More About C.O.R.E. Services

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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.

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Embracing Opportunities to Reduce Costs

Four days until Christmas.  I am writing my blog while listening to Christmas music and taking the last few phone calls before the start of the new year.

One issue is a recurring theme of these calls: How can we (as a board) save money and cut costs?  The answer: Embrace automation as a way to reduce costs and improve controls.

Accepting that moving towards management automation can help you reduce time and energy, can give you, as a board, negotiating leverage.  For instance, one of the ways we can cut time and energy is by using work flow to document approvals.  We can receive a vendor invoice, put it into the system and flag it to be approved.  The appropriate parties can log in, review the work order, the invoice, any notes or photos uploaded and then decide to approve on their time.  Once all approvals are in, the system notifies the finance department that the invoice is approved and payment can be made.

No more running around getting people to sign documents – saving time.  No more multiple meetings when required signers are not available – saving time.  No more sending emails with copies of signed documents to prove that the right parties approved – saving time.  And if something isn’t approved or rejected in the allotted time, reminder notices go out to the right people to get them to fulfill their roles.  Your management isn’t wasting time on manually tracking things… they let the system work for them.

For boards, it not only cuts down on manager time, online automated work flows improve control over the transaction.  Each person has their individual login and password – not a complete certainty that someone isn’t masquerading as an approver but pretty good proof that the person approving is the right one.  Everything required to support the invoice is available with the work flow so the approver doesn’t have to rely upon hearsay or a manager’s word.  The more information available, the more effective the review and approval process.

Save time and make the process more effective.  By adopting automated work flows a board can begin to leverage their processes to negotiate better management contracts.

Requiring the manager to move towards implementing automated workflows on your behalf is good, but even better is the board designing the work flow and implementing it themselves and then requiring the manager to fit themselves into their process.  Doing it this way allows the process to work regardless of management company – in short, it eliminates a barrier to switching.  I am certain you can envision the headaches that come from switching management companies, even management companies with automated work flows.  Each software system has its way of doing things and each manager has their approach to working with the software.  Moving it to your approach is going to provide you better results.

How can you do this?  The easiest way is to use some online e-signature system.  You licensing the e-signature system enables you to control the process.  You could then add your manager to your e-sign system and require them to submit documents your way.  Along with this, you should consider having some sort of cloud server in your Association’s name which enables you to hold onto your Association documents, like invoices, minutes, etc. instead of relying upon your manager to do so.

Board’s which see the power of controlling the work flow and having documents available online will begin to see savings.  Some of you are already working with management companies who are embracing automation and electronic storage and you are beginning to see some benefits.  The problem is that the manager’s system is almost universally non-transferrable, which leaves you with figuring out how your records are going to work with the new manager should you choose to work with someone else; or you are trapped into staying with your manager because you fear the cost of switching.  This is why it is a good idea for the board to think about how to manage processes and think about the cost and benefit of the Association managing its own cloud server.

At C.O.R.E. Services, we focus on being a strong independent check on management and their assertions. Which is why we enjoy working with Property Owner Associations. The boards are dedicated but typically outsource the management who record the transactions and prepare financial statements for the board to review. Our audits are designed to help the board and owners rely upon those statements. You can find more information about us on our website.

Living the Plan

We know it is tough to create a plan and then live it day in and out.  Even here at C.O.R.E., we often find ourselves wandering the halls thinking, “Only if…”  Sometimes it is called mission-creep, other times, strategic drift; what it always points to is a buy-in to the plan.

For instance, our single biggest focus in condo audits is how close management stuck to the budget.  The budget is the plan, it lays out the board’s priorities by providing funds to specific areas.  Management’s responsibility is to live the plan.  And it should be shocking how often we find that management not only failed to live the plan, it didn’t even bother to communicate how ineffective the plan apparently was.

We also discovered that some board’s don’t think highly of plans.  Take last year, multiply it by the 5% that the bylaws allow and get it over with because they don’t believe it matters.  Spending never matches up to priorities and as long as the Association doesn’t go broke, everything must have worked right.  In these instances, failing to plan means flailing from one crisis to another and everything is a priority.  Their ineffective planning doesn’t allow for conscious decisions about effectively using their limited resources.

