Association Finances-Reserves and Other Fund Things

WSCAI-Spokane11/02/13

Catherine Kuhn, CPACagianut & Company, CPA

Catherine Kuhn, CPA, manages the Bellevue office of Cagianut & Company, CPA, which is devoted exclusively to

serving the financial needs of close to 600 Community Associations in Washington. C&C has over 20 years of

experience in serving Community Associations.

Fun things- Priest Lake

My favorite place on Earth!

Outline Today:

What is Fund Accounting and should we be using it? Is it required or recommended?

What are the accounting implications if our budget doesn’t match our reserve study?

What happens if we miss reserve deposits that are budgeted for?

What are the accounting issues if we don’t pay back the missed reserve deposits?

Questions to Answer

Why do operating and reserve expenses need to be segregated?

What impact do the “new” Washington reserve study disclosure laws have on the audit report?

What is disclosed in the audit report about our reserve study?

How do I read our financial statements to recognize if these issues exist in our association?

Which Hat to Wear?

GAAP (Generally Accepted Accounting Principles) as defined by FASB

RCW – Washington law for condominiums and HOAs

IRS – Internal Revenue Service rulings and guidance

Industry Standards – Prevalent industry practices that are commonly held to be accepted

What is Fund Accounting??

Records financial activity by fund (operating fund, construction fund, reserve fund, insurance fund, special assessment fund)

Specific dollars earmarked for specific projects

Sample Fund Balance Sheet

Sample Fund Income Statement

Sample Income Statement

GAAP Standards:

Assessments for major repairs and replacements (reserves) must be reported separately from operations.

Fund reporting not required – but is “more informative to users”

If no fund reporting - shown as “appropriation of retained earnings”

Types of Funds

OperatingReplacement Insurance – NOT ReservePropertyOther – Special Project, Settlement

Why Fund Accounting? Know when reserve deposits are not made Know when expenses are paid out of the

wrong fund Know when monies are borrowed or

transferred between funds Have a usable operating fund net income

statement that can be used as a comparative with the budget

Better information for decisions

Fund Accounting in the Industry

Fund accounting is definitely the industry standard

Trending to fund accounting in Washington

Questions on Fund Accounting??

Fun Thing….

HOOPFEST!!

What if Budget Does NOT Equal the Reserve Study?

Does your association budget’s reserve contribution MATCH the Reserve Study annual contribution recommendation?

What happens if your annual budget contributions don’t match the study?

Is there an accounting “issue” if it doesn’t?

What if Budget Does NOT Equal the Reserve Study?

There is NO accounting (books) issue if your annual budget does not match the RS

There IS a possible audit report disclosure issue if the annual budget contribution doesn’t match the study

What if we MISS Budgeted Reserve Deposits?

GAAP: Requires that the budgeted reserve allocation (contribution) be shown as the “revenue” on the reserves Income Statement, regardless if “paid” into the fund, or not. (ie “accrual method”)

GAAP: If not paid to reserves, it will show as a “payable” to reserves, or, a “Due Between Funds”.

“Due Between Funds”

When one fund owes another fund money

Can be a result of ~• Reserve deposits not made• Expenses not paid out of right fund• Wrong amounts – either deposited or paid• Wrong coding of expense• Monies borrowed• Interest not properly posted• Accounting errors (e.g. journal entries)

Due Between Funds Example

Example: Not all reserve allocations were transferred during the year. Interest was earned on reserve cash and posted to reserve fund Expenses were coded to reserve expenses, but were paid out of

operating cash.

Operating Cash owes Reserve Cash $1,200

What if we don’t pay back the missed Reserve Deposit?

GAAP: Considered a “transfer between funds” and a “permanent transfer” is made from the reserve fund to the operating fund.

Transfer Between Funds

When one fund moves assets from one fund to another

Can be a result of:• Moving cash permanently between funds• “Forgiving” loans• “Forgiving” amounts Due Between Funds

Due Between Funds vs. Transfer - GAAP

How to determine for GAAP? True Receivable and Payable?

• Intention to repay?• Documented plans to repay?• New Reserve Study?

• Ability to repay? Enough operating cash/fund?

