Reserves

This section provides further detail on Housing Association reserves and expenditure allowances.

Purpose

The main reasons behind the generation and maintenance of reserves by Associations are:

• Internal Subsidy - To subsidise the development of properties and other activities (other funds for development are obtained such as bank loans);
• Future major repairs - To enable future requirements for major repairs to be met;
• Management of risk - To provide a cushion against risk in the medium to long term should unforeseen events create a need for additional working capital;
• Capital Loan Repayment - To enable capital loan repayments to be met;
• Working capital - To provide additional working capital.

There are two types of ‘Reserve’ maintained by Housing Associations:

Revenue Reserves

• Accumulated Surplus – this represents an accumulation of surpluses generated by the Association from their normal operating activities after transfers have been made to restricted reserves.
• Restricted Reserves – these are surpluses on which there are restrictions imposed by regulatory bodies or other external parties (e.g. banks).Following the 2014 Housing SORP, grants are to be recognised accordingly through the Statement of Comprehensive Income and reserves will be reinstated where required.

Capital Reserves

• Revaluation Reserves – this is most likely to arise if the Association includes the value of properties on the Statement of Financial Position at current value rather than historical cost. Revaluation reserves can only be realised as cash on the disposal of an asset.

Reserves should not be confused with cash balances. Revenue reserves may have been used to fund the purchase of land or property assets.

Associations should develop an appropriate reserves policy to cover existing and future needs. It should include as a minimum:

• The reasons that Reserves are required;
• The level of reserves that the Board believes is necessary;
• What steps are to be taken to maintain the reserves at the agreed level;
• Arrangements for monitoring and reviewing the policy.

Board members have a responsibility for the proper stewardship of the financial affairs of the Association. When considering the level of reserves that are required, they should consider what is sufficient or required:

• To meet future objectives, in particular, in relation to future developments and the minimisation of lending
• To meet commitments to lenders, tenants and other stakeholders
• To fund major repairs and maintenance
• To comply with restrictions imposed by regulatory bodies or other stakeholders

If the level of reserves is above that which could reasonably be required, then the Board must investigate if resources could be better employed to further the objectives of the Association.

Allowances

Allowances are a key part of the expenditure assumptions when calculating Housing Association Grants (HAG). They are designed to ensure that Associations are able to manage and maintain housing in line with required standards.

When calculating the level of Reserves required, Associations should use the figures available from the Department in relation to the major repairs allowance detailed below.

These indicative allowances are for general needs housing and are based on similar allowances in other parts of the UK.

Major Repairs Allowances (Currently Under Review)

Major repairs provisions are required to meet the anticipated cost of future major repairs and renewals over the lifespan of the property. Provisions should be made annually as follows:

New Build / Off the Shelf

0.8% of the approved works cost or a minimum of £525.

Rehabilitation / ESP

1% of the approved works cost or a minimum of £590.

The Department will also provide indicative allowances annually in relation the following operating costs:

Management Allowances (Currently Under Review)

This allowance is designed to enable the Association to provide all management services and facilities as required by this Department and other relevant legislation. The annual allowance is £396 per unit.

Maintenance Allowances (Currently Under Review)

This allowance is designed to enable the Association to provide all routine and cyclical maintenance required for each property. The annual allowance is £464 per unit for new build and £805 per unit for Rehabilitation.

These allowances are applicable to general needs units only and are reflective of rates set in other parts of the United Kingdom.