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Service charge accounting compliance hits low

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6th Sep 2016
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The Service Charge Operating Report (SCOR) for Offices is published annually, and examines the quality of accounting practices within the commercial multi-let office sector.

Over the last six years, SCOR has identified a number of ongoing issues with the quality of service charge accounting statements, including a lack of consistency, comparability and transparency within the information provided to commercial occupiers. UK commercial service charges are not subject to statutory legislation (unlike the residential sector). Practical guidance comes from the non-mandatory Royal Institution of Chartered Surveyors (RICS) Code of Practice, Service Charges in Commercial Property. This guidance was recently supplemented by an ICAEW technical release.

However, this year’s SCOR still shows that compliance with many of the accounting requirements of the RICS Code remain disappointingly low. While SCOR’s analysis did identify a longitudinal improvement in some areas of service charge accounting, compliance with certain key issues, such as the disclosure of key accounting policies remains low. What is the role of accountants in improving the current quality of commercial service charge accounting? Due to their unique skills and knowledge, accountants within the property industry are in a key position to take a leadership role in improving service charge accounting.

As many accountants are actively involved in both the preparation and assurance of service charge accounts, they are one of the key influencers in improving the overall efficiency of the reporting process.

Regardless of whether these improvements require modifications to a managing property agent or landlord’s existing internal accounting system, or new forms of presentation and disclosure within annual reconciliation certificates, accountants have the expertise to facilitate these changes and assist non-accountants with their implementation.

From a professional accounting perspective, complying with the accounting requirements of the RICS code should be no different to adhering with International Accounting Standards (IAS), or any other form of regulation. It is our job as accountants and financial reporting experts to identify how best to provide useful accounting information to intended users. We are best placed to offer unique insights about improving the quality of the information that commercial occupiers currently receive from managing parties. We have a duty to uphold the guidance and best practice methodology that now exists in this sector.

It may be that additional skills or expertise may be appropriate, relevant or necessary in order to constructively conclude on the costs presented. While the number of specific accounting requirements of the RICS code have increased over time, the majority are not onerous at all. Three requirements relate to the classification and presentation of costs and income, four relate to cost disclosure, one relates to the timely delivery of the accounts, one relates to the certification of the yearend certificates, and the final one requires the disclosure of an opening and closing schedule of accruals and prepayments.

From an accounting perspective, compliance with these requirements requires a double-entry based cost accounting system, the use of industry prescribed cost classifications, the preparation of adequate disclosures, and strict adherence to certification requirements and deadlines.

As managing parties may lack the accounting knowledge necessary to implement some of these changes, accounting professionals must drive improvements in best practice.

Whether an accountant prepares the service charge accounts, is conducting an assurance review, or acting as a property consultant, he or she has a professional and ethical obligation to assist in the improvement of service charge accounting.

While progress is slow, it appears underway. We are now seeing a small number of certificates including a balance sheet listing the assets and liabilities on the service charge account, and there are also examples of an exemplary level of presentation and disclosure by agents, accountants and landlords who understand that adhering to best practice also offers competitive advantage in the market place. 

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