Gill Powell outlines the key issues involved in financial reporting to housing association boards.
Registered social landlords (RSLs) are operating in an increasingly complex and uncertain environment. Timely and accurate financial reporting to boards, and challenge by board members, is more important than ever.
The Welsh Government’s briefing on Sector risks facing housing associations in Wales (March 2016) set out many of the main risks, including those with major impacts on income and viability. And now we have the decision to exit the European Union. No doubt this will be in the next sector risks profile.
Earlier this year boards will have approved the 30-year financial forecasts submitted to Welsh Government. To provide effective governance, all board members must continue to reassess their organisation’s financial strengths and weaknesses. For this it is crucial that boards are receiving the right financial information on which to monitor performance, assess current and projected positions, and take appropriate corrective action.
Regular financial information for board members should include:
- The management accounts: setting out the organisation’s financial performance in the current financial year, highlighting variances against budget. Understanding and questioning variances will provide insight into any performance issues.
- Treasury reporting: particularly cash against forecast, reporting on lending covenants and headroom, and compliance with treasury policy requirements.
- Key Performance Indicators: measuring performance against key targets to deliver the business plan. They should include some leading indicators that highlight potential problems, e.g. changes to demand and void levels.
Other reporting boards should see and understand includes:
- Value for money to give assurance that tenants are receiving a value service.
- Business plan projections and robust stress testing.
- A summary of the Asset and Liability Register and assurance that this is complete.
Stress testing
Welsh Government expects boards to fully understand inherent risks through robust stress testing of business plan financial projections. This means varying key assumptions within the financial model, looking at their impact on the surplus, lending covenant conditions, such as the gearing ratio and interest cover ratio.
Testing should cover the main macroeconomic risks, such as inflation, interest rate fluctuations etc and risks specific to the organisation and its strategic plan, such as new development assumptions and potential crystallisation of contingent liabilities. The process should test a variety of scenarios both individually and in combination to show what could happen.
Taking the real example of welfare reform, the impacts could be numerous. Universal credit may reduce the ability of tenants to pay their rent pushing up rent arrears, more focus on rent collection increases staff costs, bad debts increase, properties become empty as tenants cannot afford the rent – the cumulative impact on cash flow and the surplus could be substantial.
Stress testing should also model the perfect storm – what combination of adverse factors would break the plan, make the business run out of cash or break covenants? If this were to happen, the funders may want to call in their debt, seize securitised assets or (more likely) look to renegotiate and push up the cost of borrowing, putting further pressure on the longer term plan.
This process should then turn boards’ attention to action planning and mitigation measures. Actions will differ depending whether a crisis is cash flow or covenant breach driven – both would involve discussions with lenders, stopping discretionary spending and potentially selling properties. Considering and preparing for the worst financial case will put boards in a stronger position to limit and avoid the worst impacts.
Some questions for boards
- Does your board understand FRS 102 international reporting changes?
- Does everyone understand financial/treasury arrangements?
- What is your current headroom on your covenants? Which is the most sensitive to the external environment now?
- How do you monitor and gain assurance on value for money and KPIs?
- How will you gain continued assurance that the Asset and Liabilities Register is complete?
- Are you aware of any areas of long-standing poor performance?
- Stress testing – what has your board done? How was it involved in developing the scenarios?
- Were the assumptions challenged?
- What would break the business?
Gill Powell is a director at Altair, email: gill.powell@altairltd.co.uk, tel: 07887 791 381
To find out more about our financial consultancy services or discuss a potential project, please contact Susan Kane, Jim Lashmar, Gill Powell or Hugh Coll
Save the date
The annual Altair and Devonshires Seminar is on Tuesday January 17, 2017 at the Welsh Millennium Centre, Cardiff. The theme this year is ‘Transformational change’. Speakers will include Julian Ashby, Chair of the HCA Regulation Committee, Stuart Ropke, Community Housing Cymru Group Chief Executive and Helen White, Chair of Regulatory Board for Wales. To register your interest in attending, please email info@altairltd.co.uk and we will send you a full programme.