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As TECH03/11 celebrates its fifth birthday this month, we in Haines Watts’ specialist Service Charge team believe that now would be a great time to reflect on best practice guidance for Service Charge accounting. A revision to the Standard is probably due and here are five changes that I would like to see included in a revised and grown up TECH03/11.

1. An acknowledgement of incorporation within the 3rd RICS Code

The 3rd RICS Residential Code now includes a reference to TECH03/11 as best practice guidance for preparing service charge accounts. 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 what it had before.

I first heard this idea proposed by Jeff Platt (resigning CEO of IRPM) at a conference some years ago and great credit is due for the initiative. I’m not sure, though, that Property Managers or accountants fully realise the importance of this change. To my mind, this new status should be shouted out loud and clear in the first line of any revised TECH03/11. I look forward to the day when the first point of reference for all FTT cases involving service charge accounts is TECH03/11.

2. The accruals basis

I would like to see the accruals basis for preparing service charge accounts emphasised to a far greater extent in a revised TECH03/11. I do not believe the cash basis is an appropriate basis for preparing service charge accounts and its adoption usually results in a tendency to do away with the Balancing Statement (as in Commercial Service Charge accounting). A souped up TECH03/11 with an emphasis on 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.

I would also like to avoid another joust with barrister Amanda Gourlay on the different interpretation of the word “incurred” by the accounting and legal professions (See Estates Gazette article, “Two Professions divided by a common language?”)!

3. Reserves

This is an area of the standard that could be significantly improved. I would like to see the following statement added to the Reserve fund note, “The balance on the Reserve fund is considered to be adequate, but not excessive, to meet future anticipated non recurring expenditure”. I think such a note would be welcomed by all readers to the accounts.

4. Residents’ Management Company (RMC) accounts

A revised guidance note will have to address this matter as the current TECH03/11 sidesteps the issue. FRS105 is the most recent applicable accounting standard but it doesn’t give any specific guidance and the vacuum needs to be filled by some statement from the accounting profession. I think that the statement should reflect the wishes of most of the sector and follow ARMA’s most recent guidance and confirm that separate service charge accounts and statutory accounts should be prepared for RMCs.

5. Budget presentation

One of the appendices to TECH03/11 includes an example of a set of Service Charge accounts including an example Income and Expenditure report. However, the example does not include a budget column. This isn’t helpful and underestimates the importance of the service charge budget in practice. The inclusion of a budget column would also assist Managing Agents to meet the requirements of ARMA Q and the 3rd RICS Code to show significant variances between actual and budgeted expenditure in the service charge year.

Five years on and without doubt TECH03/11 has had a big impact on the service charge accounting world. With the new codes for RICS and ARHM now in place and the introduction of ARMA Q it is a good time to revisit TECH03/11 and for the guidance to do a bit more growing up!

 

 

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