 |
|
|
|
|
The Urgent Issues Task Force has been prompted to issue an abstract for comment on financial statements of residential management companies. The Issue is summarised in the Abstract as following:
1. The UITF received a request from the Institute of Chartered Accountants in England and Wales (ICAEW) to consider the treatment of transactions relating to residential service charges in the financial statements (statutory accounts) of residential management companies (RMCs).
2. In bringing the concern to the attention of the UITF, it was noted that the ICAEW has received legal counsel opinion that, irrespective of whether a RMC was acting as principal or agent, the cash balance representing contributions received from lessees in accordance with the terms of their leases and held by a RMC under S.42, Landlord & Tenant Act 1987 is held on statutory trust and is not an asset of the company.
3. This has led to confusion as to whether the lack of beneficial ownership of the cash balance means that none of the relevant transactions should be recorded in the RMC financial statements and the ICAEW has identified variations in practice. In some cases the RMC apparently regards itself as acting as an agent and, accordingly, does not record the transactions which often means, for the purposes of company law, that it is dormant. In other cases the RMC apparently regards itself as acting as a principal or as an undisclosed agent and, hence, records the transactions in its financial statements. It is not clear which treatment is correct and whether or not this is dependent on the RMC acting as principal or agent.
The proposed guidance suggests that:
(i) to determine the transactions to be included in its financial statements, a RMC must first determine whether, in its dealings with third parties, it is acting as an agent or as principal (or undisclosed agent). A RMC should consider the guidance in FRS 5 ‘Reporting the Substance of Transactions’ Application Note G. Paragraphs G62 to G66 provide principles for determining whether a seller is acting as agent or principal and this guidance should be applied by analogy to transactions to purchase goods and services. The guidance also notes, inter alia, that where the seller has not disclosed that it is acting as agent, there is a rebuttable presumption that it is acting as principal;
(ii) where the RMC determines it is acting as principal (or undisclosed agent), it shall record the relevant service charge transactions arising from contracts to purchase goods and services in the profit and loss account and concurrently recognises income by drawing from the service charge cash balances;
(iii) where the RMC determines it is acting as an agent (and has disclosed this fact), it should not record the relevant service charge transactions in its financial statements;
(iv) where a RMC determines it is acting as an agent and has no relevant service charge transactions, it may be dormant if it also meets all the requirements of company law for dormant companies; and
(v) where a RMC discloses it is an agent, the financial statements should refer to where tenants can obtain information regarding residential service charges transactions.
Comments are being sought on these proposals.
Access the full Abstract from the UITF website here |
|
|
|
|
|
