In October 2010 the institute of Chartered Accountants England and Wales (ICAEW) issued a technical release, “Accounting for service charges.” The release caused a lot of controversy in that it stated that as residential services charges are subject to statutory trust it proposed that where service charges are accounted through a residential management company, the service charge income and expenditure should be excluded from those accounts. This accounting treatment was subsequently considered by the Urgent Issues Task Force (UITF) which is part of the Accounting Standards Board. They concluded that whether the residential management company includes service charge transactions in its accounts depends on whether it is acting as principal, agent or undisclosed agent.
The lease is the principal driver of the basis of preparing the service charge accounts, the report to be attached, the costs to be recovered, and the period of time that the accounts should cover. The requirements of the lease should be followed, as otherwise it may be difficult to recover costs from the tenants.
The Technical Release 03/11 issued by ICAEW entitled, “Guidance on accounting and reporting in relation to service charge accounts for residential properties on which variable services are paid in accordance with a lease or tenancy agreement.” This release provides guidance on the preparation of service charge accounts generally and where the requirements of the lease are unclear,
In summary the guidance provides for the following:
- It is best practice to issue service charge accounts within 6 months of the year end. This is because S20B, Landlord and Tenants Act 1985 sets limits on the recovery of expenditure incurred more than 18 months before the costs are demanded from lessees.
- Service charge accounts should include a balance sheet as well as an income and expenditure statement and explanatory notes. It is good practice to also include comparatives.
- Service charge accounts should be prepared on an accruals basis. This means that costs incurred but not paid should be included in the accounts.
- Service charge accounts should be subject to examination by an independent accountant before issue to lessees. The examination certificate should be attached to the service charge accounts.
- Service charge monies paid by lessees should be held in a ring-fenced bank account. For managing agents this does not mean that each property has to have a designated bank account but the funds for each property must be separately identifiable, as it is a breach of trust for one property to pay the costs of another property.
- Transactions with a director or landlord or managing agent should be disclosed. For example if the director is paid for carrying out maintenance work or preparing the service charge accounts.