Home rule that hurts

New accounting will knock millions of pounds off the balance sheets of some housing associations.

Housing association accounts should be more transparent and brought more closely into line with those of companies, suggests new guidance issued by the National Housing Federation. But some associations' balance sheets would, as a result, show lower stock valuations, making it more difficult for them to raise capital from lenders.

The Accounting Standards Board has called on the NHF to change associations' accounting practices, which have, in its view, shown artificially inflated levels of reserves without also showing likely real future liabilities for stock renovation. Problems stem from many associations treating home repairs as revenue rather than capital expenditure.

Teresa Bray, head of financial policy at the NHF, says that its proposals would produce more accurate accounts, while taking millions of pounds from the reserves of some associations. "It could reflect more accurately what resources are required to ensure properties are maintained in the future," she comments.

Housing association accounts are already much more transparent than they used to be. The Housing Corporation, the quango which regulates associations and pays government grant to them, says that association accounts are more professional now than they were five years ago, following a series of accounting determinations issued by the Corporation.

Clare Miller, assistant director of regulation at the Housing Corporation, says that associations should be allowed to maintain some diversity in the way they present their accounts. "Individual accounts remain a matter for them," she says. "I am not sure there is a need at the moment for greater uniformity."

The Corporation's recently published review of housing association performance did, though, express concern at the difficulty in comparing associations that operate different accounting practices.

Ms Miller explains: "It can be difficult to look across the board when they do adopt different accounting practices, but it is more important that the accounts they have are meaningful for them." She adds that it is fair for associations with different ages of housing stock, and different repairs needs, to prepare accounts that reflect those differences.

Clive Barnett, head of housing finance at NatWest Markets, which is a leading lender and arranger of loans to associations, welcomes more professional accounting standards, but wishes the move to Companies Act-type accounts had come sooner. "All the investors who will invest are already in," says Mr Barnett. "The need is less now than it was several years ago."

Mr Barnett is concerned that further changes should not lead to less informative annual accounts. "Some of the information we used to get was extremely useful and detailed. My fear is that as housing associations get bigger and present PLC-style accounts, then the details on the valuation of housing stock, discussion of how it is valued, and the key management ratios may not be included."

Housing 21, which has been in the forefront of adopting more transparent accounting practices, believes that annual accounts need to reflect proper valuation of housing stocks. Pushpa Raguvaran, finance director of Housing 21, says: "It is worth remembering that all large-scale voluntary transfer (LSVT) associations are required to present their balance sheet on a valuation basis. While this may show the association carrying a deficit, provided overall the LSVT maintains a positive asset value, this does not affect their ability to persuade lenders to offer them loans.

"Housing association reserves and surpluses are currently subject to intense scrutiny and are influencing, among other things, decisions about the grant funding of major repair and reinvestment programmes. Moreover, with social housing grant in decline, levels of private borrowing will increase even further over the coming years, demanding tighter financial management of resources. Moving to a system which presents a truer reflection of an association's financial strength must be beneficial."

The new guidance from the NHF suggests that associations' accounting practices should derive from a strategic review of stock reinvestment policies, bearing in mind that many of them will have to invest heavily in modernisation programmes in the next few years. Associations should also ask themselves, says the NHF, whether demographic and political changes will make their homes more or less lettable, and this should also be reflected in accounting practices.

One of the advantages for accountants of the changes adopted by housing associations is that the old barriers between sectors are breaking down. At one point, accountants with experience of the private sector, local government, hospitals and housing associations found that experience gained in one field was of little benefit if they moved to a different type of employer. Accountants with experience in other sectors should now find a warmer welcome within housing associationsn