The Building Societies (Accounts and Related Provisions) Regulations 1998

Regulation 7

SCHEDULE 7 ACCOUNTING PRINCIPLES AND RULES

PART I ACCOUNTING PRINCIPLES

1.  Subject to paragraph 7, the amounts to be included in respect of all items shown in a society’s annual accounts shall be determined in accordance with the principles set out in this Part of this Schedule.

2.  The society shall be presumed to be carrying on business as a going concern, and so, where group accounts are prepared, shall the society and its subsidiary undertakings.

3.  Accounting policies shall be applied consistently within the same accounts and from one financial year to the next.

4.—(1) The amount of any item shall be determined on a prudent basis, and in particular—

(a) only profits realised at the date of the balance sheet shall be included in the income and expenditure account; and

(b) all liabilities and losses which have arisen or are likely to arise in respect of the financial year to which the accounts relate or a previous financial year shall be taken into account, including those which only become apparent between the balance sheet date and the relevant date.

(2) For the purposes of sub-paragraph (1), the relevant date is the date of signature of the balance sheet of the society on behalf of the board of directors under section 80 of the Act (signing of balance sheet and of documents).

5.  Except so far as these Regulations otherwise specify, income and charges relating to the financial year to which the accounts relate shall be taken into account without regard to the date of receipt or payment.

6.  In determining the aggregate amount of any item the amount of each individual asset or liability that falls to be taken into account shall be determined separately.

PART II DEPARTURE FROM ACCOUNTING PRINCIPLES

7.  If it appears to the directors of a society that there are special reasons for departing from any of the principles stated in Part I in preparing annual accounts in respect of any financial year, they may do so, but particulars of the departure, the reasons for it, and its effect shall be given in a note to the annual accounts.

PART III FIXED ASSETS

General rules

8.—(1) Subject to any provision for depreciation or diminution in value made in accordance with paragraph 9 or 10, the amount to be included in respect of any fixed asset shall be its cost unless it is valued in accordance with paragraph 28.

(2) (a) Assets included in items D and E in Parts I and II of Schedule 2 shall be valued as fixed assets.

(b) Other assets falling to be included in the balance sheet shall be valued as fixed assets where they are intended for use on a continuing basis in the normal course of the activities of the society or of the society and its subsidiary undertakings.

9.  In the case of any fixed asset which has a limited useful economic life, the amount of—

(a) the cost, or

(b) where it is estimated that any such asset will have a residual value at the end of the period of its useful economic life, its cost less that estimated residual value,

shall be reduced by provisions for depreciation calculated to write off that amount systematically over the period of the asset’s useful economic life.

10.—(1) Where a fixed asset investment of a description falling to be included under Asset item C of Parts I and II of Schedule 2, or any liquid asset held as a financial fixed asset, has diminished in value, provisions for diminution in value may be made in respect of it, and the amount to be included in respect of it may be reduced accordingly.

(2) Any such provisions as are mentioned in sub-paragraph (1) and which are not shown in the income and expenditure accounts shall be disclosed, either separately or in aggregate, in a note to the accounts, analysed according to balance sheet category.

(3) Provisions for diminution in value shall be made in respect of any fixed asset which has diminished in value if the reduction in its value is expected to be permanent (whether its useful economic life is limited or not), and the amount to be included in respect of it shall be reduced accordingly, and any such provisions which are not shown in the income and expenditure accounts shall be disclosed, either separately or in aggregate, in a note to the accounts, analysed according to balance sheet category.

(4) Where the reasons for which any provision in respect of fixed assets (whether or not it is one to which sub-paragraph (1) or (3) applies) was made have ceased to apply to any extent, that provision shall be written back to the extent that it is no longer necessary; and any amounts written back in accordance with this sub-paragraph which are not shown in the income and expenditure accounts shall be disclosed (either separately or in aggregate) in a note to the accounts.

Development costs

11.—(1) Notwithstanding that amounts representing “development costs” may be included under Asset item D in Parts I and II of Schedule 2, an amount may only be included in a society’s balance sheet in respect of development costs in accordance with generally accepted accounting principles.

(2) If any amount is included in a society’s balance sheet in respect of development costs, the following information shall be given in a note to the accounts—

(a) the period over which the amount of those costs originally capitalised is being or is to be written off, and

(b) the reasons for capitalising the development costs in question.