And budgeting is really all about prioritizing the association’s limited resources.  You get a finite amount of money from your owners every year to manage your Association and keep it livable.  You also get a finite amount of money from them to sock away for those future repairs and maintenance that, as sure as the sun rises, will happen.   The future needs, the reserve fund, is another one of those planning areas that is often ignored, until it is too late, that is.

And I have gone through almost one half of my article waxing poetic about planning without getting to the crux of today’s issue which is making money work for your Association.  Making money work is about understanding your priorities and options and then finding where the opportunity to maximize both intersect.  This would be your Reserve Investment Plan.

I believe that the last 10 years has made people a little lazy.  No returns on cash investments and often no legal opportunity to expand investment options beyond it.  But that doesn’t mean it should be ignored and it definitely should not be treated as addition effort in a period where interest rates will increase because, sadly, inflation is sure to follow (and many I talk with will argue inflation is already happening, especially in reserve expenditures).

So let’s get started.  First, take your reserve study and look at it closely.  How much money is your reserve specialist saying you need to spend over the next three years?  Set that money aside.  This is your investment base and you should consider holding this in a money market account.  These accounts are liquid enough but also not designed to be used on a daily basis so you get a “better than nothing” return.

Next, how much do you have to spend between 3 and 5 years out?  Put this amount in short-term CD’s.  A little better interest rate but a lot less liquidity.  To maximize the return, consider putting it into a 36 month CD, but you can also do it with a series of 12 month products as well.

Assuming you still have investable cash after this, (lucky you if you do!) consider investing in 60 month CD’s.  You will get a decent return and honestly, you won’t need it for a while so there is no sense in leaving it in some low return account.

The vast majority of Association’s have limited options for investing their reserves.  Many have bylaw restrictions and those that don’t will likely face state law restrictions.  Mostly, these restrictions limit your investments to federally insured or backed investments – essentially cash type investments sponsored by some government agency such as FDIC or NCUA.  I won’t lie, it is a major limitation to growing your reserve fund.  Remember, to get a 20% return you take on the risk equivalent to that rate.  So, if the risk free rate is 2.0%, you are taking on 10 times the risk.  Since it isn’t your money, the powers that be didn’t want you gambling with that pool of money.  Like I said, a major limitation but probably for the best.

But that doesn’t mean you can’t work with experts to maximize your return even with that limitation.  Look at your reserves, find out when it is needed and get to work.  You will be happy once you start the plan and you begin living it.

At C.O.R.E. Services, we focus on being a strong independent check on management and their assertions. Which is why we enjoy working with Property Owner Associations. The boards are dedicated but typically outsource the management who record the transactions and prepare financial statements for the board to review. Our audits are designed to help the board and owners rely upon those statements. You can find more information about us on our website.

More on Contracts in ASC 606

This morning I wrote on my other blog about the steps your Association will need to take when analyzing your annual owner assessments to determine when and how revenues will be recognized.   The approach there is going to be required for every entity which needs to produce financial statements in accordance with GAAP.  Specifically for HOA and condominium Associations though, there are a few things to keep in mind.

First you need to recognize who your customer is.  The vast majority of your Association’s revenues comes from assessments, also called dues, which are charged to your owners.  Thus, your contract is with the owner, both individually and collectively. So, how many contracts exist?  In theory, one for every owner in your association.

But in reality, there is really only one contract which every unit owner agrees to.  So, instead of looking at each owner agreement differently, you can combine those contracts into a single agreement for accounting purposes.  This is known as the Portfolio Approach and should be implemented for your Association as it applies ASC 606.

The reason this works is that each agreement with an owner is identical to every other agreement with every other owner.  The agreement calls for the same efforts to be expended by the Association on behalf of the owners.  The agreement is entered into on the same day and the payments are due over the same period of time.

Under the Portfolio Approach, you treat all the contracts as a single contract when it comes to revenue recognition.  This should simplify the accounting as you need only evaluate the performance obligations at the Association level, instead of looking to each owner agreement.

