Association Accounting & Budgets

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.   

Accounting Standards Codification (ASC) 972 establish the use of accrual basis and fund accounting when preparing and presenting financial statements for CIRA’s  

Cash basis accounting recognizes revenue and expenses when cash is received or disbursed.

Accrual basis accounting recognizes revenue when it is earned and expenses when they are incurred, regardless of when cash is collected or disbursed.

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. 

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.

See #9 above.  Most associations will have at a minimum, the following categories: Administrative, Operations, Ground Maintenance/Snow Removal, Repairs and Maintenance.

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. 

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.

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.

Generally speaking, this is not typically performed by the independent accountant because it can blur the line of independence.

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. 

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. 

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.

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.

Variable expenses fluctuate based on other factors versus fixed expenses, which do not change.  

This fund is used to account for financial resources available for the general operations of the association.

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.

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.

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.

#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.

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.

Relevant industry experience, size of the firm, professional credentials, involvement in industry and professional organizations are all important factors when choosing an accounting professional.

That will depend on several factors and is unique to each association.