We recently sold our house, where we had lived for 40 years, and downsized to an apartment nearby. We have now received documentation from the owners’ management company in relation to various administrative matters in advance of a planned AGM in the coming months. The documents include financial statements in relation to the last financial year.
Neither my husband nor I have a financial background and we are wondering where to start as regards understanding these. Is there anything specific we should look out for?
The system in place in Ireland for the management of multi-unit developments (MUDs) is that they are managed via owners' management companies (OMCs). These are normal companies, registered with the Companies Registration Office (CRO), and as such require financial statements to be lodged with the CRO annually. Such statements are, by their nature, technical, and, like yourselves, many property owners do not have any experience in how to engage with them.
It is good that you are engaging with the OMC because, as with any company, good financial management is fundamental to good general management and it is important that members of the company monitor this. If an OMC is not well managed financially, then it will not be able to undertake the tasks set out for it under the lease agreements for the development. And, if it is not building a good sinking fund for long-term investments, then poor financial management will come back to haunt property owners.
You don’t say if the financial statements that you received are audited accounts. It is not required under Irish company law that OMC accounts be audited, ie they can be simply prepared by somebody who believes they have the relevant expertise to do so and then circulated to members. While this can save some money, accounts prepared by a registered auditor give greater certainty to members, given that such accounts have been properly prepared by an independent, external person or company, who are themselves separately regulated.
Necessary information
Two facts that will assist you in interpreting the accounts are the number of properties (and perhaps a breakdown by type) covered by the OMC and the age of the development. If you do not have this information, the managing agent should be able to supply it.
The most important page in the accounts is the balance sheet. This provides a snapshot of the assets and liabilities of the company at the end of the last financial year (the date to which it applies should be shown at the top of the page).
On the balance sheet, perhaps the most important single figure is that for net assets, ie the total assets of the company minus any money it owes in the short term (ie current liabilities). Broadly speaking, the older and bigger the development, the higher this figure should be. However, this might not always be the case, as the OMC may have recently done a large project such as the replacement of lifts or of a roof and may now be starting the process of rebuilding its sinking fund.
The balance sheet should also indicate the company’s total cash reserves, perhaps called cash at bank and in hand. This will normally be lower than the net assets figure as some assets of the company will be tied up in money owing to the OMC (ie debtors). Again, the age and size of the development will help you to understand if the cash reserves are adequate.
You should also check the creditors figure in the balance sheet as this amount was owing by the OMC at the end of the year (eg to contractors), so it should really be subtracted from the cash balance to give a true picture.
A further breakdown of cash reserves will arise between the OMC current account and the sinking fund account. It is good practice for an OMC to have a distinct sinking fund bank account and the balance in this should be shown either in the balance sheet itself or in one of the notes to the accounts that follow it. This figure will indicate if your OMC is putting aside funds for the longer term.
Service charge arrears
Another important figure relates to service charge arrears. This is normally shown under a note to the accounts, probably titled debtors. The first line under this is normally called trade debtors or perhaps service charge debtors, and this will show the amount owing at the end of the last financial year in cumulative service charge arrears.
The age of the development, its size and its average annual charges will help to interpret this. The higher the amount of service charge arrears as a proportion of the annual income of the company, the greater the worry, as this means that while the company may have strong net assets as per its balance sheet, it may have poor cash flow if a good portion of the assets is unavailable to the company in the short term.
The paragraphs above relate to the state of the OMC’s finances at year end. A separate question is how the company performed in the last financial year. This can be seen from the income and expenditure account (also known as the profit and loss account) in the financial statements. This will show total OMC income and expenditure for the last year, as well as whether this led to a surplus or deficit. While this is important, one cannot draw any direct conclusion from one year’s outcome, eg the company may have planned for a deficit if it had to undertake a large project.
Towards the back of the accounts there may be a more detailed breakdown of expenditure. If so, that will help you to further understand what happened in the year. This page (normally not audited) should be available from the managing agent if it is not included in the accounts themselves.
These are some key points that will help you to understand the finances of your OMC. Of course, it is worth reading all sections of the financial statements as other sections, such as the reports of the auditor or the directors, also contain useful information. Under the Multi-Unit Developments Act, 2011, the OMC must also provide some specified non-financial information each year, including in relation to fire safety arrangements and the block insurance policy.
If you are having trouble understanding the accounts, a phone call or email to the managing agent will normally resolve any queries. In the case of complex queries, the agent will be able to forward such issues to the auditors for response.
Finbar McDonnell is a chartered property manager and a member of the Society of Chartered Surveyors Ireland, scsi.ie
