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All leaseholders paying paying variable service charges should receive an annual service charge statement from their landlord, RMC or RTMCo within six months of the end of the following accounting year. Even though it is not currently a legal requirement the statement needs to be produced ‘as soon as is practical’ but if the lease does state a date then that should be adhered to. This doesn’t always happen as I have seen on our own block where the year end accounts have raised a number of questions!

Nevertheless the objective of the year end accounts is to ensure that:

  1. The Financial Statements prepared after the year end procedures contain the information that is true and fair;
  2. Any errors are detected;
  3. Fraud is prevented;
  4. All the items of income and expenditure are recorded on accrual basis;
  5. The ledger balances that are transferred from one financial year to another are accurate.

Audit or a Report on Factual Findings?

Most leases written after 1980 will have clear provisions for the year end service charge accounts to be prepared and audited, and all auditing professionals (or other qualified, practising accountants) are required to follow generally accepted auditing standards. Leases written before then will usually be less specific because  there have been significant changes in auditing standards (and other legislation) which could not have been imagined when these leases were written. So, in practice there is scope for the landlord (or managing agent) to consider whether the lease terms may be construed according to their meaning at the time they were written.

Our leases fall into the latter so instead of a andit, a ‘report on factual findings’ is carried out which is where a qualified accountant is asked to perform specific procedures under the Agreed Upon Procedure (AUP) engagement.

1: INCOME AND EXPENDITURE

This shows how much money came in against what was spent and is broken down as follows:

Income: This is the budget for the financial year in question consisting of:

  1. Service Charge Receivable: This represents amounts demanded for the period in question;
  2. Interest on Late Paid Service Charges;
  3. Bank Interest Receivable.

*These figures are added together to give Total Income*

Followed by Service Charge Expenditure, Utilities & Insurance consisting of:

  1. Water – Communal
  2. Electricity
  3. Buildings Insurance
  4. Directors & Officers Insurance
  5. Insurance Valuation

*These figures are added together*

Followed by Contracts Maintenance & Services consisting of:

  1. Equipment Telephone Line
  2. Reactive Refuse Removal
  3. Drainage Maintenance
  4. Landscape Maintenance
  5. General Repairs & Maintenance
  6. CCTV System
  7. Fire/Emergency Lighting

*These figures are added together*

Followed by Fees consisting of:

  1. Debt Collection Costs
  2. Management Fee
  3. Administration Charges
  4. Accountancy Fee
  5. Fire Risk Assessment
  6. Health & Safety Assessment

*These figures are added together*

Followed by Additional & Sundry Costs consisting of:

  1. Out of Hours
  2. Bank Charges

*These figures are added together*

The total figure from each of these groups are then added together to give the Total Expenditure from which the Total Income is subtracted to provide the net surplus/deficit for the year, in other words either an overspend or an underspend.

If any surplus figure is credited back to each leaseholder then it is not added to the Balance Carried Forward figure.

Income consisting of:

  1. Sinking Fund Receivable: This is always the same figure each year.

Sinking Fund Expenditure

  1. Repairs & Maintenance: This is subtracted from the Sinking Fund Income Receivable to give the Net Increase/Decrease for the Year.

Net (Decrease) For The Year

  1. Balance Brought Forward: This is the previous years Net Increase/Decrease for the Year and the Balance Carried Forward figure added together.
  2. Balance Carried Forward: This is the Net Increase for the current Year subtracted from the above figure.

2: BALANCE SHEET

A balance sheet is only a snapshot of a business’ financial position on one particular day and it is called a balance sheet because there is a debit entry and a credit entry for everything (but one entry may be to the profit and loss account). This means the total value of the assets is always the same value as the total value of the liabilities.

