I sometimes despair of my profession. It has a habit of shooting itself in the foot by bringing forward profoundly wrong-headed solutions to problems that no-one but itself can\u00a0see.<\/p>\n
FRED 50 is a classic example. This Financial Reporting Exposure Draft seeks to address the thorny question of whether or not Residential Management Companies act as agent or principal. Sounds esoteric \u2013 unfortunately it isn\u2019t.<\/p>\n
Residential Management Companies exist for just one purpose \u2013 to enable the collective of leaseholders in a property to take control of the \u201csuperior interest\u201d \u2013 ie, to become their own landlord. Included in all residential leases are clauses relating to Service Charges \u2013 the landlord\u2019s responsibility for ensuring shared services are provided and shared maintenance undertaken, and the tenant\u2019s (ie leaseholder\u2019s) obligation to reimburse their share of costs relating thereto.<\/p>\n
Typically when leaseholders take collective control and become their own landlord, they do so to protect their investment in their own home. Disinterested landlords have a nasty habit of providing second-rate services \u2013 becoming ones own landlord overcomes that. But nothing changes as regards obligations under the lease. The landlord (now the collective of leaseholders) organises necessary works, the tenants \/ leaseholders bear the costs by way of Service Charge demands. There are strict rules governing Service Charges and Service Charge accounting, set out in the Landlord & Tenants Acts and allied legislation. Service Charge accounts must provide certain clear information relating both to the nature and quantum of expenses incurred, and to the use of cash received from tenants and cash balances at the end of the Service Charge year. The legislators made no attempt whatsoever to align Service Charge accounts with Companies Act statutory accounts formats, for good reason \u2013 the recipients of Service Charge accounts require specific, clearly laid out information relating to their Service Charge costs and their cash contributions, but they cannot be assumed to have sufficient financial literacy to be able to make sense of Companies Act format statutory accounts.<\/p>\n
And so to the statutory accounts of Residential Management Companies. Given the companies exist for the sole purpose of enabling a collective of leaseholders to take control of their own affairs, and given the relationship between landlord and leaseholder as set out in the relevant lease, many people have argued persuasively for several years that the company has acted as nothing other than a nominee or agent for the body of leaseholders. And as it does nothing on its own account, there is nothing to report in its statutory accounts. So the companies can meet their Companies Act requirements by filing dormant company accounts at Companies House \u2013 quick, and cheap. Costs are inevitably incurred in connection with the generation of Service Charge accounts, but that\u2019s it.<\/p>\n
But then the bright chaps at both my Institute and at the Financial Reporting Council decided it was necessary to address the thorny issue of principal or agent. According to FRED 50, they \u201cobtained independent legal counsel\u2019s opinions on this issue. Both legal opinions concurred that RMCs always act as principals (not agents) in their residential management transactions with third party suppliers.\u201d And having obtained said opinions, FRED 50 concludes that \u201cA residential management company shall recognise the relevant service charge expense arising from the management and arrangement of maintenance of a property in pro\ufb01t or loss. A residential management company shall concurrently recognise income in pro\ufb01t or loss by drawing from the service charge monies. This income and expense shall not be offset.\u201d FRED 50 also states that, following Section 42 of the Landlord and Tenant Act 1987 \u201cThe cash balance and other assets are not assets of a residential management company and shall not be recognised in a residential management company\u2019s balance sheet.\u201d<\/p>\n
Which means that, according to these bright chaps, Residential Management Companies will in future be obliged to produce, at the expense of its leaseholders, a rather odd looking set of statutory accounts for filing at Companies House.<\/p>\n
Cui bono? Not the leaseholders, also shareholders, who will face increased administration costs for no good purpose . Not third party suppliers, who can have no possible need for these accounts. Not banks, nor analysts, nor property purchasers. And not accountancy practitioners either, who will have the devil\u2019s own job explaining why they merit recompense for time expended producing this entirely pointless set of accounts.<\/p>\n","protected":false},"excerpt":{"rendered":"
I sometimes despair of my profession. It has a habit of shooting itself in the foot by bringing forward profoundly wrong-headed solutions to problems that no-one but itself can\u00a0see. FRED 50 is a classic example. This Financial Reporting Exposure Draft seeks to address the thorny question of whether or not Residential Management Companies act as[…] <\/p>\n