More About C.O.R.E. Services

Featured

Doug McLain wanted to expand the opportunity to provide highly effective but fairly priced audits to condominium associations in Oregon and Washington.  I was honored he asked if I would join him on this new adventure.  We officially spun off from Currie & McLain CPA’s, focused on providing audit and review services primarily to condominium and homeowner associations.

We officially kicked off on September 1 with the new company and immediately started to set up our condominium audit processes.  Since we are looking for new ways to leverage technology to provide us better audit results while also reducing time and cost, every step, every procedure, is evaluated to make sure it fits our model.

It is now November and we are into the exciting part of marketing to condominium and homeowner management companies so we can be informed when a board wants to receive a proposal for audit or review services.

We will explore various topics relevant to condominium associations, financial management and what board’s of directors may want to look for when evaluating their financial statements and reserve studies.

We would like the opportunity to discuss how we can be of help to your condominium and homeowner association.  Feel free to write us at info@core-acct.com or visit our website at http://www.core-acct.com.

C.O.R.E. Services, focused on helping stakeholders rely upon management.

Eliminate Chaotic Board Meeting

I don’t know about you, but I hate sitting through a board meeting where no one seems to know what to do or how to do it.  And the problem for us is that our hands are typically tied as we are there to present and to assist the chair – not run the meeting.  So we moved our work forward by 10 days.

Ten days before the board meeting we prepare the board briefing book.  It has a copy of the planned agenda, all our reports, a copy of any committee reports filed, and most importantly, recommended motions.

For example, we include a copy of the prior meeting’s minutes.  The directors can review it and if they find it in order, then our recommended motion, the “Move to waive reading of the minutes” is made at the meeting, followed by the “Move to approve the minutes”.  If there are changes that need to be made, we would do so through motions.  At a meeting a few months ago, a name was misspelled in the minutes.  It was pointed out and we drafted a recommended motion to “Amend the minutes by striking the work Smythe and inserting the word Smith.”  Everything out in the open.

Preparation helps keep the meeting focused.  The recommended motions are just that, recommendations to help the directors make the proper motion to address an issue.  There is nothing worse that watching a board member flounder because they don’t remember the right words.  And the decision, the motion, must be specific enough so as to help a future reader know what was accomplished.

“I move to approve paying the insurance.”  “Second.”  “All in favor?”  “Opposed?”  “The aye’s have it and the motion passes.”

What just happened?  I cannot tell you the number of times I have faced that predicament.  The copy of the insurance invoice is not presented with the motion. As a matter of fact, the invoice said pay an entirely different amount due on a different day.

“I move to approve paying XYZ insurance as called for in our insurance contract.  The terms of this contract require us to pay $5,000 for 2 months coverage to bind the insurance and then 10 months of $2,500 per month until the contract is paid in full.”

The difference is clear.  The latter motion spells out exactly what was authorized.  The board shows it is in control and the directors know exactly what they want to happen.  A reader a year from now will be able to see what was approved and, if they desired, trace it to the bank account to find the payments.

Remember, management works for the condo association’s board of directors.  Their job is to execute the approved plan.  That plan is the minutes.  The clearer your directions, the less conflict there is when it comes to determining if execution was correct.

Which is why we invest the time in the briefing book.  We use the reports as a request for action.  If the issue is simple and direct, we ask the board to approve our plan.  If it is more involved, we recommend it go to a committee first to be studied.  We then work with the committee to gain consensus and lay out a plan for the board to approve.

Which gets us back to our approach.  Committees plan.  Boards approve. Management executes.  Planning, organizing, collaborating, controlling and innovating.  When all parties do their part, the whole works smoother, with less effort.  Owners, through committees, feel empowered, directors are not overworked, and management has a clear understanding of what the owners want accomplished.

Eliminate chaos at your board meetings.  Ask for a briefing book with information on everything on the agenda.  You will be better prepared and ready to use the meeting time in the best interest of the community.

At C.O.R.E. Services, we focus on delivering superior value to boards and owners in condominium projects.  We learn your bylaws and declaration and ensure that all decisions are grounded in these documents.  We help bring order to chaos and provide tools for directors and owners to share their thoughts about how they would like their community to serve them.  You can find out more about C.O.R.E. and our approach on our website.