How do you handle this in reality?  It is dependent on both your software and accounting processes.  The easiest way is to separate the amounts due from the owners and revenues.  For our example, lets assume you are a 100 unit association with an annual budget of $120,000.  On December 31, the budget is passed by the board and ratified by the owners.  Ignoring performance obligations at the moment, you might want to consider the following entry at the time your budget is passed and ratified:

  • Owner Assessments Receivable                        $120,000
    • Association Unearned Revenue                                        $120,000

As owners pay, you receive their payment and reduce the owner assessments receivable.  This method is likely most appropriate since you passed and ratified an annual budget which obligates the units for the year’s assessments.  Owners can pay for their assessment in full or over the course of the year.  This can be somewhat challenging as we know most Associations and their management have gotten used to recording each monthly “invoice” as revenue; but keep in mind that what is billed is likely no longer tied to when revenues are earned.

For those Association’s which want to invoice monthly, this isn’t a particular problem.  The easiest way to handle this would be to record the following:

  • Annual Owner Obligation                                  $120,000
    • Association Unearned Revenue                                            $120,000

And then each month when you issue the invoice to the owners:

  • Owner Receivable                                                $10,000
    • Annual Owner Obligation                                                     $10,000

Notice though that we still haven’t recorded anything which recognizes revenues.  That is because the new rules under ASC 606 require you to look at the performance obligations inherent in your agreement with the owners.  Let’s say for our example, management determined that performance obligations equal to $10,000 were completed during the month:

  • Association Unearned Revenue                        $10,000
    • Assessments Income                                                                  $10,000

Management would analyze contract performance at least once a year to determine how much revenue from that contract is recognized.  This is important because it is quite possible that you will have areas of the contract which are still not performed.  Imagine if you will, the budget has $5,000 set for legal expenses.  It is your year-end and your Association has only spent $1,000.  What happens to the other $4,000?

The answer is, unfortunately, “It Depends”.  If you identified legal expenses as a performance obligation to your owners as part of the assessment, it should likely remain as Association Unearned Revenue.  This is especially true if you are carrying forward the budget item.  That is to say, when the board meets to pass the budget, if they say, “We didn’t use all the budget last year so lets still expect $5,000 but carry-forward the $4,000…” then it is highly likely that the board set a specific performance obligation which has not been completed yet and thus the $4,000 should remain in Association Unearned Revenue.

If your Association refunds excess assessments back to the owners in March of the following year, then you not only didn’t earn the revenue, you actually no longer have unearned revenue but rather a refund due to the owners.  This is likely even true if you don’t technically issue a check but rather use the unused budget money to reduce future assessment amounts.

Complicated?  Perhaps.  Impossible to implement?  Not at all.  What it requires is that board’s understand the expectations and rules and ensure they establish correct policies and then ensure those policies are carried out.  But hey, that is why you have audit, right?  If you have questions or concerns, feel free to write and we will try to help you understand how you may be impacted by the new rules.

At C.O.R.E. Services, we focus on being a strong independent check on management and their assertions. Which is why we enjoy working with Property Owner Associations. The boards are dedicated but typically outsource the management who record the transactions and prepare financial statements for the board to review. Our audits are designed to help the board and owners rely upon those statements. You can find more information about us on our website.

It’s about time

Phew.  It has been a mad 6 weeks.  We were asked to take over the accounting and finance management for a condominium project where the prior management company was in over its head.  We were engaged In early October and corrected 3 years of special assessment receivables, prepared the financial statement, fought with the new auditor (more on that in a moment) designed an Access application from scratch to manage the owner receivables and payments and also began beta testing our new software application HOA Fiscal.  Plus, we had to try and stay up on our regular work as well.

So, it’s about time I got back to writing.  The problems facing condominium associations and HOA’s are not going to fix themselves without a little sunlight.

On Monday we were contacted by a management company to propose an audit of the upcoming 2018 financial statement.  As part of our process we ask for a copy of the most recent audit report.  When Doug received it, he immediately buzzed me to take a look at it.

There it was, in black and white, an audited financial statement which stated that the financial statements were prepared in accordance with GAAP.  And lo and behold guess what else was there; disclosure G: Serial Assessment.

I shouldn’t be surprised.  After all, I am certain that any accounting professional who has taken college courses, passed the exam, and taken all of their CPE for dozens of years could come to the startlingly brilliant deduction that cash basis is acceptable under GAAP.  Sorry, sarcasm always seems more laughable in my head, but none-the-less…

The problem with the current school of thought – and it is very current – that a serial assessment should be treated differently than any other assessment is that it entirely contradicts established accounting principles.  I have written on this subject before and will continue to do so; GAAP clearly calls for financial statements to make a good faith effort to determine what the future cash flow of transactions is likely to be and record the present value of those cash flows at a realistic market rate of interest.

