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Service Charge Accounts - Sinking Funds

Service Charge Accounts - Sinking Funds

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As per the above really.

It’s not something I’ve had to deal with before, and we are looking at setting some up on new builds for leaseholders going forward.

My understanding is that we need to:-

  1. Establish the components which the sinking funds will be used for.
  2. Ascertain the cost of replacing the component at the end of its useful economic life.
  3. The cost of replacement is then divided by the number or regular payments that the leaseholder will make.

In regards to 2) I assume we will need to establish the cost now, and uplift each year based on an estimated CPI (or similar)? Or do we need to uplift the leaseholder contribution based on actual CPI each year? Or is a revaluation done from time to time depending on the component and it's expected life?

I presume we then hold the contributions on the balance sheet until a replacement is needed, where the cost would then offset then contributions?

Last question, I promise. The cost will also certainly differ. What happens to the residual value? Is it recovered / refunded, or do you reflect in the calculation for the next replacement?

Thanks in advance.

Replies (3)

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By Wanderer
01st Aug 2018 13:28

Most sinking fund provisions just seem to be made up of any excess surplus' just dumped into there.

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Replying to Wanderer:
By mrme89
01st Aug 2018 13:41

I presume then, that it is just about getting the most reasonable figure for the leaseholder and then take the rough with the smooth?

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01st Aug 2018 22:16

As Wanderer says most service charge accounts show a general reserve and this becomes a sinking fund. Alternatively if there is a specific project, eg tree felling, then the leaseholders can be asked to contribute x amount and this gets included in the budget request and service charge requests increased accordingly. Then this reserve is shown separately from the general reserve.

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