The Potential for Trouble with ASC 606

It is a bother, a pain, and can be considered a waste of time by most people who don’t think it matters.  ASC 606 planning and implementation entails some thought and effort – and the trouble begins when those who need to put in the effort decide it isn’t worth it.

I have heard form a good number of CPA firms who are struggling with ASC 606 implementation for their clients.  Why are you struggling with it?  Like it or not, this is a management problem.  You are struggling because you are not management.  Think about it, are you asking your clients to decide on your firm’s performance obligations?  Of course not!

I have heard some interesting takes.  That there is  no real change to business and that it can be papered over with a memo.  That the performance obligations are immaterial.  That the contracts are simple and revenues are recognized at billing.  Possibly.  But how do you, the independent CPA know?  Have you sat is your client’s office and listened to their sales people?  Did you take the time to learn how they handle call-backs or parts under warranty?  No.

If you want to be really helpful to your client, get them off of GAAP.  You are spending time trying to fix a problem your client doesn’t understand, that you are not entirely sure of because you don’t report on GAAP, and that at the end of the day can get you into a ton of trouble.  It would be more honest to go to their bank, their bonding agent, whoever is insisting on GAAP, and explain why some other method of accounting would give reasonable information with far less cost and risk of error.  But you think it is your responsibility to help your client get through this; and that is a mistake in judgement.

If you performing an attest service and you are helping your client identify performance obligations and transaction prices, you are already on the path to attest failure. Think about it – your client has no one on staff who understands the new accounting rule.  No one can take responsibility.  You are creating revenue based upon your theory of how your client should record transactions – not theirs.  And then you are performing an attest.  You are attesting to your own work.  No amount of memos can cover that up.

Don’t get me wrong, I think you trying to help your client deal with this is the right move.  Someone has to.  The problem isn’t the helping by itself.  The problem is pairing the help with the attest.  And you should know that.  So take a side – attest or assist.

I think that the same problem exists when you help your client by encouraging them to change to another basis of accounting.  I think you should offer that advice but you should probably step back and let another firm perform the attest.  The risk to your firm, to the profession overall, is real.  The more it seems we are part of management, the less useful our audit or review service becomes.  Look at the troubles the Big 4 are facing for this very subject and we all know that this stuff rolls downhill.

Honestly, if your client has no exit strategy or the plan is to sell to the kids or some key employees, your client probably should not stay on GAAP.  Go to FRF for SME; go to tax-basis.  Help your client talk to their banker, get them to rewrite covenants.  Do anything but treat ASC 606 trivially.  You risk treating every company’s commitment to their contract with the same cavalier attitude and then, in about 4 years, one of your clients will approach you and say they are thinking of going public and their new auditor has questions about how they documented their revenue from contracts with customers and since you were the one responsible

ASC 606 isn’t really difficult.  It is time consuming though and most contracts have been written to satisfy lawyers, not to help identify when control passes between vendor and customer.  Therefore, management faces lots of judgment calls.  And that judgment falls squarely on management like it or not.

At C.O.R.E. Services, we focus on delivering superior value to boards and owners in condominium projects.  We learn your bylaws and declaration and ensure that all decisions are grounded in these documents.  We help bring order to chaos and provide tools for directors and owners to share their thoughts about how they would like their community to serve them.  You can find out more about C.O.R.E. and our approach on our website.

Chairs, Know thy Robert’s

Part of our vision and mission is to help condo boards of directors make good decisions.  We do quite a bit of preparation for the board by writing up staff (management) reports and recommended motions where they might be helpful to ensure the right information is documented.  We get the board briefing book out to the directors about a week to 10 days in advance of the meeting.  For the most part, it helps by ensuring the directors have study materials in advance of the meeting so they know what is to be discussed and voted on.

But, once we get into the meeting, all that preparation is only as effective as the chair’s ability to manage the meeting.  If the chair isn’t careful, the meeting spirals into chaos – board members are constantly speaking and the audience is weighing in on the subject.  Board meeting chaos can be avoided though, and without the chair being overly heavy-handed and closing the meeting.

