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By Paul Cooper, corporate reporting manager, ACCA
Along with ACCA’s UK and Ireland-based members of its Global Forum for Corporate Reporting, I have been involved with our response to the Financial Reporting Council’s (FRC) consultation on its latest proposals on financial reporting by residential management companies (RMCs).

The FRC wants to clarify how RMCs account for expenditure from the service charge monies they hold for maintenance and other matters, such as repairs and gardening. Reflecting the legal position, a RMC’s financial statements would recognise this as service charge expenditure. At the same time, an equivalent amount of income would be recognised, representing drawings from the service charge monies received (i.e., a balancing figure). This means that to match the expenses it gives a net effect of nil, and shows the expenses are funded from the service charge receipts. These monies are held by the RMC in trust for the leaseholders, and cannot therefore be shown as an asset on the RMC’s balance sheet. The FRC proposes that the balance of the monies held is disclosed for information, along with the fact of its trust status.

While acknowledging that these proposals represent some progress by the FRC, ACCA is concerned that much more is needed to deliver authoritative guidance which fully meets the needs of leaseholders. The reporting envisaged by the FRC also has some, but not complete, common ground with the Summary of Costs, something that leaseholders can require under the Landlord and Tenant Act 1985. In consequence, there is potential for creating confusion.

Where, as is frequently the case, the leaseholders are the members of the RMC, their information needs are presently often satisfied by including all transactions and balances in the financial statements of the RMC. This methodology goes far beyond the FRC proposals by also recognising, for example, accrued expenses, service charge debtors and the balance of the sinking fund (reserves). As it satisfies the information needs of leaseholders, it is unlikely that a statutory Summary of Costs will also be required. However, this method of accounting is incorrect, particularly as the RMC is recognising assets and liabilities which are not its own.

A working group, which was devised by ACCA and other professional bodies, produced best practice guidance to encourage financial reporting by RMCs which is both appropriate, and attempts to meet the information needs of leaseholders. However, the guidance is not binding, tends not to be favoured by the leaseholders, and RMCs usually have no external stakeholder which could require them to adopt the correct method of financial reporting.

ACCA believes that the solution would be for the FRC to use its greater authority and endorse similar comprehensive guidance, rather than the partial solution which it currently proposes. A consultation process for such guidance would also enable the advisers of RMCs to provide their views, in order to accommodate the preferences of leaseholders as far as is possible. Legal and accounting terms need to be looked at together on this issue.

ACCA’s response can be read in full here