Goodwill

12.—(1) The application of paragraphs 8 to 10 in relation to goodwill (in any case where goodwill is treated as an asset) is subject to the following provisions of this paragraph.

(2) Subject to sub-paragraph (3), the amount of the consideration for any goodwill acquired by a society shall be reduced by provisions for amortisation calculated so as to write off that amount systematically over a period chosen by the directors of the society.

(3) The period chosen shall not exceed the useful economic life of the goodwill.

Financial fixed assets

13.—(1) Debt securities including securities held as financial fixed assets shall be included in the balance sheet at an amount equal to their maturity value plus any premium, or less any discount, on their purchase, subject to the following provisions of this paragraph.

(2) The amount included in the balance sheet with respect to such a security as is mentioned in sub-paragraph (1) purchased at a premium shall be reduced each financial year on a systematic basis so as to write the premium off over the period to the maturity date of the security, and the amounts written off shall be charged to the income and expenditure account for the relevant financial years.

(3) The amount included in the balance sheet with respect to such a security purchased at a discount shall be increased each financial year on a systematic basis so as to extinguish the discount over the period to the maturity date of the security, and the amounts by which the amount is increased shall be credited to the income and expenditure account for the relevant financial years.

(4) The notes to the accounts shall disclose the amounts of any unamortised premium or discount not extinguished which are included in the balance sheet by virtue of sub-paragraph (1).

(5) For the purposes of this paragraph, “premium” means any excess of the amount paid for a security over its maturity value and “discount” means any deficit of the amount paid for a security over its maturity value.

PART IV CURRENT ASSETS

14.  The amount to be included in respect of Asset items A.3, A.4, B and C in Parts I and II of Schedule 2 shall be, subject to paragraphs 15 and 16, their cost.

15.—(1) If the net realisable value of any current asset is lower than its cost the amount to be included in respect of that asset shall be the net realisable value.

(2) Where the reasons for which any provision for diminution in value was made in accordance with sub-paragraph (1) have ceased to apply to any extent, that provision shall be written back to the extent that it is no longer necessary.

(1) Subject to paragraph 15, the amount to be included in the balance sheet in respect of transferable securities not held as financial fixed assets may be the higher of their cost or their market value at the balance sheet date.

(2) The difference between the cost of any securities included in the balance sheet at a valuation under sub-paragraph (1) and their market value shall be shown (in aggregate) in the notes to the accounts.

PART V OTHER ACCOUNTING RULES

General rules

17.—(1) Without prejudice to paragraph 3(6)(c) of Part III of Schedule 2, amounts in respect of items representing assets or income may not be set off against amounts in respect of items representing as the case may be liabilities or expenditure, or vice versa.

(2) Charges required to be included in items 12(a) and 12(b) in Parts I and II of Schedule 1 may, however, be set off against income required to be included in items 13(a) and 13(b) of Parts I and II of that Schedule and the resulting figure shown as a single item.

(3) Charges required to be included in item 14 in Parts I and II of Schedule 1 may also be set off against income required to be included in item 15 in Parts I and II of Schedule 1 and the resulting figure shown as a single item.

18.—(1) Assets shall be shown under the relevant balance sheet headings even where the society has pledged them as security for its own liabilities or for those of third parties, or has otherwise assigned them as security to third parties.

(2) A society shall not include in its balance sheet assets pledged or otherwise assigned to it as security, unless such assets are in the form of cash in the hands of the society.

19.  Preliminary expenses, expenses of and commission on any issue of subscribed capital and costs of research shall not be treated as assets in a society’s balance sheet.

20.  Assets acquired in the name of and on behalf of third parties shall not be shown in the balance sheet.

Excess of money owed over value received as an asset item

21.—(1) Where the amount repayable on any debt owed by a society is greater than the value of the consideration received in the transaction giving rise to the debt, the amount of the difference may be treated as an asset.

(2) Where any such amount is so treated—

(a) it shall be written off by reasonable amounts each year and must be completely written off before repayment of the debt; and

(b) if the current amount is not shown as a separate item in the society’s balance sheet it must be disclosed in a note to the accounts.

