DRAFT GUIDANCE COULD IMPACT ON RMC'S ACCOUNTS (10/11/10)

The ICAEW and AMRA have issued a consultation document with proposed changes on how resident management companies (RMCs) prepare their accounts

A new consultation document could have a significant impact on how resident management companies (RMCs) prepare their accounts.

The issue has been the focus of attention over the last few months, although the Government has finally confirmed that it does not intend to proceed with the development of regulations on residential service charge accounts, accountants' reports and requirements for service charge monies to be held in designated bank accounts.

These regulations were anticipated towards the end of last year and many companies had been waiting for them to clarify the position and put in place some additional procedures.

The matter has arisen because many RMCs prepare their accounts incorrectly. They include all the transactions that the company undertakes in the company’s statutory accounts and fail to recognise that many of these transactions (possibly all) may have been incurred on behalf of tenants and that service charge monies are held in trust by the company and should be excluded from the statutory accounts.

If requested by the tenants or required by the lease they should be dealt with in separate accounts. The statutory accounts will only include the company’s own assets and income such as property owned and ground rent received.

Following the Government’s decision, the Institute of Chartered Accountants and the Association of Residential Managing Agents issued draft guidance at the end of last month, as the interaction of the Companies Act 2006, the provision of property leases and the Landlord and Tenant Acts 1985 and 1987 have caused a lot of confusion.

This has resulted in a number of residents' management companies reconsidering the accounting treatment adopted in their financial statements.
 
The draft guidance focuses on residents' management companies, where the members are also the leaseholders paying variable service charges, and takes the point that variable service charge contributions paid by lessees are held on statutory trust to meet the costs specified in the lease.

It has taken the line that, because the service charge monies do not belong to the residents' management company, they should not be shown as assets on the company's balance sheet.

Further, service charge transactions may not feature in the company's profit and loss account either, depending on the terms of the lease and contractual arrangements.

If this is the case, then clearly a separate service charge statement of account would also be required. As can be seen, if this guidance is adopted, there could be significant changes to some companies’ accounts.
 
The draft guidance is open to consultation until 31 January 2011 and we will keep you informed of changes.