Financial reporting ‘significantly affected’ by impacts of COVID-19

News08 Jun 2020Sarah Williams

Audit and accountancy experts have warned of continued challenges as housing associations prepare their 2020 financial accounts during the COVID-19 crisis.

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Audit and accountancy experts are warning of continued challenges as housing associations prepare their 2020 financial accounts during the #coronavirus crisis #ukhousing #socialhousingfinance

“Even if the lender doesn’t actually call a default, that lender may well refuse to advance further funding to the borrower. And fundamentally, drawstops make bad situations worse.” #ukhousing #socialhousingfinance #coronavirus

Housing association financial reporting “significantly affected” by impacts of #coronavirus #ukhousing #socialhousingfinance

Omadevi Jani, not-for-profit technical lead at Grant Thornton UK, said that while technology is supporting the social housing sector to continue ‘business as usual’ with the start of the audit process, “it has become evident that some areas of financial reporting are proving more challenging and have been significantly affected by the impact of COVID-19”.

She added: “There are a number of areas that warrant greater focus, including significant judgements and estimate disclosures, with detailed entity-specific reporting critical in this current climate.

“Specifically, the sector should focus on any judgements taken by management on indicators of impairment, and on demonstrating how the carrying values of assets remain supportable at the balance sheet date.”

Ms Jani said that this appears to be a greater challenge for “properties under the revaluation model, properties held for sale [stock] and shared ownership properties”.

Julia Poulter, partner for non-profits at Crowe, said that valuation of properties and consideration of impairment of fixed assets and stock continued to be a key area of focus for the 2020 accounts.

“This is challenging considering the pause in the UK property market meaning a lack of comparable sales data. Realistically it is going to be difficult to value property by reference to market value at 31 March 2020.”

While a previous “material uncertainty clause” has now been lifted from properties valued using EUV-SH, the clause still applies to properties using MV-T.

Ms Poulter said that where new development is concerned, some HAs are halting their programmes, while others are seeing an opportunity to obtain land at a more competitive price.

But she said: “Those in the latter camp are being more cautious about the expectations for the sales percentage and clients are modelling a development on higher proportion designated for rent or modelling renting for two to five years until the market is right for sale.”

Writing in its 2019/20 unaudited accounts statement, Optivo said it had assessed its COVID-19 exposure to rental income delays or losses and made a provision in its accounts, subject to external audit. But it said: “So far, however, we have not experienced any significant increase in arrears,” it said.

On Thursday (4 June), Social Housing reported that the organisation is one of two housing associations to have accessed the Bank of England’s Covid Corporate Finance Facility (CCFF) to date.

In its unaudited year-end statement, fellow G15 member Metropolitan Thames Valley said: “While there has been a small increase in arrears experienced to date, it is well within our stress scenario.”

Meanwhile, Midlands-based Bromford said its full year-end audit would include an impairment review. It added: “The associated financial impact on [financial year] 2021 is also being considered with a revised forecast reflecting a reduction in development in the short term; a slowdown in planned maintenance; a reduced sales programme and an increase in arrears associated with self-payers.”

Accounting deadlines

Eleanor James, partner at Trowers & Hamlins, highlighted that housing associations need to be aware of adhering to accounts deadlines where their lenders are concerned, despite some of the submission extensions made available by the Scottish, Welsh and English regulators, and bodies such as Companies House.

Speaking on a recent Trowers podcast episode, Ms James emphasised that the timetables agreed by housing associations in their loan documents with individual lenders, which in most cases are for 180 days, are not impacted by these wider regulatory or registration extensions.

“Even if another body like Companies House or the [Financial Conduct Authority] has allowed you an extension or agreed that it won’t take enforcement action, that doesn’t affect the loan terms. So if you fail to comply with your funding agreement deadlines, there’s an event of default no matter what the regulators or the registrars might say.

“If there’s any risk that your accounts might not be ready on time within that 180 days, early conversations with funders are absolutely crucial.”

Ms James added that any loan covenant breach would signify a so-called ‘drawstop’ – with potentially significant consequences at a time when ‘cash is king’.

“Even if the lender doesn’t actually call a default, that lender may well refuse to advance further funding to the borrower. And fundamentally, drawstops make bad situations worse,” she said.

Ms James added that, for associations with publicly listed debt, agreeing waivers may be “more tricky”. Here, any waivers would need to be sought from a trustee body acting as an intermediary, rather than the lender itself.