COVID 19 – IMPACT ON PROPERTY ACCOUNTING

COVID 19 – IMPACT ON PROPERTY ACCOUNTING

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  • On May 6, 2020
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As we are now coming to terms with COVID-19, it is clear that there are a number of area’s of concern for our property investment and development clients. Covid 19 has affected all sectors in varying degrees with the retail, hotel and leisure sectors hardest hit.

As finance business partners, Seles have supported our clients through this period by ensuring our clients are kept up to date and have the necessary information to hand to make informed decisions.

As a paperless firm, it has really been business as usual, with our staff properly set up with large screens, laptops and equipment to make working from home a breeze.

 

Seles accountants are working with our clients focusing on:

 

  • Cashflow management
    • Although part of our standard service, cashflow projections and understanding the income and expense profile of a portfolio and business is key to understanding the health of the business and allow our clients to plan for various scenarios.

 

  • Loan covenant compliance monitoring
    • Calculating projections of ICR, and other covenant requirements (LTV), based on projections of rental collections and expenses, allows our clients to assess the risk of breaching loan covenants and allowing management to have meaningful data to hand when discussing covenant waivers with the bank.

 

  • Understanding the accounting implications of decisions take to manage tenants through the crisis 
    • Accounting for changes to rental agreements, debt terms and other adjustments allows us to provide clients with estimated changes in NAV and profit and loss.

 

  • Making our clients aware of the various financial support schemes in place and assisting in applying for schemes available
    • Ensuring VAT payments are deferred and advising clients on their options around furloughing staff and government supported business loans.

 

  • Management of the audit and reporting process
    • With many audits in progress for December and March year-ends, we are working with our clients and their auditors in ensuring adequate disclosure for the effects of Covid 19 and working on cashflow projections to support the going concern assumptions.

 

Future of finance post Covid19

COVID 19 has accelerated the change in working practices, which many have been predicting for some time. As we start to work from home more frequently, the need for full-time in-house finance staff is being questioned. At Seles, we focus on finding a balance between in-house and outsourcing, by offering a range of business partnering services from purchase ledger to accounting to financial control. We work with all real estate functions (investment, property and facilities management)  in a company and act as a value-adding resource, understanding our clients reporting requirements and aligning our services to our client’s goals.

 

Below are some COVID 19 property accounting area’s we are focussing on.

 

Accounting for tenants lease amendments:

Rental income is recognised in the financial statements evenly over the term of the lease. Changes to lease terms means that the accounting for income needs to be assessed and changed.

Changes we have come across include:

  • Additional rent free periods
  • Lease extensions for rent free periods
  • Fixed uplifts for rent free periods
  • Rent payment deferral schemes (effect on income would be zero)
  • Service charge holidays (increasing landlord costs)

Tenants are at risk in this environment, therefore we are focusing on understanding the effect on the financial accounts and costs to the landlord for the following:

  • Tenant’s going into administration
  • CVA agreements
  • Changes to lease terms in respect of turnover rent amendments
  • Changes to payment terms from quarterly to monthly in advance
  • Business rates holidays and deferrals
  • Bad debt reviews –as we assess the recoverability of arrears, provisions for both rent and service charge arrears need to be assessed

 

Debt – amendments to loan agreements:

Changes in facility terms need to be assessed, with the timing of payments affecting cashflows and changes affecting financial reporting. Changes identified include:

  • Deferral of interest payments
  • Interest rolled into the principle debt
  • Terms may be extended – may have an effect on the fair value of debt calculation
  • Additional fees paid for improved terms – amortised over a new period
  • Interest payment holidays or reductions
  • Changes to amortisation payment terms

Loan compliance reporting:

  • Assessing the effect on loan covenants including forward interest rate cover and LTV ratio. We providing clients with financial models accounting for various probabilities of tenant defaults and valuation movements
  • Opening discussions with lenders with regard to the relaxation of reporting requirements
  • Reviewing hedging instrument valuations and potential counterparty defaults.

 

VAT and Tax:

  • VAT payments deferred to March 20
  • HMRC direct debits have to be cancelled through the banks
  • Tax instalment payments deferred
  • Capital gains tax base cost valuation as at 6th April 2020 for non-resident landlords needs to be assessed and may result in an increase in future capital gains tax.
  • Change in classification of property, mainly residential developments from trading to investment and the Tax and VAT effect.

 

Other accounting issues we focussed on:

  • Goodwill impairment
  • Calculation of net selling price of property accounted for as inventory (trading)
  • Onerous contracts provisions resulting in an increase in liabilities

 

Then audit:

  • Post balance sheet events note for Covid19 (increased subsequent events disclosure)
  • Going concern reviews
  • Bad debt provisions and recovery of any receivables will need to be assessed with additional disclosure of payment terms.
  • Material uncertainty of property valuations.

 

If you have any questions and would like to talk to us about our services, please contact us at for a call or ZOOM chat.

 

CONTACT  Email: ryan.seligmann@selesgroup.com

 

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