Impact of FRS 102 changes on the social housing sector

FRS 102 background in the social housing sector

The FRC has issued comprehensive amendments to FRS 102, which pervade the entire standard. The Amendments are effective for periods beginning on or after 1 January 2026.

The Housing SORP provides sector-specific application guidance for FRS 102, but does not depart from the accounting requirements themselves.

The areas most impacted by the Amendments are the accounting for leases and revenue, but this article sets out the specific considerations relevant for the social housing sector.

FRS 102 Section 20 Leases

• The lease accounting requirements have been completely replaced with a new section that is based on IFRS 16 Leases.
• For lessees, the Amendments require all lease arrangements to be recognised on-balance sheet, therefore removing the distinction between operating and finance lease arrangements.
• A right-of-use asset and lease liability will be recognised on the balance sheet. The operating lease expense will be replaced by depreciation of the right-of-use asset and a finance expense, as the discount on the lease liability unwinds.
• Exemptions will be available for short-term leases (under 12 months) and low-value leases.

FRS 102 Section 20: Lease impact on the social housing sector

In 2023, RPs reported a staggering £2bn in operating lease commitments. The amendments to accounting for lessees are therefore expected to be significant, particularly to those who operate a lease-based business model, and RPs will need to consider sector-specific application issues.

Changes to KPIs

As lease liabilities are brought onto the balance sheet and the operating lease expense is replaced by depreciation and finance charges, RPs can expect to see changes to their key performance indicators, such as:

• Leverage ratios
• Profitability ratios
• Interest cover ratios

This could impact existing and future banking covenants and other contractual arrangements. Early assessment and communication with stakeholders will therefore be key.

Managing agent arrangements

Where RPs enter into an arrangement to act as managing agent of a housing property, the arrangement may meet the definition of a lease, making the RP a lessee and, also, possibly a lessor in a sub-lease arrangement with the tenant.

Investment properties held under a lease

FRS 102 requires that properties held for rental income should be classified as investment property, whilst the SORP requires that properties rented for the purpose of social benefit should be classified as Property, Plant and Equipment (PPE). RPs therefore apply judgement in determining the classification between investment property and PPE, depending on the use of each property.

For RPs acting as both lessees and lessors under sub-leases, this classification decision will be even more important. If a sub-leased property is classified as an investment property, it will be measured at its fair value. In this context, the fair value will be that of the right-of use asset, rather than that of the underlying property. Application of the fair value model will require periodic external valuation, which will increase costs and result in fluctuations in the income statement.

Below market-rent leases

An RP may be a lessee in an arrangement where it pays a below-market rent. The Amendments include specific guidance where an arrangement provides an entity with incoming resources from a “non-exchange” transaction. The lessee is required to recognise incoming resources as part of the cost of the right-of-use asset - measured as the difference between the lease payments made and the expected market rate, in accordance with FRS 102 Section 34 Specialised Activities.

Service charges

The Amendments provide guidance on the accounting for service charges receivable in an RP’s capacity as a lessor as a non-lease component. It explains that lease payments for lessors do not include payments allocated to non-lease components and so the service charge is accounted for separately as revenue from a non-lease component.

FRS 102 Section 23 revenue from contracts with customers

• Extant Section 23 has been replaced in its entirety with a new Section 23 that is based on the requirements of IFRS 15 Revenue from Contracts with Customers.
• The Amendments introduce a five-step revenue recognition model to be applied to all contracts with customers. This model is based on the core principle that an entity should recognise revenue in a manner that depicts the transfer of control of promised goods or services to the customer, as follows:
  • Step 1: Identify the contract(s) with a customer.
  • Step 2: Identify the performance obligations in the contract.
  • Step 3: Determine the transaction price.
  • Step 4: Allocate the transaction price to the performance obligations in the contract.
  • Step 5: Recognise revenue when (or as) the company satisfies a performance obligation.
• Areas of increased complexity include non-refundable upfront fees, principal versus agent considerations, customer options for additional goods or services, variable consideration, licensing, and contract balances. 
• There are no exemptions for intra-group arrangements, for example, intra-group service agreements.

Impact of FRS 102 Section 23 on the Social Housing Section

The amendments to revenue are expected to be less significant for most RPs compared to the changes for leasing, since much of the sector’s income is rental income, which is accounted for under Section 20. However, the changes to revenue should not be overlooked.

New revenue recognitional model

Common revenue streams within the social housing sector include sales of property and land, service charges and fee income from community, neighbourhood and supported living services. All contracts with customers will need to be considered against the five-step model.

Some RPs enter into long-term construction contracts to build infrastructure such as roads and schools, which may be complex in nature. Where this is the case, detailed accounting analysis of these contracts will be required. On adoption of IFRS 15, construction companies were amongst those reporting the greatest impact in their financial statements because of their long-term construction contracts. RPs could therefore expect to see a similar impact in accounting for long-term construction contracts under the Amendments.

The accounting analysis for long-term service contracts and service contracts that span the year-end will also require particular care.

Determining and allocating transaction price

The Amendments require a transaction price to be allocated to each performance obligation in a contract, based on a stand-alone selling price. This assessment may be particularly challenging for RPs which have complex service contracts, containing multiple services, for which stand-alone prices may not be readily available.

How to prepare for FRS 102

It is essential that a full impact assessment is carried out early, to allow adequate time for planning and implementation. RPs will be required to determine their opening retained earnings positions.