This approach works on both sides of the balance sheet: Assets and Liabilities and Equity.

The approach espoused by certain accounting professionals ignores this.  The argument is that a serial assessment is, by its very nature, a cash received issue.  And I call bullshit. The rules have been, and will remain, record the present value of the expected cash flows.

Another simplified example of this:

Association calls for a “serial assessment” for $1,200,000.  Each of the 100 unit owners has an option to pay  either up front $12,000 or pay $100 per month for 120 months plus interest at 5% per year.

By the way, this is exactly what was in the disclosure.

Let’s unpack this.  Association uses it’s levy power to Assess the unit owners for $1,200,000.  Not $10,000 per month, not $120,000 this year, but $1,200,000.

It provides the owners the option of paying it off in full by the payment date or paying it over 120 months.  If they elect to pay it over time, the owner must pay interest at 5.0% per year.  How is this any different from buying something with a credit card and agreeing to pay it off by the payment date and avoid interest charges (at 36%) or deciding to pay it off over 10 years?  Answer: It isn’t.

So, somehow, some over-educated but none-the-less not too bright CPA, says that this information should be ignored and the only receivable that should be recorded is any amounts past due and that the only “revenue” earned is the amount that was paid or was due and payable at the end of the period.  By the way, if you really think about it, the amount that is in arrears is the owners’ share of $1,200,000 less payments received!

By the way, remember that the disclosure provided for interest at 5%.  Guess what?  No interest was recorded on the audited financial statement.  Why?  Because the CPA firm is filled with minions who don’t question the bosses decision.  So much for professional responsibility.

I am not saying that allowing for owners to pay a special assessment over time is an easy accounting process.  It isn’t – and we know because we have to keep up several hundred special assessment amortization schedules which show how much of each payment was applied to interest and it has to be updated for each payment.  It is time-consuming.  Which is why we set up the Access system – to allow us to track payments to each assessment and make recording the transaction a little less error-prone.

But the fact that something isn’t easy doesn’t mean it should be ignored.  And the treatment of a special assessment on the cash basis ignores the reality.  The truth of the matter is, you can simply state that you are not competent enough to track a special assessment which allows payment over time and include it in your significant accounting policies.

It isn’t GAAP and the auditor should comment on it.  But for an auditor to pretend that cash basis is acceptable in a GAAP financial statement because it makes management and lawyers feel good is simply an auditor who practices malpractice for a living.  It will catch up with them sooner or later, but in the meantime, you as owners will pay the price.

Regarding the proposal – we wrote back to the manager that we would love to propose on the audit but the board will need to decide first if they are ready to restate the prior years’ financial statements as they are not GAAP; or live with a GAAP departure and possibly even an adverse opinion from us.  Once they face the truth, the board will no doubt take the easy road and stick with the current auditor.  Sometimes losing is better than winning.


Regarding our new software system!  HOA Fiscal is our HOA financial and accounting management software system we are rolling out.  It focuses on internal control and documenting which employee – and in what role – does certain functions.  We create groups for limited common elements, track the declared ownership and allow an association to track all the relevant details about regular assessments and special assessments.  Sorry, no “serial assessments” allowed.

In addition, we have a module to track fines and escalations so that managers and board members can see where things are and ensure compliance with policies on review and appeal.

And tons more.

We think it is awesome!  For a demonstration or to discuss how our new software system is going to make your life really easy, feel free to give us a call or shoot us an email.  The first 100 associations (and their manager’s) get free unlimited support by the accounting team that dreamed this up.  Seriously, your success is our success.

At C.O.R.E. Services, we focus on being a strong independent check on management and their assertions. Which is why we enjoy working with Property Owner Associations. The boards are dedicated but typically outsource the management who record the transactions and prepare financial statements for the board to review. Our audits are designed to help the board and owners rely upon those statements. You can find more information about us on our website.