The balance sheet is comprised of the following:

Current Assets:
The assets of a company are recorded as debits (a good thing) which are expected to be converted into cash, inventory and accounts receivable within 12 months of the balance sheet date. They are also termed liquid assets but whatever they are called their value can fluctuate from day to day. They show the following:

  1. Bank Balance;
  2. Service Charge Debtors: This figure includes the amounts owed by lessees at the year end. A significant increase in debtors from one year to the next may indicate a service charge dispute, weak credit control or an inability of lessees to meet their service charge demands. Lessees should always seek an explanation for a large increase in debtors from one year to the next.
  3. Other Debtors (money owed from elsewhere such as trade debtors. These are suppliers that give a grace period in which to pay after services have been provided. The amount that goes on the balance sheet for trade debtors is the sum of all unpaid customer invoices at that point in time. A provision is usually made in the accounts of a firm to to offset uncontrollable accounts receivable (bad debts) as losses.
  4. Prepayments: These transfer expenditure into the next year end/or accounting period, if they don’t relate to the year they occurred. So, if half of an expense crosses over into the following year, such as when a debt or an instalment payment is made before it’s due (whether for the entire balance or not)  then half the amount is placed on the balance sheet as a ‘prepayment’ and classed as an asset. On the first day of the following year the expense is taken from the prepayments and returned to expenses.

Fixed Assets

These are long-term possessions that are not expected to be turned into cash within one year which include tangible assets such as buildings , land, machinery, computers, vehicles, fixtures and fittings. These are shown at their depreciated or resale value where appropriate and there are two ways to approach this:

  1. Write off the same charge over the calculated life of the asset. So, if for example, a computer was bought for £2,000 and has a useful life of around five years 20% can be written off each year.
  2. Stagger the depreciation rate in the first few years of an asset’s value by setting it higher at 30% for the first two years, 20% in the third year and 10% in the final two years. This method may allow the business to keep abreast with market value trends and the replacement cost of assets where value falls rapidly at the beginning.

Intangible Assets

These come under fixed assets and cover such things as intellectual property rights (i.e. trade marks, patents and website domain names) and long term investments.

Net Assets

Net assets are defined as total assets minus total liabilities.

*These figures are added together*

Current Liabilities

  1. Trade Creditors;
  2. Service Charges Paid in Advance;
  3. Short term loans from an RMC, overdrafts or other finance which won’t appear on the Profit and Loss sheet;
  4. Other Creditors.
  5. Accruals: These are items where expenses have been incurred during that period or year end where a) the benefits have already been taken by the company but the payments have not yet been made or b) the services which have already been provided but payment has not yet been received. They are classed as a liability. When the payment comes in the following year but relates to the previous year, at year-end the balance sheet is credited in accrued expenses (accruals). This cancels the expense for that year.
  6. Total accounts payable which are debts that must be paid off within a given period to avoid default with the other party recording the transaction as an increase to its accounts receivable in the same amount. If the AP increases over a prior period, it means that it is buying more services or goods on credit, rather than paying cash. If it decreases then it achieves the opposite effect.

*These are all added together with the Current Liabilities subtracted from the Current Assets*

Reserves

Sinking Fund

Note: The balance sheet should also include any statements and signatures by the landlord or agent required by the lease. If there is no such requirement, it is good practice for the landlord or agent, (as applicable), to sign the balance sheet to confirm approval of the accounts. There is no statutory requirement as to the form or content of the balance sheet.

3: NOTES

Some question the need for  the Notes but others view them as a fundamental tool in enabling the understanding of key figures contained within the accounts as well as the accounting policies used in their preparation.

It is Appendix C in the Tech 03/11 that suggests that the following be contained in the Notes:

  1. Tax Treatment on Interest Received;
  2. Further details of debtors and creditors;
  3. Disclosure of trust bank account details;
  4. Reserve funds including movement on reserves;
  5. Transactions with related or concerned parties.

Having said that, the Notes are only relevant to information contained within the accounts so if there are no transactions with related or concerned parties for example, then the Notes will not contain any such reference.

What won’t appear on the service charge year end statements are those items that are entered into the RMC statutory accounts such as share capital, depreciation and tax on profits. In addition there is company expenditure that should not be taken from the service charge accounts such as fees for filing and those of the Company Secretary.

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