Gordon Whelan from Haines Watts explains technical guidance note TECH03/11.
TECH03/11 is the technical guidance note issued jointly by professional accountancy bodies, ARMA and RICS, providing best practice guidance for the preparation of service charge accounts. The issuing of the 3rd RICS Code in June of this year elevated the status of the document and there is now an opportunity for a revised guidance note to bring TECH03/11 into line with developments in the sector.
The road to TECH03/11 – A potted history
In 2007, as a result of the wide variation in practices and approaches to service charge accounting, the professional bodies issued a guidance memorandum entitled, “The Accountant’s report on service charge accounts prepared under The Commonhold and Leasehold Reform Act 2002”. The document was full of bold type and embodied the general confusion at that time of the best way to prepare and report on service charge accounts.
Despite its failings, the document was important because it laid the way for the Technical Guidance Note issued in October 2010 (TECH01/10). Although a draft guidance, it was far more detailed and included an illustrated example of the form that service charge accounts should take along with work programmes that the reporting accountant should follow. The document, however, was held up on two thorny issues:-
- The meaning of the term “audit” in the context of service charge accounts and
- Accounting for Residents’ Management Companies
In October 2011, TECH03/11 was finalised and released at the ARMA conference in November of that year. Its release coincided with the government’s decision not to regulate the Property Management sector and ARMA’s declaration that the way forward was self regulation. TECH03/11 had found itself at the right place at the right time and was greeted by the Conference with rousing applause. After five years, it is safe to conclude that there can be few accounting guidance notes that have made such an important contribution to one sector.
The importance of the 3rd RICS Code of Practice
The 3rd RICS Residential Code now includes a reference to TECH03/11 as best practice guidance and section 3.4 of the code states that a Managing Agent should “produce and circulate service charge accounts that comply with TECH03/11”. As the RICS Code has Secretary of State Approval and can be used for evidential purposes before the courts and tribunals, this gives TECH03/11 a new and elevated status above that it had held previously. The inclusion of TECH03/11 in the Code of practice has in effect moved TECH03/11 from recommended best practice to “mandatory or recommended good practice”. This development is of significant importance as TECH03/11 is now in a position to influence the outcome of FTT hearings. For instance, a reference to TECH03/11 and the accruals concept may have resulted in a different outcome in the case of Morshead Mansions Ltd v Mactra Properties Ltd [2013] EWHC 224(Ch); [2013] PLCS 53.
Time to revise TECH03/11
With the new elevated status of TECH03/11, a revision to the guidance is probably now appropriate. The sector has developed considerably since 2011 and the document should be updated to reflect these changes. Areas for suggested improvement include the following:
Reserves
The recent case of Syed Balkhi v Southern Land Securities Ltd [2016] UKUT 0239 (LC) extended the definition of “reasonableness” to include only carrying justifiable reserves. The treatment and disclosure of reserve movements is an area that would benefit from a revised guidance note.
Accounting for Residents’ Management Companies (RMCs)
TECH03/11 currently sidesteps the issue and a revised guidance note could serve to add clarity to the debate. FRS105 is the most recent applicable accounting standard but this does not give any specific guidance on RMC accounting and the vacuum should be filled by some statement from the accounting profession. A revised TECH03/11 could reflect the wishes of most of the sector and follow ARMA’s most recent guidance that separate service charge accounts and statutory accounts should be prepared for RMCs.
Budget presentation
An appendix to TECH03/11 provides an example of service charge accounts that do not include a budget comparison against actual expenditure. This is an oversight and underestimates the importance of the service charge budget in practice.
Disclosure notes
A revised document could emphasise the role and importance of the disclosure notes to be included within the service charge accounts. Disclosure notes can play a key role in communicating valuable information to lessees and more clarity of thought and guidance in this area could be beneficial to the whole sector.
Written by Haines Watts.