The big picture

The past three weeks has, once again, provided proof that it is important to understand the big picture of a transaction before recording it.  Yes, it means really understanding what GAAP requires, but it is more than that, it is literally about seeing the big picture.

For instance, if the entity follows fund accounting, are your funds always in balance?  If you lose sight of the fact that each fund exists for its own purpose and instead think the association is simply one big mass of money coming in and going out, you are missing the bigger picture.  The funds exist for a reason.  Money is coming in for a purpose, are you ensuring that the purpose is being followed?

Do you really understand the big picture of why a particular charge exists?  Do you believe the invoice determines the transaction?  In other words, do you only look at the discreet transaction and say it stands alone?  Are you asking questions about how this transaction was created and its purpose for the organization?  If not, are you sure you are capturing all the relevant data for the entity?

We understand.  It is frankly easier on an entity to simply accept the individual transaction at face value.  It is soothing to the accounting team to receive a vendor invoice and post it to accounts payable and an expense account.  After all, everything we do is now triggered by some document which says that someone has a claim for payment based upon perceived value transferred.  Are you asking the question, “Have we received value for this transaction or is it for some future value?”

Yes, pondering the big picture is driven by understanding what is supposed to be happening and then ensuring the accounting system models that.  In the big picture, accounting is not recording invoices and payments, it is about ensuring the economic model is valid.  For instance, the big picture I envision for associations is recognizing that

  • Property units, not their particular owners, are customers.  Owners are transient, property lasts as long as the association, and maybe even longer;
  • Vendors want annual contracts (or longer) but don’t offer value through the annual period.  Some work is simply not conducive to seasonal cycles;
  • That if the reserve study says you should have $X today to deal with future replacement project and you have 25% of X, you have a funding deficit.  Ignoring this is dangerous to your association.  And someone’s pocketbook;
  • The goal of an association is to breakeven on its operations.  This is why the budget is created.  When things go right, your bank accounts end up where they started.  Internally generated financial statements which use words like “profit” or “loss” are intellectually misleading and defeat the actual focus on the need for funding.
  • All economic claims should be recorded and reported.  A well-designed information system can help identify economic claims but good old-fashioned questioning helps too.  The accounting literature uses the word probable – substitute commonsense; and finally
  • When in doubt, disclose.  Nothing is gained by hiding the picture from those who need it for making important decisions.

While it might seem that taking the time to understand the big picture is inefficient, I would argue that it leads to superior efficiency.  Spending an hour understanding why a transaction is created will save you 8 hours of recording it incorrectly, 4 hours of undoing your entries and then another 5 hours of doing it right.  Not to mention the time spent by auditors and lawyers arguing with you about how you should have handled it to begin with.

If you are struggling with the bigger picture, ask for help.  If no one in your organization seems to be able to grasp it, call your auditor.  Hopefully this firm can see the big picture and can help you get it recorded.  Or contact us.  We will be happy to help you identify the patterns and look at how the transaction fits into the bigger scheme of activity.  Doug and I bounce ideas off of each other 3 or 4 times a day.  Because we would rather spend 2 hours talking about an issue than 8 hours doing and undoing transactions.

Seeing the big picture helps you become more effective and in the process, more efficient.  Efficiency wins the game so stop working and start thinking.

At C.O.R.E. Services, we focus on being a strong independent check on management and their assertions. Which is why we enjoy working with Property Owner Associations. The boards are dedicated but typically outsource the management who record the transactions and prepare financial statements for the board to review. Our audits are designed to help the board and owners rely upon those statements. You can find more information about us on our website.

Getting Assessments Right is Important

GAAP is incredibly simple, at least as long as your activities are simple.  For a condominium association, you assess and your owners pay.  Your bills are taken care of and things go smoothly.  Until they don’t.

Things no longer go smoothly when one day the board wakes up and has to address a funding deficit.  I mean, to be clear, it was always obvious, but the board preferred to be oblivious.  Now, the roofs are leaking, the siding is falling off and your reserve is $3,000,000 in the hole.  It is time to pay the piper.

The first problem is that, unsurprisingly, your owners can’t come up with their portion of $3.0 Million.  This problem leads to the second problem.  You have to borrow the $3.0 Million from the bank.  And now your potential headaches as a board expand dramatically.

