Money Belonging to the Company
Whoever prepares and presents both the statutory year end accounts (and the service charge accounts) must be a practising member firm of the Institute of Chartered Accountants in England and Wales (ICAEW). This means they are subject to its ethical and other professional requirements which are detailed at http://www.icaew.com/en/members/regulations-standards-and-guidance/ Their report will be made in accordance with both the terms of their engagement letter and with the ICAEW Technical Release 07/16 AAF. Under s386 of the Companies Act 2006 residential management companies (and this includes managing agents) are required to keep adequate accounting records in order to be able to prepare statutory financial statements that give a true and fair view of the assets, liabilities, financial position and surplus of the company.
The year end accounts must be approved by the Board of Directors before being sent to company members and will generally contain the following:
Company Information which contains the names of the Directors, company number, registered office and the name and address of the accountants.
Directors Report: This contains the names of the Directors who held office during the year end and up to the date of the financial statement.
Accountants Report: This is a statement that in order to assist the company with their duties under the Companies Act 2006 they have prepared the accounts for the year end as a practising member firm of the Institute of Chartered Accountants in England and Wales. They have made the report in accordance with ICAEW Technical Release 07/16 AAF.
INCOME AND EXPENDITURE ACCOUNT
Where the service charge accounts have a Profit and Loss Account, which is a summary of trading transactions for a given period, usually 12 months, it is not required if the company has its own income in the form of ground rents or income from other areas such as lease extensions or garage rentals. In such cases the Companies Act 2006 allows the Profit and Loss account to be referred to as an income and expenditure account where the company is a non-profit entity.
It is broken down into the following:
Income which contains Administrative expenses which represent the finances needed to run the daily operations of the company. As these costs do not contribute to the production of goods and services they can include Company Secretary and Accountancy fees.
Then comes the Surplus before Taxation figure from which the Taxation figure (tax paid) is subtracted giving the Surplus for the Financial Year.
This will only contain items that belong to the company such as the freehold of the block at cost or valuation (if applicable) share capital (if the company is limited by shares) or any contribution to working capital when the company was established. They are broken down into the following:
Fixed Assets: These are assets which are purchased for long-term use and are not likely to be converted quickly into cash, such as land, buildings, and equipment.
Tangible Assets: These not only include the above but also inventory, stock, bonds and cash.
Current Assets: A current asset is cash and any other company asset that will be turning to cash within one year from the date shown on the balance sheet. Current assets consist of:
Debtors which are monies due to be received by the business, and Cash at Bank and in Hand which refers to amounts which are held by a business in the form of notes and coins (e.g. petty cash) and considered a highly liquid form of current asset and part of the current assets reported in the balance sheet.
*These two figures of the debtors and cash at bank etc are added together*
Creditors: Amounts Falling Due Within One Year: This is an amount of money in a company’s accounts that has to be paid back within the following year such as Corporation Tax and other creditors. The total creditors figure is subtracted from the above total to give the Net Current Assets which in turn gives Total Assets less Current Liabilities (and is another term for working capital).
Reserves which is the figure from the Income and Expenditure account.
At the end of this comes a declaration that the company is exempted from audit under s477 of the Companies Act 2006. Its members have not required to obtain an audit under s476 of the Act and the financial statements have been prepared in accordance with the provisions applicable to companies subject to the small companies regime.
NOTES TO THE FINANCIAL STATEMENTS
This is where you will see additional information pertaining to the Balance Sheet. So for example, Fixed and Tangible Assets are explained in the Notes as:
- Depreciation and Impairment
- Carrying Amount (the cost of the acquisition minus subsequent depreciation and impairment charges which are triggered by a decline in the assets fair value
These assets are initially measured at cost and subsequently at cost or valuation along with any impairment losses, which are a recognized reduction in the carrying amount of an asset. An impaired will have a market price that is less than the value listed on the company balance sheet. If the asset declines below its carrying amount, the difference is written off. Accounts that are likely to be written down because the carrying value has a longer time span for impairment are:
- The company’s goodwill;
- Accounts receivable and;
- Long-term assets.
Impairment losses are not however usually recognized for low-cost assets, because of the time involved in analysis so they are usually confined to high-cost assets, with the losses being correspondingly large. Depreciation is recognised to allow the offset of the cost or valuation of assets, (less their residual values) over time. The gain or loss arising on the disposal of an asset is determined as the difference between the sale proceeds and the carrying value of the asset, and is credited or charged to surplus or deficit accordingly.
However if the relevant asset is carried at a revalued amount, the impairment loss is treated as a revaluation decrease. Recognised impairment losses are reversed if, (and only if), the reasons for the impairment loss have ceased to apply. Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or cash-generating unit) in prior years.