Paradigm adopts component accounting

Published by Liz Turner for Paradigm Housing Group in Housing

Paradigm Housing is using component accounting as recommended by the Accounting Standards Board and the National Housing Federation’s Statement of Recommended Practice.
Previously, component replacements were counted as a capital spend only to a limited extent because of the previous accounting rules and depreciation was charged at 1% per year on the full cost of the homes excluding their notional land value.
Under component accounting, individual items must be depreciated rather than entire homes. For example, Paradigm has chosen six components and adopted an appropriate lifespan for each. These are: kitchens (30 years), bathrooms (40 years), roofs (70 years), heating systems (18 years), windows and doors (40 years) and structure (100 years).
Each component is depreciated from the day it was last replaced. The depreciation is charged into our income and expenditure account and the cost of replacement is capitalised and shown on our balance sheet.
The result is a higher surplus, although tax is not affected because these assets are owned by a charity.
Executive Director of Finance, Andy Nicol, was not in favour of this system when he first heard about it. Colleagues in the community seemed to believe it would take more than a year plus the expense of additional staff to identify every component and the date of its last replacement.
However, Paradigm has an in house IT system and database, going back to the 1980s, and Nicol found he was able to gather the information himself within a matter of weeks.
Not only that, but he has made a prior year adjustment to Paradigm’s accounts going back to 1989. This is the date when the housing association (then called Chiltern Hundreds Charitable Housing association) was formed, in the first large-scale stock transfer in the country.
Around half Paradigm’s stock has been built since that date. Some others go back to the 1890s, and for older homes, Nicol was able to work from records of when components were last replaced,
He says “I have gone from being cynical about this exercise to believing this presents a better representation of our financial position. It has the effect of demanding improved data from the asset management team, and I was pleased to find that in fact we already have good information.”