BUDGETING FOR BAD DEBT EXPENSE

How does the Allowance for Doubtful Assessments Reduce the Assessments Receivable?

It is an unfortunate reality that almost every Association has owners that do not pay assessments in a timely manner or sometimes not at all. The delinquent balances are reflected as an assessments receivable balance on the Association’s financial statements. The Association and management should periodically determine if an estimate to reduce the assessments receivable should be recorded in the Association’s financial statements for the delinquent balances that may not be collected. This estimate account is called an allowance for doubtful assessments. The allowance account is a negative balance (a contra-asset account) that reduces the delinquent owner balances to a realizable (collectible) level. This tells the readers of the financial statements that there is a possibility that not all the delinquent balances will be collected. The delinquent owner balances are not actually written off and will continue to be reflected on the monthly delinquency report. Using an allowance account, the Association will recognize bad debt expense on a consistent basis over time as the owner becomes delinquent rather than in a lump sum when an owner’s balance is written off. This will also give the Association a more realistic view of the Association’s financial position. If the Association subsequently collects a delinquent owner’s balance that was included in the allowance, then the Association would recognize bad debt recovery (income) in the year collected. If the Association subsequently writes-off a delinquent owner’s balance that was in the allowance, then the Association would reduce the allowance and would not recognize any additional bad debt expense.

Our firm uses the following guidelines in estimating the allowance for doubtful assessments; however, the Association may develop its own guidelines based on the collection history of the Association:

Condominiums and Cooperatives - consider establishing an allowance for any delinquent balances that are more than six times the average monthly assessment.

Homeowners Associations - consider establishing an allowance for any delinquent balances that are more than 12 times the monthly assessment.

On the audited financial statements, the Assessments Receivable will be reflected as a net number. This means the Assessments Receivable - Net on the balance sheet is the total assessments receivable less any amounts established in the allowance for doubtful assessments. The notes that accompany the financial statements will reflect the components of the net receivable. The note might have a chart that looks like this:

If the Association has incurred bad debt expense on a consistent basis, it is recommended the Association include a bad debt expense line item within the annual budget to more accurately reflect the assessment income to be received from owners. The Association should look at which owners are not currently paying assessments to determine the budget for bad debt expense. The amount budgeted should not reflect amounts that are in the allowance, but rather what portion of the budgeted assessments will not be paid by owners.

In summary, every Association should review the delinquent owner balances monthly. The Association should develop a criteria for delinquent balances to be included in the allowance for doubtful assessments. If no delinquent balances meet the established criteria, an allowance for doubtful assessments may not be necessary. However, if delinquent balances meet this criteria, the allowance for doubtful assessments should be established. At least annually, the Association should adjust the allowance for doubtful assessments based on this criteria. Additionally, during the budget process, the Association should evaluate the need to include a bad debt expense line item in the budget.

Written by: Jennifer L. Murray, CPA Manager, Goldklang Group CPAs, P.C. jmurray@ggroupcpas.com

Can Your Community Pond Be Managed 100% Chemical Free?

When it comes to the lakes and stormwater ponds in a homeowners association, residents expect them to be healthy, beautiful, and functional. At the same time, they may be averse to the use of herbicides and algaecides for the management of these water resources. Though the pesticides used to eliminate aquatic weeds, algae, and toxic cyanobacteria are very low-risk, well-studied, and registered with the Environmental Protection Agency (EPA), residents sometimes prefer a 100% natural approach. With this in mind, community managers may find themselves in an uncertain situation. How do they meet the expectations of residents while keeping management costs as low as possible?

Though community managers see their water resources as an asset, some may not believe they have the budget necessary to keep them in peak condition through natural means. Fortunately, this couldn’t be further from the truth. On paper, pesticides sometimes seem like the most affordable and fast-acting option to eliminate nuisance weeds and algae; but the key word there is “eliminate.” This approach only works to target undesirable growth that has already appeared. Natural management programs, on the other hand, work to prevent that growth from ever occurring. And while pesticide-reliant approaches only provide shortlived results – meaning treatment costs will continue to rise over time – natural maintenance efforts typically yield better results and slash treatment-related costs by nurturing a healthier, more resilient waterbody.

Communities that choose a natural approach have many tools available to them. When establishing a natural management program, aquatic experts can help stakeholders evaluate and understand their challenges, budget, and goals – and then create a tailored roadmap to achieve them. Though no two journeys are the same, almost all are driven by sciencebacked solutions and technologies:

Water Quality Testing

Water quality testing kicks off this journey. By analyzing water samples in a scientific laboratory, professionals can identify pollutants, algal toxins, and potential imbalances below the surface. Once your aquatic expert has a more complete picture, they can implement the right solutions. When collected on a consistent basis, this data can also expose bigger trends and help experts detect water quality changes before problems occur.

Nutrient Remediation

Waterbodies that struggle with aquatic weed and algae issues tend to contain an excess level of nutrients like phosphorus. Nutrients are the building blocks of aquatic life, but a surplus can lead to an overabundance of growth. Under chemical-free management programs, professionals rely on naturallyoccurring products like aluminum sulfate or lanthanummodified clay to “lock up” these excess nutrients and prevent them from playing a role in the food chain.

Maintaining Beneficial Shoreline Plants

Once nutrient levels in the waterbody are managed, it’s important to find the source. Grass clippings, yard waste, trash, animal droppings, lawn and garden fertilizers, and eroded sediment are all composed of nutrients, which inundate the water column when these organic materials are swept into lakes and ponds during rainstorms. Native flowering plants and tall grasses can be cultivated as a filtration buffer around the shoreline. Sometimes, nutrients are saturated in the bottom sediments. Hydro-raking or dredging can be used to physically remove this matter.

