Draft UITF Abstract Residential Management Companies Financial Statements
By Adrian Gibbons
The ASB has issued a draft abstract produced by the Urgent Issues Task Force regarding the accounting treatment of residential management companies when they deal with transactions for the tenants. This is now open for consultation until the 13 June 2012.
Section 42 Landlord & Tenants Act 1987
The draft abstract confirms that the money collected from the tenants as ‘service charges’ is held in a statutory trust for the tenants and is not an asset of the residential management company.
Agent or Principal
The draft abstract says that the accounting treatment should follow an assessment of whether the residential management company is acting as an agent or principal in the transactions that it enters in to. Guidance in this area is given in FRS 5. In most cases the residential management company is likely to be acting as an ‘undisclosed agent’ on behalf of the tenants.
The draft abstract sets out the following accounting treatment depending on the status the residential management company has.
RMC acts as Principal or Undisclosed Agent
The accounts for the RMC should recognise the costs that it has incurred on behalf of the tenants as these contracts are a legal liability of the RMC. In other words in acting as an undisclosed agent the RMC has entered in to a contract with the supplier and has a legal liability to make the payment. The RMC also has a right to recover the costs from the trust account held on behalf of the tenants. Thus the turnover of the RMC would be the amount it recovers from the trust account.
Thus under this proposal the turnover of the RMC is the amounts recovered from the trust for the services that it has contracted for.
The trust account is not an asset of the company so the balance sheet would show the amount recoverable as either cash in its bank account or a debtor.
RMC acts as an Agent for the tenants
This must be disclosed to any supplier to the RMC. The accounts would show no transactions undertaken on behalf of the tenants but would disclose any commission earned for dealing with the transactions. If no commission is charged it is possible that the RMC would meet the Companies Act definition of dormant and so could prepare dormant accounts. The draft abstract says that the accounts should disclose where the tenants can get information on the transactions that have occurred and been dealt with by the RMC as their agent.
The draft abstract will apply to accounting periods ending after 31 December 2012 and early adoption is permitted.
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