Where the freehold is owned by a limited company and has its own income in the form of ground rents (which is investment income for the freeholder) bank and building society interest, or it has received a lump sum for an extension of a lease to a particular lessee, then that company is considered to be trading. All these items are taxable and require the filing of more detailed accounts than those required by a dormant company and a corporation tax return will need to be prepared and filed on an annual basis with HMRC. Where the company is a non-profit entity, the Companies Act 2006 allows the Profit and Loss account to be referred to as an Income and Expenditure Account.
This account 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.
It is then broken down into the following:
- The Surplus before Taxation figure from which;
- The Taxation figure (tax paid) is subtracted which gives;
- 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);
- 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. Fixed assets also include Tangible Assets such as 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: This is the figure from the Income and Expenditure account and all movements in and out should be disclosed either in the notes to the accounts or on the face of the Balancing Statement. Lessees should always ensure that that the reserve balance is more than the cash balance in Assets. If the reserve balance is less than cash then it indicates that the reserves are being used to fund the short term cash requirements of the property which indicates poor cashflow management.
At the end 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.
Under s386 of the Companies Act 2006 (duty to keep accounting records) 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.
NOTES TO THE FINANCIAL STATEMENTS
This is where there is additional information relating 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. This is 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.