Best practice accounting guidance TECH03/11 requires service charge accounts to include an Income and Expenditure report, a Balance Sheet and explanatory notes to the accounts. All three components are required if the reader of the accounts is to fully understand the financial information presented.
The 3rd RICS Residential Code is less favourable towards notes to the accounts and advocates that they may not be required and even goes so far as to state that valuable information should be disclosed outside of the service charge accounts.
At Haines Watts we believe that notes to the accounts are central to understanding the annual service charge statement and that they are a perfect way to convey any valuable information to lessees.
The case for notes to the accounts
Notes to the accounts have many important functions including explaining key figures in the accounts and detailing the accounting policies that have been adopted in the preparation of the accounts. If used appropriately they can provide transparency to the reader and allow a better understanding of the key matters.
Appendix C to TECH03/11 suggests that the following notes accompany the accounts,
a) Accounting policies used in the preparation of the accounts
b) Tax treatment on interest received
c) Further details of debtors and creditors
d) Disclosure of trust bank account details
e) Reserve funds including movements on reserves
f) Transactions with related or connected parties.
These are standard notes that would be expected to be included in most service charge accounts. However, notes are only required to the extent that they are relevant to the accounts. So if there is no reserve fund for the property then a reserve note is not required even though it appears in the illustrative accounts in TECH03/11.
The 3rd RICS Residential Code – No place for notes?
The 3rd RICS Residential Code adopts a different approach to notes to service charge accounts. Far from advocating their use the Code undervalues and underplays the role of notes. The attack is on two levels,
- The Code requires disclosure of important information such as “connected parties” transactions and other income arising to the landlord or Managing Agent but states that the disclosures should be made outside of the accounts (Part 10.1 and Part 3.6 of the Code)
- Appendix C to the Code states that explanatory notes may be included, “within an accompanying letter. They may not always be needed.”
This approach is in direct contradiction to the requirements of TECH03/11 and it will be interesting to see how a revised TECH03/11 deals with this conflict.
Conclusion
Typical circumstances when we would suggest the inclusion of additional notes includes,
- Explaining any significant events in the year
- Highlighting any future events that may impact on the service charge funds
- Giving additional details on expenditure items. e.g. insurance costs with details of the policy number, level of cover and period of cover.
- Disclosing details of estimates or the basis for apportionment of costs across schedules.
- Further details about reserves such as future planned maintenance programmes.
At the heart of our approach is the belief that the service charge accounts are a powerful way to improve communications with lessees and that the skilled reporting accountant can play a valuable role in assisting managing agents and directors to add value to their annual service charge statements.
Written by Haines Watts
