Bob Smytherman talks about the latest accountancy regulations

RMC directors are unlikely to welcome new accountancy regulations which signal the end of filing dormant accounts.

The accountancy profession continues to struggle with the conundrum of how to account for funds held by Residents’ Management Companies (RMCs). Over the past few years there have been several consultation documents issued on the subject including UITF92, FRED50, the EU Accounting Directive on small companies and now FRED58, which sounds the death knell for the practice of RMCs filing dormant accounts.

Under section 42 of the Landlord and Tenant Act 1985, service charge funds are monies that are held in trust on behalf of the lessees and so do not belong to the company. In the past, directors of RMCs have used this ruling to prepare and file dormant accounts for their companies on the grounds that the company has no assets and does not carry out any transactions in its own right. This was a simple and cheap option for directors. It also meant they could report on service charge expenditure in a separate set of service charge accounts prepared in accordance with the lease. Straightforward enough, I hear you say. Unfortunately the accounting requirements for RMCs have now changed and, as often seems to be the way with regulations, the changes have complicated the situation.

The problem is that the body responsible for preparing new accounting standards (the Financial Reporting Council) has now received a legal opinion that when an RMC company deals with third parties – including residents - the transactions belong to the company. Therefore the RMC must report these transactions in its accounts as any other company would be obliged to do.

FRED58, which is the most recent guidance, makes it clear that, in future, RMC companies will not be able to file dormant accounts and that when it comes to filing statutory accounts, there will be no other special exemptions for RMCs. They are to be treated just the same as any other company. This is despite attempts from industry insiders to get concessions or further clarification for RMCs under the new accounting regime for small companies.

This leaves RMC directors in a tricky position. They have two options, neither of which is satisfactory. The first option is to prepare and file statutory accounts and to also prepare service charge accounts showing identical information but presented in a way that ensures it complies with the lease and best practice. This means two sets of accounts and two sets of costs. The alternative is to just file statutory accounts and not prepare service charge accounts at all. This will certainly keep accountancy fees down but it increases the risk that at a later date the accounts will not stand up in court because they have not been prepared in accordance with the lease.

To date, the accounting standard setters have consistently failed to come up with a solution that fully meets the needs of the sector. RMCs are special purpose companies. They do not trade and they cannot recover the additional costs of these new accounting requirements by simply passing them onto customers. Instead this accounting mess will have to be paid for by residents. What we need now is a creative solution to overcome this dilemma. As ever, a better understanding by the regulators of the needs of leaseholders, could make all the difference.

Bob Smytherman is Chairman of the FPRA