Andrew Bond discusses how RPs may wish to use the forthcoming consultation on service charge accounts to review their existing practice.
The Commonhold and Leasehold Reform Act 2002 was expected to have a major impact on a number of areas of leasehold management for housing associations and others. In the event, while many of the new regulations anticipated under the Act have come into law, those most directly affecting accounting were never enacted. Last year the new Government let it be known that it was unlikely that it would enact these regulations at all. As a result, legislation regarding the form and content of service charge accounts, independent accountants' reports and designated bank accounts are now no longer expected.
While the housing association sector has adopted good practice over a number of years and is exempt from some elements of the legislation, an imminent new publication produced by a joint working party of the ICAEW, Scottish and Certified accounting bodies, the Association of Residential Managing Agents and RICS is likely to be of interest. A working group was formed by these bodies largely as a result of the 'void' it was felt existed as a result of the failure of the anticipated regulations to come into force. An initial consultation document was issued in October 2010. Following that a range of issues were debated and, because of the difficulty in resolving some issues, Counsel's opinion was sought. The publication is now at final draft stage and may well have been issued by the time this newsletter is distributed. While not directed primarily at housing associations, RPs may wish to consider whether some of the content should influence their own working practices; key points are as follows.
There is a distinction to be made between service charge accounts and the statutory accounts of the company that makes the service charges. Service charge accounts should contain an income and expenditure account and ordinarily be drawn up on an accruals basis with a balance sheet.
The group was unable to resolve satisfactorily whether variable service charges should be accounted for within the accounts of the company owning the freehold to the relevant property. The current accounting determination for RPs requires that service charges are accounted for in the accounts of the RPs. However, the issue is likely to go to the ASB's Urgent Issues Task Force. It will be interesting to see what develops should that group decide that given that essentially an RP (or any other body) cannot benefit from trust funds raised to meet service charge obligations, these amounts should be excluded from the accounts.
Many contributors to the document argued that the content of leases, which in many instances mention an audit, did not mean an audit in accordance with International Standards on Auditing was necessary. Where leases are over 30 years old there were actually no auditing standards in existence when they were drawn up, so this is not unreasonable. A further issue arose in that International Standards on Auditing require a recognised accounting framework against which to report. No such framework exists for service charge accounts. In that context, ISA 800, relating to auditing special purpose financial statements, has been suggested as the appropriate auditing standard to report against. Also suggested, where appropriate, For more information on service charge accounts speak to Andrew. 020 7131 4370 andrew.bond@smith.williamson.co.uk are agreed upon procedures leading to a report of factual findings where an audit is not required.
Model service charges accounts contained within the new guidance are likely to become standard for private sector residential managers. RPs may therefore wish to watch out for this publication, which is expected imminently and will provide a useful tool against which to review their existing practice.
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