Southern Housing Group Addresses Component Accounting

While the majority of UK housing associations are beginning to face up to the challenges associated with moving to Component Accounting and meeting the SORP 2008 deadline, Southern Housing Group has already successfully made the move to component accounting from April 2006 and delivered its first statement.

Using Asset4000 from Real Asset Management, the housing association, which has properties at £1,250 million cost net of depreciation, is not only prepared to meet its new SORP obligations but also used improved information and the audit trail to impose control over its 215,000 asset records, improve information and drive down the cost of the annual audit.

Housing Association
Founded over 100 years ago, Southern Housing Group now manages 24,000 houses from London to the Thames Gateway in the East to Reading in the West. The organisation employs 900 people and works with 80 local authorities to provide homes for more than 66,000 residents.

In common with every other organisation, Southern Housing Group is looking closely at its performance in light of the current economic downturn. Critically, this means ensuring effective management of the properties and attaining the funds to expand the housing stock to meet growing demands for social housing.

“Southern Housing Group has an asset base with a cost net of depreciation in excess of £1,250 million, and grants of £620 million,” says Rai Agostini, Financial Planning Analyst, Southern Housing. “The organisation invests over £33 million a year in upgrading and maintaining properties of which a significant proportion is capitalised.”

In the past, this entire property asset portfolio was managed using a number of spreadsheets across the four companies that comprise Southern Housing Group. The organisation managed its properties at scheme rather than unit level, with asset cost broken down to include land, building and associated scheme grants.

However, “Spreadsheets are open to error,” he says. “From an audit point of view, the auditors wanted to see far more control over an asset base of this value.”

In addition, Southern Housing Group recognised that adopting a Component Accounting policy for its property assets and the proposals in the then draft Statement of Recommended Practice (SORP) due to come into effect for housing associations in 2008, created significant new challenges in asset recording and valuation.

“It was clear that Southern Housing Group needed a far more robust approach to impose greater control over the asset management process and enable the organisation to meet the obligations of SORP without a massive administrative overhead,” Agostini says.

Fixed Asset Register
Having assessed the market, Southern Housing Group opted for Asset4000 from Real Asset Management. The fixed asset database and associated application system provides a highly structured environment with a full audit trail to ensure information clarity and control.

“Mistakes can happen with a spreadsheet and it is often hard to pick up those mistakes – errors can be missed for some time. Asset4000 is structured, errors are immediately picked up and, critically, it offers a clear audit trail which provides the auditors with far more confidence in the accuracy of the figures,” Agostini confirms.

Key to the decision to opt for Asset4000 was the need to manage a far greater volume of assets. “Component Accounting is now recommended practice of SORP 2008, hence the pressure for housing associations to move to component accounting,” he explains. “For Southern Housing Group this created an asset register of 215,000 records, so it was essential to implement a solution that could easily scale to this volume.”

SORP Compliance
Under the move to component accounting, Southern Housing Group evolved not just from scheme to unit level but each property now has multiple component records, including land, building, kitchen and bathroom, as well as land and building grant records where applicable.

In addition, each component is now depreciated separately, creating a far more comprehensive month end reconciliation process. Agostini comments, “Once Southern Housing Group had identified how much we were going to allocate to each of the components and identified the depreciation policy, Asset4000 has made the entire process extremely easy to manage.”

An additional challenge is the need to manage the high level of component replacement that occurs each year. Average component life is between 15 and 30 years, creating between 300 and 400 replacements each month. Southern Housing Group uses Asset4000 to manage component disposals and model the replacement assets.

“Asset4000 also enables Southern Housing Group to link all assets within each scheme in a parent/child relationship,” he says. “It is a very powerful tool.”

This facility is also used to manage the organisation’s grants which are received from multiple sources and allocated to specific schemes. Typically, the organisation receives between 30% and 40% of the total building cost in grants.

“By managing grants on the same system, Southern Housing Group can produce just one set of reports encompassing the entire fixed asset value,” Agostini says. “Using the parent/child facility in Asset4000 to link each grant to a specific scheme means that it is easy to demonstrate to auditors that grants are correctly associated with the right scheme – a process that has proved challenging in the past.”

Furthermore, when a unit or scheme is sold, the Asset4000 system ensures the grant is correctly taken out of the fixed asset register.

Detailed Information
Asset4000 is used on a daily basis by the organisation’s fixed asset accountant to manage disposals and acquisitions to deliver detailed information. This ranges from ad hoc requests from sales negotiators to the provision of monthly depreciation information to the finance managers of the Southern Housing Group companies and the delivery of annual reports to auditors.

“Southern Housing can now produce reports that meet the auditors’ demands for both high level and detailed information,” he says. “Reports include total acquisitions per year, acquisitions of each asset type and reports that demonstrate how the numbers in the fixed asset note are derived.”

Ad hoc information requests are also supported by the system, including the provision of net book valuation to sales negotiators when a scheme or unit is being sold – with information downloaded to Excel and emailed to recipients to streamline the process and ensure rapid access to data.

Conclusion
Southern Housing Group was an early adopter of component accounting, making the move way ahead of the majority of housing associations. Agostini confirms, “It was clear that meeting the demands of component accounting would be complex, so the organisation decided to get a head start. The key issue is the enormous volume of data created by the shift to component accounting and Real Asset Management’s advice has helped Southern Housing Group to dramatically improve the organisation’s asset management. “Using Asset4000 will also prove helpful to Southern Housing Group in meeting the SORP 2008 recommendations on accounting for 1st Tranche receipts on shared ownership properties.”

While theoretically, he says, a housing association could move to component accounting and meet the SORP 2008 recommendations on a spreadsheet, “The number of records would be huge; keeping it up to date would be slow and cumbersome and open to errors which would make the auditors extremely unhappy.”

Instead, using Asset4000, “We have met the SORP requirements and transformed the information available to auditors. As a result, the annual process for auditing the fixed assets will be much shorter, reducing the overall cost to Southern Housing Group.”

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