Here's our update:
Service charge accounts are a relatively niche accounting area and debate between the RICS, ARMA and the ICAEW continues. The Financial Reporting Council has issued proposals called (FRC), FRED 50 and the jury is still out.
Other guiding documents along the way include:
- Technical Release 01/10 Accounting for Service Charges 2010 issued by the ICAEW, in conjunction with the Association of Residential Managing Agents (ARMA) and the Royal Institute of Chartered Surveyors (RICS) issued for public comment. This did not solve but fueled the debate with the key area of uncertainty being:
- That by virtue of being a company, an RMC is required to prepare statutory accounts for its members; under the terms of the lease it is likely to need to prepare service charge accounts for tenants; and those paying service charges have a right under the Landlord and Tenant Act to demand a 'statement of charges'.
- There was also disagreement over the capacity in which an RMC acts with third party suppliers, i.e. whether they are acting as agent or principal. The end result was diversity in practice in the preparation of RMC statutory accounts, and the issue was ultimately referred for consideration to the Urgent Issue Task Force (UITF).
- 2011 - An updated and final ICAEW Technical Release (Tech 03/11) was issued in conjunction with ARMA, RICS, ACCA and ICAS. This differed from the earlier draft Tech 01/10 as it provided guidance on the preparation of residential service charge accounts only.
Although Tech 03/11 made a brief mention of an RMC's statutory accounts, it did not provide any specific guidance or examples because the matter was still subject to debate by the UITF.
- 2012, UITF draft abstract 49 was issued. This proposed that each RMC should assess whether it was operating as an agent or principal with third party suppliers and account for service charge transactions accordingly in its statutory accounts (i.e., as principal the transactions would be recognised in the accounts, but as agent the RMC might be able to prepare dormant statutory accounts). In response to these proposals both ICAEW and the FRC individually sought legal advice. The conclusion in both cases was that an RMC always acts as principal with respect to service charge transactions with third party suppliers. This resulted in the initial UITF proposals being withdrawn and FRED 50 was issued in August 2013.
- 2013 FRED 50 - Under the revised proposals, an RMC would be required to recognise transactions entered into with third party suppliers in the profit and loss account and concurrently recognise income from drawing on the service charge cash received from tenants. However, the RMC would not recognise the cash balance arising from service charges received from tenants on the balance sheet because it is held in a statutory trust. This information would instead be disclosed in the notes to the accounts.
- The ICAEW has raised concerns over the proposals outlined in FRED 50 and wrote a letter of representations to the FRC. The main concern was, the exclusion of service charge cash from the balance sheet and how the proposals would interact with the exemptions available under the new micro-entity regulations - Many RMCs are expected to qualify as a micro-entity and, if they chose to take advantage of the exemptions, would be required to disclose certain information at the foot of the balance sheet but no information in the notes to their accounts.