CONDO LIFESTYLES
boards that have Due to the economic Due to the economic climate, potenreserve studies completed climate, potential buyers tial buyers do not want to buy a unit are often remiss in not do not want to buy a unit in an association where in an association where they may setting aside sufficient funds because the studies they may have to pay a special assessment in a have to pay a special assessment in a were not completed by a person or firm compeyear or two after puryear or two after purchasing their tent to produce a comchasing their dream prehensive and quality home. Potential buyers dream home. product or because they are now looking to see if choose to ignore one that an association has is a realistic projection of future capital needs. reserves and if it has a reserve study. SilIn the first case, the scope of the analysis berman says “They are asking me, as their would likely be inadequate to permit a reasonaccountant, not only to see if there is a study ably accurate forecasting of need. In the but is the study prepared by a professional and second, assessments will not truly reflect the is the association following the reserve study.” amount needed to provide for funding future Furthermore, lending institutions will be less work and the common elements will suffer as likely to lend money to associations for expena result. Silberman has also found that boards sive improvements if they do not have a are not reviewing their reserve study. “So reserve study since they do not know if the many things happen each year that may lead association will have funds available for future to a departure from what is in the reserve projects and when these projects will have to study. The boards should review and update be done. the study annually when they are preparing cost is often a reason that some boards their budget and it should be reviewed every are negligent in this area. “We’re finding a lot three to five years by a professional.” of small associations are not doing professional reserve studies because they’re too Non-Fund Accounting expensive or the board may prepare their own many associations fail to properly study and just set aside funds for one or two account for their reserves. They use what is future projects,” said Silberman. Despite that called non-fund accounting in which all the hindrance, however, having such a long term money of an association is lumped together. planning tool available for guidance in the The association budgeted to have a certain gradual funding of a reserve makes good busiamount of assessments transferred to reserves, ness sense. but, then, even when an associaso if you are using non-fund accounting you tion has a reserve study completed the board will not know if the assessments were transmay ignore it, which leads to the following ferred to reserves and you will not know if the problem. budgeted reserve expenses were paid out of • Associations are not funding a reserve reserves. according to a reserve study and do not account for expenditures properly.
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Associations that use non-fund accounting do so because the system is easier to understand than the alternative of fund accounting but a disadvantage in doing so is that the IrS won’t permit an association to file tax form 1120. The association can only file IrS income tax form 1120-H if they are using non-fund accounting. (more on IrS filings below.) Associations that do use non-fund accounting and are co-mingling their funds may be violating their governing documents as some actually provide for using the fund method of accounting, according to Silberman. • boards not understanding or reviewing the management company’s financial reports or the cPA’s year end financial statements. board members have to run their association like a business so they need to have some understanding of general accounting principles and practices even if someone else compiles the numbers. They are responsible for the financial information of the association. They should know whether the monthly statements from the preparer- usually management- are constructed on a cash basis, reflecting actual money in and money out or on an accrual basis, indicating in addition to what is actually received and disbursed, amounts that are due to be received or to be paid later. They should also know how to distinguish fund from non-fund accounting described above. And it is essential that someone- but preferably everyone- on the board actually review the monthly or quarterly reports, whatever the frequency of preparation. “You must do due diligence by looking over the financial package given you by management,” said Silberman. That’s the only way to make sure that your association is financially successful. Also, it is possible that fraud can occur when you do not have an active board. As far as years end financial statements are concerned, a board is required by law to furnish unit owners with an annual accounting of income and expenses for the common elements. A cPA is not required to prepare year-end financial statements, but it is a good idea to have a professional undertake the work for a few reasons. It may be required by the governing documents or a lending institution may request that a cPA prepared
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