Prepare a Script

One of the things we do for our chairs is write a meeting script.  It has the language that the chair should use throughout the meeting.  It is formalized and comes almost straight out of Robert’s Rules of Order Newly Revised (RRONR).  We understand that it may seem silly, but lets be clear, even comics prepare for their standup routines.  Scripts have been used by every Academy Award winner so using one can’t be a bad thing.

Meeting Script for Board Meetings of the Association

The plain text is the Chair’s spoken words. Italicized words are actions or reminders of steps

  1. The Meeting will come to order (one rap of gavel)
  2. The first order of business is determining directors present and establishing a quorum (scan the directors and ensure 3 or more are present) A quorum is established for this meeting
  3. The next order of business is the reading of the minutes
    1. Secretary will move to waive the reading; a director will second
    2. A motion to waive the reading of the minutes has been made and seconded. Is there any objection? Hearing no objection, the reading of the minutes is waived.
  4. The next order of business is the approval of the minutes
    1. Secretary will move to approve the minutes of the prior meeting; a director will second
    2. A motion to approve the minutes to the January 23rd, 2020 meeting has been made and seconded. Is there any objection? Hearing no objection, the minutes for the February 23rd 20XX meeting are approved.
  5. The next order of business is the chair’s report. While the chair reports, the Secretary will act as the meeting chair.
    1. Chair will make a report.
    2. [Secretary speaking] Are there any questions for the chair? Once questions are done
    3. The Chair’s report is filed. I yield the gavel back to the chair.
    4. At this point, if there is a motion to be made (sometimes) then a director will make a motion regarding the chair’s report and will likely be seconded.
    5. A motion to adopt [whatever the motion is] has been made and seconded. Is there any discussion?
    6. Allow the directors to debate and ask questions as necessary. Once they are done.
    7. The question is, do we [adopt the motion]? All those in favor say “AYE”; opposed say “NAY”.
      1. The AYES have it and the motion passes; or
      2. The NAYS have it and the motion fails to pass

Maintain Control

In the best of situations, it is inevitable that people start to talk and get sidetracked.  It is the chair’s responsibility to maintain control of the meeting.  While it can seem disrespectful to you, as the chair, to stop people from whispering back and forth, it is equally disrespectful for the audience or the board to have sidebar conversations which can derail the concentration of the directors.

Don’t be afraid to use the gavel to get everyone’s attention.  If the disruption is from the board, gavel once and say

  • The board will come to order.

If it is the audience, again gavel once and say

  • The audience will refrain from talking while the board is in session.

Keep in mind that a board meeting is representative democracy in action.  You come to do business on behalf of your condominium association, not to spend hours answering questions from owners.  If you have owners who feel that your actions are infringing on their rights, perhaps the board needs to establish committee and owner workshops to air issues before you get to the point of deciding.

We believe that every major issue should follow this pattern:

  • A director moves to bring an issue up for vote
  • A second director moves to refer the issue to a committee
  • The committee is charged with meeting and reporting back with its recommendations at a future meeting
    • The chair creates a committee and appoints a committee chair
    • The committee meets and gets feedback from the owners
    • The committee writes up a report with recommendations
  • The committee chair submits the report to the board
  • The board reviews the report and votes on the recommendations

All the gaveling, all the yelling in the world, will not stop an owner or group of owners who feel they are being ignored.  Give them the channel to discuss their concerns; just not the board meeting.  Let the owners weigh in on the issue. The worse that happens is that owners do not show up to the meeting and the committee can’t report.  At that point, you can say in good faith you tried and then hold the vote.

Meetings require preparation, practice and scripting.  You do not need to memorize the words, write them down.  Don’t let the meeting get sidetracked or taken hostage by others.  Your meetings can be productive and effective by you taking control of the board and ensuring that regular order is followed at all times.

Association Strategic Planning

Planning is what drives a successful engagement.  And longer-term, or strategic planning, is a big part of an association’s success.  And a major component of strategic planning is the reserve study.

The reserve study helps your association identify those long-lived assets which will need replacing.  Typically, the reserve study is capped at 30 years – meaning that it attempts to identify those common elements which will need some major work or complete replacement in that 30 year window.