Determination of cost

22.—(1) The cost of an asset shall be determined by adding to the actual price paid any expenses incidental to its acquisition.

(2) The cost of an asset constructed by the society shall be determined by adding to the purchase price of the raw materials and consumables used the amount of the costs incurred by the society which are directly attributable to the construction of that asset.

(3) In addition, there may be included in the cost of an asset constructed by the society—

(a) a reasonable proportion of the costs incurred by the society which are only indirectly attributable to the construction of that asset, but only to the extent that they relate to the period of construction; and

(b) interest on capital borrowed to finance the construction of that asset, to the extent that it accrues in respect of the period of construction,

provided, however, in a case within sub-paragraph (b), that the inclusion of the interest in determining the cost of that asset and the amount of the interest so included is disclosed in a note to the accounts.

23.—(1) Subject to the qualification mentioned below, the cost of any assets which are fungible assets (including liquid assets) may be determined by the application of any of the methods mentioned in sub-paragraph (2) in relation to any such assets of the same class, but the method chosen must be one which appears to the directors to be appropriate to the circumstances of the society.

(2) Those methods are—

(a) the method known as “first in, first out” (FIFO),

(b) the method known as “last in, first out” (LIFO),

(c) a weighted average price, and

(d) any other method similar to any of the methods mentioned above.

(3) Where in the case of any society—

(a) the cost of assets falling to be included under any item shown in the society’s balance sheet has been determined by the application of any method permitted by this paragraph, and

(b) the amount shown in respect of that item differs materially from the relevant alternative amount given below in this paragraph,

the amount of that difference shall be disclosed in a note to the accounts.

(4) Subject to sub-paragraph (5), for the purposes of sub-paragraph (3)(b), the relevant alternative amount, in relation to any item shown in a society’s balance sheet, is the amount which would have been shown in respect of that item if assets of any class included under that item at an amount determined by any method permitted by this paragraph had instead been included at their replacement cost as at the balance sheet date.

(5) The relevant alternative amount may be determined by reference to the most recent actual cost before the balance sheet date of assets of any class included under the item in question instead of by reference to their replacement cost as at that date, but only if the former appears to the directors of the society to constitute the more appropriate standard of comparison in the case of assets of that class.

(6) For the purposes of this paragraph, assets of any description shall be regarded as fungible if assets of that description are substantially indistinguishable one from another.

24.  To the extent that debt securities included in a society’s balance sheet include assets valued at cost, the method of arriving at their cost shall be disclosed in the notes to the annual accounts.

Substitution of original amount where cost unknown

25.  Where there is no record of the cost of any asset acquired by a society or of any price, expenses or costs relevant for determining its cost in accordance with paragraph 22, or any such record cannot be obtained without unreasonable expense or delay, its cost shall be taken for the purposes of paragraphs 8 to 16 to be the value ascribed to it in the earliest available record of its value made on or after its acquisition by the society.

PART VI ALTERNATIVE ACCOUNTING RULES

26.  The rules set out in paragraphs 8 to 25 of this Schedule are referred to below in this Schedule as the historical cost accounting rules.

27.  Subject to paragraphs 29, 30 and 31, the amounts to be included in respect of assets of any description mentioned in paragraph 28 may be determined on any basis so mentioned.

28.—(1) Intangible fixed assets, other than goodwill, may be included at their current cost.

(2) Tangible fixed assets may be included at a market value determined as at the date of their last valuation or at their current cost.

(3) Investments of any description falling to be included under Asset items C.2 and 3 in Parts I and II of Schedule 2 and under Asset item C.4 in Part II of Schedule 2, and all other securities held as financial fixed assets may be included either—

(a) at a market value determined as at the date of their last valuation, or

(b) at a value determined on any basis which appears to the directors to be appropriate in the circumstances of the society,

but in the latter case particulars of the method of valuation adopted and of the reasons for adopting it shall be disclosed in a note to the accounts.

(4) Investments of any description not held as financial fixed assets (if not valued in accordance with paragraph 16) may be included at their current cost.

29.—(1) Where the value of any asset of a society is determined on any basis mentioned in paragraph 28, that value shall be, or (as the case may require) shall be the starting point for determining the amount to be included in respect of that asset in the society’s accounts, instead of its cost or any value previously so determined for that asset; and methods of depreciation to be used pursuant to these Regulations shall apply accordingly in relation to any such asset with the substitution for any reference to its cost of a reference to the value most recently determined for that asset on any basis mentioned in paragraph 28.