You are going to hear advice between two extremes: The current owners are on the hook for the bank debt and only future owners are on the hook.  Your lawyers will explain how they will try to make this to where you can collect as much money as possible from current owners and even future owners.  This is great.  It also has nothing to do with the underlying accounting.

GAAP is all about the economics.  As we spelled out last week in our research article, accounting standards spell out exactly how to treat this transaction.  You have to look at the substance of this transaction.  If the substance is you are dealing with a funding deficit, then you need to record a receivable on the books of your association.

Yes I know.  Your manager and his cousin who once practiced as a CPA before taking a lucrative position selling ice cream, tell you that it isn’t a receivable.  That your resolution says that the owners are only on the hook for the monthly assessment.  That the form of the transaction says it is a regular assessment and you can safely ignore the actual reasons you are here.

Wonderful sentiments, but bad advice.

GAAP is clear.  Because you are dealing with a funding deficit, you are acknowledging that your owners owe it.  Think about it.  How can you say that you are $3,000,000 in the hole and not say that somehow your owners aren’t on the hook for it?  By saying there is a fund deficit, aren’t you implicitly stating that your ownership, past and through the day you pass the resolution, didn’t pay enough?

Had they paid in their extra $50 a month for the past ten years, do you really think you would be here today?  You didn’t wake up this morning and suddenly realize that some mythical owner in 5 years might have a fund deficit – you notice it is a problem now.

And the now part of this is what causes it to be recognized.

Oh, we understand.  You will hear all sorts of advice.  You can defer the maintenance, you can fix the leaks one at a time, you can borrow money and the owners won’t be liable.  Possibly true.  We aren’t hear to tell you how to handle those management problems.  We are here to tell you how you should record the transaction for purposes of your financial statements; those statements you claim are GAAP.

The moment you officially recognize that you are short, you create the receivable.  Just like when you bounce a check, you are responsible for the overdraft now.  Not in 10 days when your paycheck comes in, now.  If the bank has overdraft protection, you are still responsible for the overdraft now but they are giving you the 10 days to pay it; at a stiff price we might add.

Logic and economics rule accounting, not legal niceties.   The bottom line is, if you are getting into the banking business by “loaning” money to your owners so your association can get needed repairs done, then you should be treated like a bank for accounting and reporting purposes.  Our strongest advice is, “DON’T!!!!!”  Assess what needs to be assessed and demand owners pay it.  Today.  In full.

If you don’t, or can’t, deal with the real problem, then simply face the fact that you are creating a nightmare reporting problem and don’t listen to those who whisper in your ear that there is an easy way out.  There isn’t.

Neither a lender nor a borrower be.  Sage advice for most of us and even more spot on when you are a condominium association.

At C.O.R.E. Services, we focus on being a strong independent check on management and their assertions. Which is why we enjoy working with Property Owner Associations. The boards are dedicated but typically outsource the management who record the transactions and prepare financial statements for the board to review. Our audits are designed to help the board and owners rely upon those statements. You can find more information about us on our website.

Recording Serial Assessments

The accounting treatment for the special assessment called Serial Assessment

Addressing the recognition and reporting of a complex transaction under accounting principles generally accepted in the United States (GAAP).

Over the last four or five years, there has been an attempt to create a hybrid mechanism to protect condominium assessments and the associated lien rights which attach to those liens. This research does not address the individual claims against property and owners and instead focuses on the specific accounting treatment to ensure that the transaction is recorded correctly under US GAAP.  Our concern in this analysis is the appropriate accounting treatment of assessments under existing GAAP.  We do not attempt to clarify the impact of the new pronouncement of ASC 606 as it pertains to assessments.