But the one thing that isn’t addressed in your reserve study is improvement.  Over a 30 year period, there will be innovation; new products will be introduced that are light years ahead of what was originally there.  And that is part of the problem, your reserve study expects “Like-for-Like”.  Anything else is an improvement and is not part of the reserve planning process.

According to many declarations, improvements need to be handled as a separate vote of the owners and should likely have a separate assessment.  The concept is sound; the goal was to keep a board from buying up a lot and putting in a community swimming pool without the community’s buy-in.  To change from high-energy incandescent bulbs to LED on motion-sensor switches?  Still an improvement and yes, should still be subject to the rule.

With this in mind, whenever a committee is looking at a reserve project we help them identify the cost of the actual “Like-for-Like” replacement.  We then identify the costs for the improvement.  The committee report then recommends the entire project to the board, with the understanding that the improvement requires an increase to future reserve assessments to recoup the additional investment.

For example.  Condo Association is planning on replacing the outside lights in the community.  They are 25 years old, are corroded, discolored and burn energy due to all being incandescent bulbs.  The chair formed a committee to study options.

The replacement cost of the outside lighting ‘Like-for-Like” was $18,000. Changing over to motion and photo sensor LED lights, and some rewiring to eliminate the switches, is an improvement calling for a $25,000 investment.  the $18,000 had already been collected in past reserve assessments; the $25,000 had not.

improvement planning a

With this method in place, the association has a plan to address every reserve project which has some level of improvement and innovation which needs to be considered today.  The reserve fund is, in essence, invested in the improvement with an understanding that it will “repay” the reserve in the form of future reserve assessments.  The finance committee, or board, can set a reasonable investment return rate but the important part is that, done properly, the reserve fund is potentially generating a superior return over CD and money market rates today while also maintaining or even possibly increasing market value for the units.

This method does require some thought and planning.  You need to be sure you have the reserve funds available to invest in such a project and that a past board or the owners have not hamstrung such an approach through amending bylaws or declarations.

We also ask that the committee hold at least two open forums for owners to weigh in on the improvement idea.  Sometimes what seems like a grand idea is met with such resistance that the entire project is tossed and restarted.  Not often, but often enough that the value of owner input is proven to be worthwhile.  And we remind the committee that it is not looking for unanimity, it is looking for consensus.  Associations will never please everyone but if you can get most on board then you win.

The goal is to ensure that your association plans for technological improvement and has a means to capitalize on it without having to discuss and plan for a special assessment.  It doesn’t mean that every project should be funded this way and some projects should not be greenlighted no matter the cost.  But if you have a management team that can help you crunch the numbers and evaluate the costs and benefits, then this approach could help your community enhance the units marketability and price, resulting in a win-win opportunity for everyone.

At C.O.R.E. Services, we focus on delivering superior value to boards and owners in condominium projects.  We learn your bylaws and declaration and ensure that all decisions are grounded in these documents.  We help bring order to chaos and provide tools for directors and owners to share their thoughts about how they would like their community to serve them.  You can find out more about C.O.R.E. and our approach on our website.

C.O.R.E.’s Vision

As we move from auditing condominium associations and HOA’s into management, we are often asked what sets us apart from other management companies.  Fair question.  We believe that our vision of a helping board’s and owners make better decisions for their communities is what sets us apart.

This starts with our POCCI approach.

Planning

We believe that a strong, well-run association has a well-designed budget which can hold management accountable to the needs and expectations of the community.  We believe that major decisions require engagement with owners and with experts and bringing all of that together demands the ability to look at the big picture and put the pieces together.  We relentlessly plan and are dedicated to getting the best outcome for the association and its community members.

Organization

We believe that our role is to support good governance and decision-making.  To that end we nurture the board’s use of community-based committees to evaluate the community’s needs and then help the board find the best solution to those needs.  We are organized, and help our clients organize, around sharing the work so no one need focus on their community as a full-time occupation.

Coordination

We believe that well informed stakeholders help keep costs under control and ensure effective decisions.  We will focus on coordinating information flow to ensure that everyone receives access to the information necessary in the most cost-effective and efficient manner so that decisions are made timely and accurately.  We will ensure that our team of contractors and service providers have easy access to the data they need to do their jobs by providing accurate scopes of work and crystal clear expectations.