(2) The amount of any provision for depreciation required in the case of any fixed asset by paragraph 9 or 10 as it applies by virtue of sub-paragraph (1) is referred to below in this paragraph as the adjusted amount, and the amount of any provision which would be required by that paragraph in the case of that asset according to the historical cost accounting rules is referred to as the historical cost amount.

(3) Where sub-paragraph (1) applies in the case of any fixed asset the amount of any provision for depreciation in respect of that asset included in any item shown in the income and expenditure account in respect of amounts written off assets of the description in question may be the historical cost amount instead of the adjusted amount, provided that the amount of any difference between the two is shown separately in the income and expenditure account or in a note to the accounts.

30.—(1) This paragraph applies where the amounts to be included in respect of any assets of a society have been determined on any basis mentioned in paragraph 28.

(2) The items affected and the basis of valuation adopted in determining the amounts of the assets in question in the case of each such item shall be disclosed in a note to the accounts.

(3) In the case of each balance sheet item affected either—

(a) the comparable amounts determined according to the historical cost accounting rules; or

(b) the differences between those amounts and the corresponding amounts actually shown in the balance sheet in respect of that item,

shall be shown separately in the balance sheet or in a note to the accounts.

(4) In sub-paragraph (3), references in relation to any item to the comparable amounts determined as there mentioned are references to—

(a) the aggregate amount which would be required to be shown in respect of that item if the amounts to be included in respect of all the assets covered by that item were determined according to the historical cost accounting rules; and

(b) the aggregate amount of the cumulative provisions for depreciation or diminution in value which would be permitted or required in determining those amounts according to those rules.

31.—(1) With respect to any determination of the value of an asset of a society on any basis mentioned in paragraph 28, the amount of any profit or loss arising from that determination (after allowing, where appropriate, for any provisions for depreciation or diminution in value made otherwise than by reference to the value so determined and any adjustments of any such provisions made in the light of that determination) shall be credited or, as the case may be, debited to a separate reserve (referred to in these Regulations as “the revaluation reserve”).

(2) The revaluation reserve shall be reduced to the extent that the amounts standing to the credit of that reserve are no longer necessary for the purpose of the accounting policies adopted by the society, but an amount may only be transferred—

(a) from the revaluation reserve to the income and expenditure account if—

(i) the amount in question was previously charged to that account, or

(ii) it represents a realised profit, or

(b) to or from the revaluation reserve in respect of the taxation relating to any profit or loss credited or debited to the reserve.

(3) The treatment for taxation purposes of amounts credited or debited to the revaluation reserve shall be disclosed in a note to the accounts.

PART VII ASSETS AND LIABILITIES DENOMINATED IN FOREIGN CURRENCIES

32.—(1) Subject to the following sub-paragraphs, amounts to be included in respect of assets and liabilities denominated in foreign currencies shall be expressed in sterling after translation at an appropriate spot rate of exchange prevailing at the balance sheet date.

(2) An appropriate rate of exchange prevailing on the date of purchase may however be used for assets held as financial fixed assets and assets to be included under Asset items D and E in Parts I and II of Schedule 2, if they are not covered or not specifically covered in either the spot or forward currency markets.

(3) An appropriate spot rate of exchange prevailing at the balance sheet date shall be used for translating uncompleted spot exchange transactions.

(4) An appropriate forward rate of exchange prevailing at the balance sheet date shall be used for translating uncompleted forward exchange transactions.

(5) This paragraph does not apply to assets or liabilities held, or any transaction entered into, for hedging purposes, or to any assets or liabilities which are themselves hedged.

33.—(1) Subject to sub-paragraph (2), any difference between the amount to be included in respect of an asset or liability under paragraph 32 and the book value, after translation into sterling at an appropriate rate, of that asset or liability, shall be credited or, as the case may be, debited to the income and expenditure account.

(2) In the case however of assets held as financial fixed assets, of assets to be included in Asset items D and E in Parts I and II of Schedule 2, and of transactions undertaken to cover such assets, any such difference shall be deducted from or credited to the general reserve included in the balance sheet.