Owner Management Companies – Service Charge Debtors: Do We Still Need To Provide?
In the midsts of the recession it was easier to argue that service charge debtors should be provided for in instances that they will not be recovered. We have seen instances unfortunately where property receivers were appointed and that the management charges went unpaid. However as the economy is improving we are noticing that some property agents are reverting to the old adage that they, the outstanding management charges have to have to be paid before a property can be sold, therefore no provision is required in the financial statements The issue of, if and when these sales take place must be considered. If you are a director of a management company you should ensure that the company has a clear policy on providing for long term debtors. Also with the introduction of FRS102 we as directors and auditors need to consider the time value of the debtor balance. Therefore if a service charge debtor is unlikely to be recovered for five to seven years then under the new standard the balance will need to be adjusted to its net present value. Furthermore as the OMC’s are required to have a sinking fund by law, by not providing for old debtors is the management company potentially overstating their ability for future capital expenditure. By taking a proactive approach to the recovery of service charge debtors, including providing against long term debtors the directors are ensuring the financial stability of the company. In the short to medium term where the recovery of debtors is an issue these uncollected service charge debtors may lead to a shortage of cash for the company. The nature of owner management companies is such that any shortfall will have to be met by other members of the company or by a reduction in future expenditure within the development or a withdrawal of services.