Control

We believe that the association has the right to expect that every dollar is spent in supporting the association.  To support this, we build strong control procedures to limit who has access to association resources and who can determine how these are spent.  We are always mindful of the budget and where a plan runs against the budget, the budget always wins.  We are humbled to be entrusted with your money and we never forget that we have a solemn obligation to ensure it is spent to further your objectives, not ours.

Innovation

We believe that it is vital to engage as many people as possible in the process of establishing community.  Therefore, we will find ways to interact with people the way they feel most comfortable;  in-person, by phone, email, text, twitter, facebook and any other means that enable people to join in the discussion.  We also will find new ways to share information so that community members have the opportunity to learn about the issues facing them and offer solutions based on their life experiences in the hope that everyone’s contribution will help in building a greater community.

Interested in learning more?

If you have any questions or would like to know more about how our POCCI approach can benefit your condo, feel free to write us or find out more from our website.  We are here to serve you and look forward to the opportunity to build your community together.

ASC 606 in Perspective

In our past life (when we did tax returns) we would offer the following deal for clients:

We will prepare your tax return for $2,000 and you will receive,

  • Free unlimited phone calls to us for questions about taxes;
  • quarterly meet and greet opportunities to come in and listen to tax and investing experts;
  • a free tax planning meeting between August and November to ensure you are on target.

For new clients who joined us after tax season, we offered the following:

We will perform a highly detailed tax planning analysis for $2,000 and you will receive,

  • Free unlimited phone calls to us for questions about taxes;
  • quarterly meet and greet opportunities to come in and listen to tax and investing experts;
  • your next year’s tax return filed for free.

Serious question: When did we earn the $2,000?

This is all that ASC 606 is trying to identify.  Businesses make promises and collect money from customers.  Sometimes it is as simple as the promise to sell the bar of candy in exchange for $1.00; oftentimes it is as complex, or more so, than the promise above.  But when promises now extend beyond the point of the initial exchange of money, the concern is that relying upon the exchange was leading to terrible results.

Nothing has really changed.  You promise to do perform X, Y, and Z for your customers in exchange for $1.  The $1 is non-refundable.  It is yours.  You get to keep it.  $1 to cash and its off-set account is…

is…

By default, we assume revenues.  Revenues was a dumping ground for money billed to customers.  But you promised to perform services, sell goods, support the customer after the installation.  How can the default be to recognize $1 at the time of invoicing?

As accountants, we would love to tell you there is a hard and fast rule for every business in every industry.  There isn’t.  There is an overlap, perhaps 80%, but the other 20% is what sets companies apart.  And that 20%?  That is likely going to end up being deferred revenue.

Much like my example above, most of the revenue is pushed beyond the actual exchange of the $2,000.  The exchange of the money for completed tax return, while satisfying, isn’t the driver of revenue for the customer; the pre/post preparation interaction is the value.  In short, I need to look at the performance obligations I am offering:

  • Tax return preparation
  • Tax planning
  • Phone support

I then allocate the transaction price over the performance obligations:

  • Tax return preparation $500
  • Tax planning   $1,260
  • Phone support  $240

I would say the tax return and tax planning were realized when delivered and the phone support is recognized over time as standing ready to perform.

This all looks familiar right?

So if we were to prepare our firm’s financial statements under GAAP ASC 606, we would probably have to be honest and record the following:

record tax prep

record phone support

So, what does this tell you, other than the fact that I like making journal entries?

  1. You can tell a great deal about an entity by how much emphasis they place on recognizing revenues at the earliest possible moment.
  2. You can infer the amount of after-sale support a business is likely to offer customers.
  3. For an association, you can evaluate if a short-term “Budget-closing” assessment (i.e. special assessment) is going to be needed, either this year or next.

We write almost exclusively about condo associations and HOA’s.  ASC 606, however, impacts every entity which has agreed to issue financial statements prepared in accordance with GAAP.  ASC 606 asks us to evaluate our contracts, our commitments to customers, assign a revenue figure for those commitments and then figure out how to honestly and objectively allocate the revenue as the commitment is honored.  It is challenging and we are running into issues every day that defy logic.  But it is worth the effort as we believe directors make better decisions when given accurate financial information and owners-as-investors make superior decisions when they understand their association’s financial position.

