Provisions A provision is recognised in the balance sheet when the association has a present legal or constructive obligation as a result of a past event, that can be reliably measured, and it is probable that an outflow of benefits will be required to settle the obligation. Provisions are recognised as the best estimate of the amount required to settle the obligation at the reporting date. Judgments and Areas of Estimation Uncertainty The preparation of financial statements requires the use of estimates and assumptions that affect the amounts reported for assets and liabilities as at the balance sheet date and the amounts reported for income and expenses for the year. Although these estimates and associated assumptions are based on historical experience and management’s best knowledge of current events and actions, the actual results may ultimately differ from those estimates. The estimates and underlying assumptions are reviewed on an on-going basis. Significant Judgments in Applying the Association’s Accounting Policies The following are the significant judgments, apart from those involving estimations (which are dealt with separately below), that the Board has made in the process of applying the association’s accounting policies and that have the most significant effect on the amounts recognised in the financial statements. • The association has applied judgments in deciding on the component categories which are considered to have substantially different useful lives from the structure. Where there are indications of impairment on property, plant and equipment and housing property assets, the association performs impairment tests on those assets that require judgments to be made. Key Sources of Estimation Uncertainty The estimates and assumptions which have the most significant effect on amounts recognised in the financial statements are discussed below: The depreciation expense is the recognition of the consumption of the asset and allocation of the cost of the asset over the periods in which the asset will be used. The useful lives of the assets are estimated and regularly reviewed to reflect changes in the environment. The Stratford Office (the “Hub”) has been purchased and fitted out for occupation by the association and its partners. On acquisition the following estimates were made: • That 45% of the acquisition price should be attributed to acquiring the lease and that the lease asset (£1.183m) be depreciated over the 999-year term of the lease. • That the remaining 55% of the acquisition price (£1.446m) be attributed to the structure of the building acquired and be attributed a 100-year useful economic life, in line with the useful economic life attributed to housing property structures. Since its fitout the Hub was only occupied for a short period before the Covid-19 pandemic prevented it from being used. Initially, the fitout costs were attributed an economic life of five years, however, the Audit & Risk Committee of Arhag was of the opinion that this estimation should be reconsidered by the Board of Arhag as the fitout has created a number of different assets within the building which have different economic lives linked to potential cycles of major refurbishment over the 100-year life of the structure of the building. As the pandemic comes to an end, the association and our partners have started returning to the building and will be using the assets created by the fitout. The Board of Arhag has considered the appropriate economic lives of the various components of the building and has attributed lives of between 10 and 35 years to those components. Annual Report 2021-2022 57
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