Prepare for component accounting

Social landlords will have to introduce component accounting, where they account for the various parts of houses - such as kitchens, roofs and bathrooms - separately, rather than as one home as at present. The change is likely to come into effect for March 2011. So what does it mean for landlords?

If you are not an association that has applied component accounting early, we strongly advise that you start planning as soon as possible. Those that have applied it, have found many practical difficulties to overcome, and a period of at least 12 months is needed from start to finish.

There are several effects of component accounting. The first is that it will smooth out results. This is because fluctuations in major repairs work from year to year will have much less of an impact on the income and expenditure account under component accounting.

This is due to the fact that the costs will be capitalised and depreciated over the lifespan of the component as opposed to being largely expensed under non-component accounting and hitting the accounts in one go.

Consequently, it will be more difficult to play around with results by deferring or accelerating major repair expenditure.

It will also shed more light on associations that have been adopting aggressive accounting policies in respect of capitalisation rates - the amounts of repairs that associations capitalise as opposed to taking the cost through their income and expenditure account.

This hugely significant accounting policy - in some cases blatantly abused by associations and misunderstood by supine auditors - will have much less significance under component accounting.

Jonathan Pryor is director of assurance and business services at Smith & Williamson Limited

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