Keep ASC 606 in perspective.  Association’s can identify the commitment(s) and assign them a dollar value – but this only impacts the timing of when it is realized as revenue.  It doesn’t change the fact that assessments are due based upon the elected board’s best guesstimate of planned expenses and like all guesses is subject to modification and adjustment.

Money in simply no longer means revenues in.  And that isn’t necessarily a bad thing for an association.

At C.O.R.E. Services, we focus on delivering superior value to boards and owners in condominium projects.  We learn your bylaws and declaration and ensure that all decisions are grounded in these documents.  We help bring order to chaos and provide tools for directors and owners to share their thoughts about how they would like their community to serve them.  You can find out more about C.O.R.E. and our approach on our website.

ASC 606 and Dues and fees for Recreational Facilities

Another area of concern we have is when assessments includes dues and fees for other recreational facilities, such as clubhouse use, tennis courts, gym/workout rooms and social events.  These are challenging enough when they are stand-alone services with separate market-rate charges, but what if they are also entirely or partially included in the ‘contract with customers’?

If this were a separate charge at market-rate, this is pretty straight-forward.  Take the rental of a tennis court.  Perhaps your association requires owners to preregister to use a court and charge $10 per hour.  An owner registers and uses it and the $10 is charges as a receivable against his bill. Easy enough.

The clubhouse will follow a similar rule.  If you change $100 in advance to use the facility and $50 of that is refunded after the event if it is cleaned properly, then you have deferred revenue of $50 and a cleaning deposit of $50.  This is mostly likely how you handed it under old-GAAP as it wasn’t revenue until the event was complete.

But as with everything, there is that added complexity.  What if your association decided to open up the tennis courts to non-owners?  What if the charge for non-owners is $25 per hour and an owner is only $10?  In this instance, isn’t it likely true that some amount of the assessments are being used to “pre-pay” tennis court fees?

The recording of most ancillary revenue isn’t going to change very much; what might is how your assessment, the major ‘contract with customer’ is handled. Are part of your assessments revenue to a particular function?

Let’s step back to the golf example from the other day.  What if you first allow non-unit owners to buy an annual unlimited pass for $3,500 while you charge the unit-owners $1,500?  While this could be considered a discount, it could also be considered a subsidy from the assessments contract.  Remember, it is all derived by the implied agreement with your customer and if that implied contract includes

assessing owners for any operating deficit in golf operations

It is quite likely that part of the assessment is in fact a golf operations deferred revenue, whether any particular unit-owner golfs or not.

While it might seem complex, it really isn’t. A pretty basic spreadsheet will help you determine how much of the assessment is earned with each round of golf or over the course of the year.  The important thing is to evaluate what your association is promising to the unit-as-customer.  In the case of recreational facilities, the unit-as-customer had an expectation that there was a golf course or the tennis court and that some amount of their dues were going to be used to support the operations of those activities.  The unit-as-customer is less concerned with the how of the allocation; rather the unit-as-customer is definitely concerned with the market value of the overall property due to a healthy and supportive recreational facility.

Remember, ASC 606 is both blessing and curse.  It can lead to additional work and possibly even unforeseen reporting consequences but the benefits can be better understanding of how your association works and how fees, dues and charges are collected and used. Whether you elect to use ASC 606 to defer the recognition of revenues until certain events happen which transfer control of the contractual item or if your association chooses to simply record everything over time, understanding what you are committing to is what is important.  Don’t get hung up on the accounting technicalities, that is what firms like C.O.R.E. are for… Look to what is being promised and how you want it paid for and the accounting will fall into place.

At C.O.R.E. Services, we focus on delivering superior value to boards and owners in condominium projects.  We learn your bylaws and declaration and ensure that all decisions are grounded in these documents.  We help bring order to chaos and provide tools for directors and owners to share their thoughts about how they would like their community to serve them.  You can find out more about C.O.R.E. and our approach on our website.