Changes to Association Revenue Recognition

Accounting rules for recognizing assessment revenue from members have recently been amended with the introduction of FASB ASC 606 Revenue Recognition: Revenue from Contracts with Customers, (recognizing assessment revenue from association members).

The new guidance takes effect for associations with accounting periods ending December 15, 2019 and beyond. All Generally Accepted Accounting Principles (GAAP) – based (accrual) financial reports for year ends beginning with December 31, 2019 are affected.

Some new terms include:

• Contract – Agreement between member and association, typically for assessments. • Performance obligation – An association’s obligation to perform, i.e., incur expenses. • Transaction price – For most associations, assessments charged to owners • Contract Liability – Unused reserve fund assessments.

FASB ASC 606 establishes a Five Step Approach for recognizing and measuring assessment revenue:

• Identify the association’s contract with members (assessments typically based on the association’sbudget). • Identify the separate performance obligations of the contract with members (operating expenses,reserve expenses) • Determine the transaction price (assessment) • Allocate the transaction price (assessment) to the separate performance obligations • Recognize revenue as each performance obligation is satisfied

Assessment revenue is recognized as the related performance obligations (expenses) are satisfied at transaction (assessment) amounts expected to be collected. An association’s performance obligations (expenses) related to its operating assessments are satisfied over time. Operating assessments are generally considered to be matched in the period operating expenses are incurred.

The performance obligations (expenses) related to replacement fund (reserves) assessments are satisfied when those funds are expended for their designated purpose. Thus, under the new guidance, reserve assessments are recognized when reserve expenses are incurred.

Accounting for Association Revenue

Member Assessments

The annual budget is generally the basis for establishing assessments to fund operations, reserves and other funds such as insurance funds and special project funds.

Operating Fund Assessments

is the maintenance and management of common area property. Operating assessment revenue recognition will generally not change from existing practice since operating assessments and expenses generally occur on a periodic basis throughout a fiscal period. We expect excess or deficit of revenue over expenses to continue to be recognized in each reporting period.

Accounting/presentation change:

Bad debts should be recorded as a charge below operating assessments (revenue section) in an association’s statement of revenues and expenses.

Reserves Fund Assessments

Under the new guidance, the performance obligation for reserves assessments is met when the reserve expenditure is incurred; therefore, reserves assessment revenue is recognized when reserve expenses are incurred. Under the new guidance unspent reserve funds are generally presented as a liability (Contract Liability (Assessments received in advance – replacement fund)), on an association’s balance sheet, which is a change from the existing practice of accounting for reserves fund balances in the equity section. The change will generally result in retrospective presentation of the opening reserves fund balance in the current year as a Contract Liability (assessments received in advance – replacement fund), subject to specific analysis of your association’s reserves fund.

Typically, in calculating the recognized portion of reserve assessment revenue, reserve fund expenses will be first applied against reserve fund non-contract income such as investment interest income. Reserve expenses in excess of interest income will be charged against reserve fund assessments, with that amount recognized as reserve fund assessment income in the current period.

Accounting/presentation change:

Reserves excess will generally be reported in Contract Liabilities (assessments received in advance – replacement fund) on an association’s balance sheet. Reserves assessment revenue will match incurred expenses (subject to interest income and other noncontract income).

Special Assessments

Under previous guidance, special assessment revenue was typically recognized in the period expenses for which the special assessment was levied were incurred. Similarly, FASB ASC 606 requires associations to recognize special assessments revenue as performance obligations (expenses) are satisfied. Consistent with the accounting treatment for an association’s reserves fund, special assessment fund balances should be accounted for as Contract Liabilities – (Assessments received in advance – special assessment fund) until expenses have been incurred. Previous practice had generally been to present unspent special assessment revenue as deferred income. • To fund operating fund deficits — Generally, recognize special assessment revenue in the period the special assessment islevied. • To repay a loan — Recognize special assessment revenue as the loan repayments are made • To pay for specific expenditures — Recognize special assessment revenue in the period the expenditure is incurred(performance obligation completed).

Accounting/presentation change:

This is not a significant change to current practice.

Other Income

Revenue recognition of income that is not part of a contract with owners will generally continue to be accounted for using existing practices. Examples of other income include settlements, insurance claims, interest income (bank accounts), rental income.

Wrap Up

It’s business as usual for most aspects of association accounting. Revenue recognition of contracted (assessments) revenue from members as it relates to the reserves fund is the biggest area of change. Remember, for most associations, the reserve fund will be presented in the balance sheet liabilities section in an account named Contract Liabilities (Assessments received in advance – replacement fund), and reserves assessments will match reserves expenses after those expenses have been funded by non-contract income such as interest income.

Jeremy Newman CPA Principal at Newman Certified Public Accountant, PC. Newman Certified Public Accountant, PC provides audit and tax services to community associations in multiple states. More information can be found at www.hoacpa.com.