The Basics of a Serial Assessment

  • It derives its power to assess from the bylaws of the condominium organization which typically grants the board of directors broad powers to levy assessments for “special” situations.
  • The special situations are those which lie outside the standard budget and assessment cycle – the operating assessments
  • The special situation generally addresses funding shortfalls in the reserve fund when specific reserve projects are required to be done
  • Serial assessments attempt to levy a sum of money on a periodic basis over a period in excess of one year.
  • Serial assessments might incorporate an interest charge for those periods in excess of one year
  • Serial assessments may grant the right to a unit owner to pay off the serial assessment, either in the beginning or at certain times during the assessment period
  • If a serial assessment is not paid at time of transfer of a unit, the buyer takes the unit with that serial assessment still outstanding
  • The serial assessment is “levied” periodically instead of at the time of the original assessment, which attempts to ensure that there is a continuing lien against the property regardless of transfer of title or default and discharge

 GAAP on Serial Assessments

The Financial Accounting Standards Board (FASB) has issued the Accounting Standards Codification (ASC) which details accounting principles generally accepted in the United States of America (GAAP). GAAP are based on the economic qualities of a transaction, not necessarily its legal structure.  The objective of financial reporting is to provide information that is useful in making decisions about providing resources to an entity.  The purpose of financial reporting is to provide decision makers with useful information.

Some of the qualitative aspects of financial reporting include

  • Usefulness for decisions
  • Relevance
  • Faithful representation
  • Understandability

ASC 972 provides GAAP for Common Interest Realty Associations (CIRA), of which condominiums are a specific type of CIRA.

ASC 972-605-20 provides that CIRA’s are typically funded by periodic assessments of its members so that the CIRA can provide ongoing management, maintenance, administration, repair and replacement services on behalf of the organization’s members.  These are the annual operating and reserve assessments which are approved by the board of directors and which may need to be ratified by the ownership at an annual meeting.

Any other assessment is a special assessment.  Boards of directors are given the power, typically stated in the bylaws, to assess the ownership and members for non-budgetary transactions, i.e. special transactions.  This special transaction could be to address a deficit in the operating fund due to unforeseen common operating expenses or to address a deficit in the reserve fund for either specified reserve projects or to build up the general reserve fund for unspecified future projects.

ASC 927-605-25-1 states that “Special assessments shall be reported as revenue, unless they are deferred in accordance with the guidance in paragraph ASC 972-403-25-1.”

ASC 972-403-25 states, “Deferred revenue may include items such as a special assessment designed for specific costs that have not yet been incurred.  Such amounts shall be reported as revenues when the corresponding liabilities and expenses are reported.”

Both ASC 972-603-25-1 and ASC 972-403-25 are built upon the conceptual framework.  For the purpose of this analysis, we provide the following definitions from CON 6:

Assets – Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.

Revenues – Inflows or other enhancements of assets of an entity or settlement of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major and central operations

An event is a happening of consequence to an entity. It can be an internal event or an external event with another entity or with the environment in which the entity operates.

A transaction is a particular kind of event. It is an external event that involves transferring something of value to another entity.

Accrual is the accounting process of recognizing the effects of future cash receipts and payments in the current period. Accrual accounting attempts to record the financial effects on an entity of transactions and of other events and circumstances that have consequences for the entity in the period in which those transactions, events, and circumstances occur rather than in the periods in which cash is received or paid by the entity.

Matching is the simultaneous recognition of the revenues and expenses that result directly and jointly from the same transaction or event.

Analysis of the Facts and Conclusions

A serial assessment is a special assessment.  It is a special assessment as it is prepared outside the normal budgeting and assessment process for determining the operating assessment and the reserve contribution to be levied against the owners in the upcoming fiscal year.

There is no legislative support for the concept of a serial assessment.  As a matter of fact, most state laws are silent even as to the power of a special assessment.  The right to assess the owners and memberships outside the standard budget cycle is generally a power given to a board of directors by its bylaws.  It is generally understood that where state law does not directly contradict a governing document, the governing document will prevail.

There is also no specific codification to be found in the accounting literature addressing serial assessments.  That is because the serial assessment can be analyzed as either an operating, or common, assessment, or a special assessment.  If the assessments has the characteristics of an operating assessment, it should be treated as an operating assessment; if it has the characteristics of a special assessment it should be treated as such.

This means the serial assessment must be judged based upon its economic consequence.  In order to determine how the transaction should be recorded, we must look to the underlying reason why the assessment is being levied to the owners and members.

Example 1: Large construction project coming due

In this example, the hypothetical condominium association AB Condo Association has identified that in three years, it will be required to expend approximately $5,000,000 for a series of reserve projects.  The board has determined it will have a reserve funding deficit of $2,000,000 when that project is done.  The board passes a special assessment and calls it a serial assessment where the $2,000,000 is going to be levied monthly to the ownership over 36 months.

