includes contractual terms giving the lender the unilateral option to change the terms of that loan, for example from a pre-determined fixed rate to a variable rate or to a different fixed rate chosen by the lender, even if the holder can avoid it by repaying the loan. ”

LOBOS • No scope for interpretation • Must fair value through profit and loss • Is there an alternative? - IAS/IFRS - likely to be deemed closely related - measure at amortised cost - but…. . must then apply to all financial instruments

Cancellable embedded hedges • Less definitive than LOBOs • On balance view is that under FRS 102 these would be deemed as ‘non-basic’ • Why? Bank has ability to exercise its option which is deemed as a contingent event