Tech 03/11, Residential Service Charge Accounts, contains the following paragraphs on the statutory accounts where the ‘landlord’ of a residential property is a residents’ management company (RMC) or Right to Manage Company (RTMCo):
1.2.1 Where the landlord is an RMC or RTMCo or similar, service charge monies are subject to a statutory trust. Trust monies do not belong to the RMC/RTMCo and so should not be included as an asset in the statutory accounts of the RMC/RTMCo.
1.2.2 The treatment of transactions relating to service charges in the RMC’s/RTMCo’s statutory accounts and therefore by extension to the statutory accounts of investor landlords is subject to debate. It is not disputed that service charge monies are received on trust but the consequences of this in accounting for the transactions settled from such funds have yet to be clarified.
1.2.3 If service charge transactions are included in the statutory profit and loss/income and expenditure account of the RMC/RTMCo, the account should reflect the economic substance of the transactions. The account should be prepared in accordance with Schedule 1 to the applicable Accounts and Reports Regulations (SI 2008/409 for small companies and groups; SI 2008/410 for large and medium-sized companies and groups).
1.2.4 The question of whether service charge transactions should be included in the landlord company’s statutory profit and loss/income and expenditure account has been referred to the Urgent Issues Task Force. Separate guidance and examples for the treatment of service charge transactions in RMC/RTMCo statutory accounts will be issued when the underlying principles have been agreed.
UITF agreed to consider the question and on 10 May ASB published an Information sheet setting out a proposed UITF Abstract 'Residential Management Companies Financial Statements'.
The central consensus in the draft Abstract is that the inclusion or otherwise of transactions with third parties in the statutory profit and loss account (or equivalent for non-profit companies) depends on whether the RMC is acting as agent or principal in its operations. The draft Abstract noted that ICAEW received legal counsel opinion that, irrespective of whether a RMC is acting as principal or agent, the cash balance representing contributions received from lessees in accordance with the terms of their leases and held by a RMC under S.42, Landlord & Tenant Act 1987 is held on statutory trust and is not an asset of the company.
Where the RMC determines it is acting as principal (or undisclosed agent), it shall record the relevant service charge transactions arising from contracts to purchase goods and services in the profit and loss account and concurrently recognises income by drawing from the service charge cash balances.
The guidance proposed by UITF, to assist RMCs in determining whether they are acting as principal or agent when undertaking residential service transactions with third parties, is to follow the guidance in Application Note G to FRS 5 ‘Reporting the Substance of Transactions’. UITF explains that, although this advice is focused towards revenue transactions, it can be applied, by analogy, by a RMC to assist in determining whether the RMC is acting as a principal or agent.
The draft Abstract can be downloaded from the ASB website here. The deadline for comments is 13 June. If you would like your comments to be taken into account in preparing the ICAEW response, please send them to Mary-Lou Wedderburn, Consultant, Business Law (MaryLouise.firstname.lastname@example.org).
Once the Abstract is finalised, it will be used as the basis for practical guidance and examples in a new Technical Release to complement the guidance in Tech 03/11.