When it comes to the association’s finances, how can boards be assured they’re handling things properly?
Familiarize themselves with accounting rules applicable to Common Interest Realty Associations (CIRA’s); regularly review financial statements and compare actual results to budget expectations, and obtain explanations for significant variances; engage an independent CPA firm annually to perform an audit or review of the Association’s financial statements.
What are the proper accounting methods?
Accounting Standards Codification (ASC) 972 establish the use of accrual basis and fund accounting when preparing and presenting financial statements for CIRA’s
What is cash accounting?
Cash basis accounting recognizes revenue and expenses when cash is received or disbursed.
What is accrual accounting?
Accrual basis accounting recognizes revenue when it is earned and expenses when they are incurred, regardless of when cash is collected or disbursed.
Which of these two methods is the best for an association?
ASC-972 promulgates the accrual basis of accounting for CIRA’s. However, the rules allow that cash basis statements are acceptable, provided however, that the results reported using the cash basis would not be materially different than if the statements were prepared using the accrual basis.
Many associations use a “modified accrual” basis of accounting whereby revenue is recognized when earned and expenses when paid.
Where should the board begin when creating budgets?
A primary fiduciary responsibility of the Board of Managers is to maintain the property, not to keep maintenance fees low. As such, best practice is to create a budget using a “bottom-up” approach, estimating needs and expenses necessary to operate and maintain the association, then determining the fees necessary to execute on those plans.
When creating a budget, what is the best way to categorize expenses?
Best practice is to create categories that closely identify and align with the operations of the association.
What categories should an association have?
See #9 above. Most associations will have at a minimum, the following categories: Administrative, Operations, Ground Maintenance/Snow Removal, Repairs and Maintenance.
How detailed should the categories be?
Categories should be detailed enough to enable management to identify significant areas of revenue and spending, but not too many as to render the financial management to become unwieldy.
What are the advantages of sub-categories?
Sub-categories allow management to quickly review and analyze financial reports. For example, a primary category such as Repairs/Maintenance may have sub-categories for External building; Internal building; Recreation facilities; etc.
How often should the budget be analyzed and by whom?
That depends on the complexity of the association, but typically a monthly, but not less than quarterly review of the actual versus budget comparison should be performed by each member of the board.
Does the association’s independent accountant typically review the budget prior to its being approved by the board?
Generally speaking, this is not typically performed by the independent accountant because it can blur the line of independence.
Should boards consult with their accountants prior to approving their budgets?
Depending on the circumstances, it may be prudent for the board to seek information from subject matter experts if it assists the members in their decision-making process.
What are an association’s annual reporting requirements for financial statements?
The requirements are typically set forth in each association’s declarations and by-laws. Generally speaking, financial reports must be made available to any member upon request. Most associations provide their members financial statements at least annually.
What is the financial statement as opposed to the budget?
The budget is management’s estimate of future spending and revenue. The financial statements consisting of a Balance Sheet; Statement of Revenue and Expenditures; Fund Balance; and Cash Flows present the actual financial results of the association.
When should the board/manager analyze the financial statement?
That depends on the complexity of the association, but typically a monthly, but not less than quarterly review of the actual versus budget comparison should be performed by each member of the board.
What are variable expenses?
Variable expenses fluctuate based on other factors versus fixed expenses, which do not change.
What is the association’s operating fund?
This fund is used to account for financial resources available for the general operations of the association.
What types of tax returns does an association file? What are the differences between filing each?
Association’s are typically defined as “not-for-profit” entities for Federal and State Income Tax purposes. Homeowner’s associations have the option to make an annual election to file IRS Form 1120-H and pay a 30% tax rate on “non-function” revenue only. Examples of non-function revenue would be interest income, laundry or vending machine income, etc. Expenses related to the production of non-function revenue can be deducted and the first $100 dollars of revenue is exempt from tax.
Alternatively, the association can elect to file the standard IRS form 1120, reporting all revenue and deductible expenses and paying tax at the standard corporate tax rates.
Are associations required to have audits?
In the State of Ohio, there is no legal requirement for an association to have an audit or review performed. Some associations declarations and by-laws require an independent audit or review be performed. In certain states, an independent audit or review is required by law depending on the size of the association, unless a majority of the members elect annually to forego the audit or review.
What is a compilation?
A compilation is the preparation of financial statements based on the books and records provided by the association. It is substantially less in scope than a review or audit and no opinion on the financial statements is provided.
How can an association be assured they don’t become the victims of theft or fraud?
#1-Be informed and engaged. Prepare a budget and review actual performance versus the budget regularly. Ask questions of management regarding significant variances between actual versus budget. Ensure that fiduciary insurance is in place to cover anyone with access to association funds. Use dual signatures on checks, or at a minimum for any check that exceeds a pre-established amount. Review and approve association expenditures by comparing source documents to checks written. Engage an independent CPA to perform a review or audit of the association’s financial statements annually.
What are some of the warning signs that theft or fraud is occurring?
A reluctance to provide open access to the financial records, late or incomplete financial reports, payments to suppliers unfamiliar to the board, unexplained increases in unit owner receivables, miscellaneous revenue that falls far short of budget expectations can all be an indication that something is amiss.
What should an association look for in an accounting firm? In an auditor?
Relevant industry experience, size of the firm, professional credentials, involvement in industry and professional organizations are all important factors when choosing an accounting professional.
How will an association be billed for their accounting services?
That will depend on several factors and is unique to each association.