Shoreline Restoration

A well-managed shoreline is not only aestheticallypleasing, it’s essential to a healthy waterbody. In cases of severe degradation, a shoreline may need to be completely restored. Bioengineered restoration techniques are often the most impactful and longlasting. During the process, experts fill patented knit mesh materials with sediment (sometimes dredged from the bottom) and then shape and anchor it to the land. Once in place, bioengineered shorelines are strong and beautiful, yet virtually imperceptible.

Aeration

Floating fountains are a staple of many HOA lakes to add movement and elegance to any waterbody. Fountains also have many water quality benefits such as circulation and oxygenation. A well-oxygenated waterbody is less hospitable to algae and weeds. Proper fountain sizing and equipment maintenance are crucial to reap these benefits. Professionals may also recommend pairing a fountain with a submersed aerator for top to bottom water quality improvements.

Community Education

Proactive maintenance tools are excellent, but nothing can beat the impact of well-informed residents. We each play a role in the health of our surrounding waterbodies. Small actions like reducing the use of garden fertilizers, picking up trash, and properly disposing of pet waste can reinforce ongoing management efforts, help you maximize your freshwater maintenance budget, and bring people together for fun and relaxation around the water.

Sustainable management programs aren’t just about finding natural solutions; they’re about getting ahead of problems and the natural milestones of aging that we know will occur weeks, months, and years down the road. While herbicides and algaecides are helpful and sometimes necessary tools in lake and pond management, they should never be viewed as a lasting solution. Even if a 100% natural management plan is not feasible due to budget, goals, or existing conditions, implementing some or all of these ecofriendly management solutions can help reduce the reliance on aquatic herbicides and save you money in the long run. Interested in a more natural approach to achieving a beautiful lake? Your local aquatic expert will guide you on the path to success – so that worrying about pond weeds or erosion is one less thing on your to-do list.

Learn more about this topic at www.solitudelakemanagement.com/knowledge

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Written by: Trent Nelson Aquatic Specialist, SOLitude Lake Management info@solitudelake.com

Financial Best Practices for Community Associations Financial Best Practices for Community Associations

I hear it all the time, the board gets a stack of paper reports but doesn’t look at them. The reason why? I suspect information overload and not knowing what to look for in each report. This can be overwhelming for a community board member who isn’t used to looking at financial reports. So what if you only needed a handful of reports to look at,that would make it simpler and take less time to get a picture of your association’s financial health? The following is Community Financials’ top 4 financial reports for HOAs and condo communities.

1. Aged Delinquency Report

This aged delinquency report/aged owner balance report shows who is behind in their assessments. Different reports can also break out the delinquency by type of charge owed (assessment, late fees, etc). The board needs to review this at every board meeting to see what action needs to be taken at certain late dates (30, 60 days) like sending a demand letter or turning the account over to a collection attorney or agency. If you get behind in collections it can cause a problem with services at your community, and worse you may not be able to collect the entire past due amount depending on your state laws and how long it took you to commence legal action. Some states only guarantee collection of 9 months past due assessments and it takes a few months for the action to work itself through the courts. So if you are owed a year you may only get 9 months – ouch!

2. Comparative Income & Expense Report

This is my favorite report to run for the association. The Income Statement is meant to inform association is compared to budget. It shows the current period actual expense, budgeted expense and any variance between the two. It also shows the same thing for the year to date. When you see a variance it is a warning flag to ask why and dig deeper. It can also allow you to make up any shortfall quickly so you don’t cripple your community’s cash flow and vendor payments. For example, if you are spending more on snow removal than budgeted due to an extreme winter, you can do a special assessment right away to cover the shortfall while it is still cold and owners are more understanding.

3. Balance Sheet

A balance sheet is an important part of the financial package. It tells where the association stands with their asset, liability and reserves at a particular point in time.

There are three key accounts on a balance sheet that HOA officials should pay special attention to:

1. Cash in the Operating Checking Account – shows ability to meet current operating expenses.

2. Accounts Payable – shows how much is owed to vendors and ser

3. Capital Reserves – shows how much is available for major capita near and distant future.

4. Bank Reconciliation Report

The Bank Reconciliation report is used to “prove” that the cash assets shown on the association’s books and balance sheet agree with what the bank statement shows. The reconciliation takes into account outstanding checks that have not been processed by the bank as well as deposits of cash that have not been processed by the bank. There should not be any difference, it should be $0, but if there is a difference it is a flag for you to look into something further. This report is a great tool to ensure you are not a victim of embezzlement (for more on this see my Community Embezzlement Case Studies).

Additional Reports to Consider

Bank Statements

Bank statements are another tool to ensure you are not a victim of theft. Plus you can easily see how much money you have in the bank. Bank statements are easier to understand than the balance sheet since we’re all used to looking at them and they show the current amount of money in the bank account(s), recent deposits and withdrawals.

Current Capital Reserve Plan

You don’t need a fancy report but you should have something that shows how much money you have set aside and the anticipated cost for replacements and larger capital projects. This report is far superior than looking at a capital/reserve bank account, which can be deceiving. You may think you have a lot of money saved but if you had a big roofing or paving project it could be wiped out with no funds for other projects.

Summary

As a volunteer board member you only have so much time to dedicate to operating your community. There are emergencies to deal with, vendors, projects and of course financial and administrative tasks. A large part of your responsibility is your fiduciary responsibility to the community. Overseeing that the community funds are safe and being spent properly is of high importance. To simplify this task we highly recommend you make sure to review Community Financials’ top 4 financial reports for HOAs and condo communities.

Written by: Russell Munz CEO & Founder of Community Financials

833-CONDO-HOA (266-3646) x 700 russell@communityfinancials.com