Comments from ACCA to the Financial Reporting Council (FRC), November 2013.
ACCA welcomes the opportunity to comment on the above Exposure Draft (ED). UK and Ireland-based members of our Global Forum for Corporate Reporting have considered the proposals, and their views are reflected in the following general and specific comments.
ACCA is pleased to note the clarification within the ED. Under the previous proposals by the UITF (Information Sheet no. 92, issued in May 2012), Residential Management Companies (RMCs) would have needed to determine whether they are acting as principal or agent when dealing with service charge costs. We argued that most RMCs do not have the knowledge or resources to make this legal determination. The current ED now gives a confirmation that the RMC acts as principal.
However, ACCA believes that the current ED still does not provide sufficient authoritative guidance for RMCs and their shareholders (who are usually the leaseholders, and constitute the principal users of the financial statements). Our response to Question 1 below gives examples of meaningful financial information which will still not be reported to the shareholders under the provisions of this ED. The length of time for which such guidance has been lacking is a concern to many interested parties, including ACCA.
Wide-ranging guidance has been issued by accounting bodies, but as mentioned in our response to UITF Information Sheet no. 92, we believe that this would have greater authority if issued by the FRC. The result would be that best practice is more likely to be adopted by RMCs, and that divergence in practice between them is avoided. In our response to Question 1 below, we have described how guidance might be issued which meets both legal requirements, and also the information needs of the users of RMCs’ financial statements.
At present, the guidance issued by the accounting bodies is often ignored in favour of including all service charge transactions in the statutory financial statements of the RMC. This approach is adopted on the grounds that the information produced is understandable to the leaseholders. Despite the changes made as a result of the provisions of this ED, we would anticipate that this divergent practice will mostly continue, in the absence of guidance which is comprehensive and appropriate, whilst being authoritative at the same time.
Finally, the ED, whilst reflecting the legal opinion received, will result in some duplication with the Summary of Costs prepared under the Landlord and Tenant Act 1985. We accept that in order to resolve the confusion which could potentially arise, there would need to be collaboration between the FRC and Government. Furthermore, though, if information is presented in accordance with the guidance which we would prefer to see issued, we envisage that leaseholders will be less likely to require the production of a Summary of Costs.
Question 1: Do you agree with proposed draft FRC Abstract 1 and Consequential Amendments to the FRSSE? If not, why not?
ACCA acknowledges that the proposed Abstract and amendments to the FRSSE reflect the RMC’s legal status as principal, and also that the RMC holds service charge monies in trust. We accept that the disclosure of the amount of such monies (and the fact of the trustee relationship) is intended to be helpful to leaseholders.
As explained in our General Comments above, there is, however a clear need for authoritative guidance on the form and content of RMC financial statements which provides the information needed by the leaseholders, and ensures that there is a framework for RMCs to report consistently in practice. For example, service charge debtors and creditors, accrued expenses and the current balance of any sinking fund (which can build up to a high level) are generally of importance to leaseholders.
Where balances (such as service charge debtors) are not legally assets or liabilities of the RMC, a practical solution would be to include these in the financial statements of the RMC by way of disclosure only. Alternatively, they could be included as assets or liabilities with an equal and opposite entry (as is often done for client monies held on trust by an organisation), along with an explanatory note.
ACCA acknowledges that many RMCs will be micro-entities, and consequently not required to provide either all of the information either in the ED, or as set out in our response to this question. However, as this additional information will be driven by the information needs of leaseholders, we envisage that many RMCs will choose to include it in their financial statements.
Question 2: Do you agree with the proposed effective date? If not, why not?
ACCA agrees with the proposal to align the effective date of FRC Abstract 1 with that for the revised FRSSE, being periods starting on or after 1 January 2015, with early adoption permitted.