Due Between Funds vs. Transfer - RCW

Is not funding the same as borrowing?True borrowing –

must be repaid

within 24 months(out of cycle res exp or a reserve component not yet in the

study is not a borrowing)

Due Between Funds vs. Transfer - IRS

Form 1120-H• No impact

Form 1120• May fail the tests ~

• Strict segregation of cash• Use of monies as intended

• May not be qualified to filed form 1120 if large

Due Between Funds or Transfers

Questions?? Due to Reserves, transfers, missed deposits~

Ready to JUMP in to the next section?

Priest Lake

Operating vs. Reserve ExpensesIs it a Reserve Expense?

GAAP: Major repair or replacement

Industry Standard: Major repair/replacement not an annual eventExtends the life of common area component Included in the reserve studyBoard determination

Is it a Reserve Expense?

RCW: “Infrequent and significant nature make them impractical to be included in the annual budget”

IRS: Must be “capital” in nature

Ops versus Reserve Expense? Why Important?

Reserve Study will not be accurate if operating and reserve expenses are not segregated and improper expenses are taken out of reserve cash

Operating Income Statement analysis of Budget to Actual will be inaccurate

For IRS purposes, very important to segregate operating and reserve expenses

Controls on Reserve Activity

Funding in accordance with the budget Does your Board know when reserve deposits are missed?

Reserve expenses• Operating or Reserve expense?• Paid from correct fund?• Approvals?

Controls on Reserve Activity

Funding in agreement with Reserve Study Spending in agreement with Reserve Study

Changes in either not funding or not spending according to the Reserve Study can significantly impact future cash flow projections.

Controls on Reserve Activity

BOARD MINUTES – Very Important!

Nature and amount of reserve expenses Decisions to repay reserves, payment plans Decisions to transfer funds (instead of repay) Why the budget does not match the Reserve Study Why reserve deposits are missed/plans --

Questions? Operating/Reserve Expense:

Fun Things…

The View from Elkins Resort @ Priest- Chimney Rock!

Fun Things…

Making it to the TOP of Chimney Rock!

Audit Reports and Reserve Disclosures

Footnotes to the Audited Statements:• Requirements to accumulate funds (statutes),

including FHA (RCW: no funding requirement)• Funding Policy• Reserve allocation for the year (Income Stmt)• Reserve Study status

• Reserve Study annual allocation – compared to budget

Required (Unaudited) Supplementary Information (RSI)

Estimates of current or future costs of major repairs and replacements for all existing components (i.e., Reserve Study)

Components, useful lives Funds accumulated (i.e. Reserve Fund Equity)

C&C adds: “Percent Funded”

R S

I

Required (Unaudited) Supplementary Information (RSI)

Auditor’s Report: A statement that the RSI (Reserve Study) is included, or, a

statement that it has been omitted

The Auditor’s Report is the only thing the CPA “owns” in the financial statements- so this is on the first page

R S

I

Required (Unaudited) Supplementary Information (RSI)

If a Reserve Study was presented in a prior audit report:

The CPA is now required to COMPARE RSI to RSI: (Disclosed in Reserves footnote)• Material changes in components• Material changes in estimated current/future costs• Material changes in component lives• Anything else the reader should know R

S I

New Reserve Study Requirements:RCW 1/1/12 Certain required disclosures now in the annual BUDGET

document (Talaga presentation)• Most of our 12/31/12 audit clients did NOT have this

disclosure in their 2013 budgets

• Internal Control Report “comment” if not included in Budget document

Questions? Audit/Internal Control Disclosures?

Fun Things…. BloomsDay!2013 Corporate Cup table with my sister, daughters, nieces

Fun Things…. AFTER BloomsDay 2013!Cousins taking a break….

Reading Your Financials: Spot the “Issues”

The BOARD is responsible for the financial statements, disclosures, reserve study

Reading Your Financials: Spot the “Issues”

Read Budget to Actual Income Statement each month Helps identify misclassifications in operating and reserve

expense

Look for “Due Between Funds” (i.e. amounts owed to reserves)

Easier to spot if you have Fund Accounting ASK your Manager or Accountant if you

don’t understand!

Reading Your Financials: Spot the “Issues”

Transfers between Funds:• There shouldn’t be ANY changes in the equity/fund accounts each

month unless authorized/documented by the Board • DOCUMENT the reasons for any permanent funds transfers (ie

forgiveness of amounts owed to reserves)• Communicate with reserve preparer

DOCUMENT

Document

Document!

Document!!

Questions? Spotting Issues….

Resource: hoacpa.comcathy@hoacpa.com

FINAL “Fun Thing…….”

CHOCOLATE!!