It’s a common misperception that Service Charge accounts should be easy to produce.
At Blocks Online we often receive enquiries from leaseholders, via their agents, about providing cash accounting because they want to understand what they can spend. Or agents themselves sometimes ask for accruals-based accounting to be ignored. And most worryingly, for Service Charges to be accounted for through the Management Company accounts.
Why can’t these simple requests be actioned? Because there are several important principles that Service Charge accounting, and hence accounts must adhere to, which are shaped by legal obligations, accounting requirements, and the terms of the Lease.
1. Service Charge monies belong to the leaseholders
This a well-known legal requirement detailed in the Landlord and Tenant Act 1987 (section 42). However, the implications are not always appreciated. In simple language, the monies collected from the leaseholders ‘belong’ to the leaseholders until committed or spent. The Management Company (and/or its agent) is spending the leaseholders’ money – not their own. This is why the Service Charge monies should never be included in the Management Company accounts: their collection does not imply income for the Management Company and the monies held in the bank do not reflect assets of the Management Company. This is why Service Charges need to be accounted for in their own set of accounts and is the basis for the recommendations in the TECH 03/11 guidance from ICAEW.
2. Collection and expenditure of money allocated to funds needs to be clearly tracked
Leases will refer to ‘Service Charges’ and ‘Reserve Funds’ which are generic funds that are collected with no covenants (rules) on how it can be spent. Larger blocks/estates may also have separate funds specified in the Lease, such as ‘garage fund’ or ‘major works fund’. These funds have covenants (rules) that dictate what the monies can be spent on. Because of these requirements we need to apply ‘fund accounting’ principles to handling and accounting for the monies. At the most basic level, all monies collected need to be tracked until they are spent against the fund they relate to. This ensures transparency that they are appropriately used.
3. The calculation and reporting of income and expenditure must done by Schedule
This is driven by the contractual disclosures of the Lease using ‘functional expense accounting’ to give transparency to leaseholders on where their monies have been spent. Schedules often have different contribution profiles, and as with funds, agents must track monies demanded and collected by Schedule and track what Schedule pays for each expenditure item. Therefore, the Service Charge accounts need to provide a breakdown of income and expenditure by Schedule otherwise the correct surplus/deficits cannot be calculated and administered.
4. A TECH 03/11 recommendation is to follow accruals-based accounting.
This ensures an accurate financial picture is given for each accounting period. Why is this important? Because Directors of Management Companies need correct and full financial information to inform the decisions they make. Fundamentally, accruals-based accounting includes expenses not yet paid (accruals) and excludes expenses paid that relate to a future period (pre-payments). Because some of these can be of significant value (e.g. insurance) they can have a material impact on the accounts if not accrued.
At Blocks Online, we use technology to simplify the process of producing service charge accounts. Our SCOAP Accountants service, delivered by ACA/ACCA qualified professionals, offers a compliant and competitive alternative for producing year-end service charge accounts.
If you’re interested in a more efficient and accurate way to produce service charge accounts, contact us at hello@blocksonline.co.uk.
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