The board identified that there is a reserve fund deficit and calls for an assessment of $2,000,000.  Because the board called for a special assessment for the full amount but is allowing owners to pay in monthly installments over 36 months, the Association should record the receivable and a deferred revenue item for the $2,000,000 which will become revenue as the reserve project is completed.

From an economic standpoint, the board and owners have acknowledged a funding deficit exists.  The board and owners have agreed to a process to address the funding deficit.  This meets the requirements of an asset as laid out in the Concept Statement 6 and should therefore be recorded at is present value.

While our analysis is focused exclusively on the appropriate accounting treatment of the assessment, the interest factor should not be ignored.  Because this assessment is being collected over 36 months, ASC 835 Interest should be taken into consideration.  Since the board has not stated that there is an interest component on the payments from owners who elect to pay over the 36 months, the interest should be imputed at a market rate.  This is necessary as financial statements prepared in accordance with GAAP should have assets and liabilities stated at their present value. (ASC 835-30-10)

Example 2: Desire to build up the reserve account

AB Condo Association board of directors has a concern that the Association could be underfunding its replacement reserve.  It decides to assess a 12 month serial assessment against the units for a total of $1,000,000 and levy it monthly until all units have paid.

From an economic standpoint, the board and owners also acknowledge a funding deficit exists.  The board and owners have agreed to a process to address the funding deficit.  This is a special assessment for the full amount with installment payments due in under twelve months.  Because the special assessment is for less than twelve months, ASC 835-30-10 will not apply.

Example 3: Large construction project coming due and board borrows funds for the construction

Similar to Example 1 ,only the AB condo board has identified that it cannot collect the full assessment due for the deficit which exists for this reserve project.  The board borrows $2,000,000 from a bank.  It states that owners have two options: pay their portion of the special assessment up front or pay it over 120 months with interest due on those payments equal to the bank’s rate of interest it will charge on the loan.  The board calls this a serial assessment and owners have the option, but not the obligation, to pay their outstanding balance on their assessment at the time of sale of their unit.

As in example 1, the board recognizes a deficit in the reserve fund to pay for the construction.  To facilitate the immediate construction, the board addresses the funding deficit by borrowing funds.  The Association will record revenues to match the construction costs paid for by the bank financing and will have a receivable from the owners for the total amount of the construction costs above what has been financed from the established reserves.

Example 4: Large construction project coming due, board borrows funds for the construction and there is no special assessment

Similar to examples 1 and 3, only the board does not pass a special resolution to assess the deficiency to the owners.  Instead, the board agrees to increase the annual operating assessment in an amount sufficient to pay the bank a monthly principal and interest payment.

The board recognizes that there is a deficiency in the reserve fund.  The borrowed funds are used to pay for the construction.  To match the construction costs, revenues should be recorded and properly charged to the owners as a receivable.  The amount of the receivable is the present value of the discounted cash flows of the excess operating assessments charged to the owners.  If, for instance, the actual operating expenses of the association are $200,000 and the board increases the operating assessment to collect funds to pay the bank its principal and interest by $200,000 per year and this will run for 15 years, the present value, at an appropriate market interest rate (assume 5% for this example) would be the present value of that additional assessment charge.  In this case, $200,000 over 15 years at 5% interest rate is a present value of $2,075,000.

Conclusion

The authoritative guidance for assessments all support the premise that the Association has an economic claim against the unit owners for the present value of the payments which are incurred to pay for addressing a funding deficit.  GAAP calls for matching the revenues to the expenses in a given reporting period and, to the extent that funding deficits are identified and a plan put in place to address it, the funding plan has economic substance and should be recognized as an asset.

The determination of its recording as income earned by the Association or deferred is a matter of the facts and circumstance which led to the special assessment.  If the special assessment is for a designated purpose, the assessment should be deferred until the related costs are incurred and then recognized as revenue.  If the special assessment is put in place to address an overall funding deficit, the amounts are likely revenue upon the assessment.

The economic reality is that the owners, especially in a condominium, own the common elements.  Charges to repair or rehabilitate the common elements are, in fact, the responsibility of the owners.  Thus, either the Association has pre-collected those funds and have established a reserve for those future amounts, or the Association has an obligation to assess the owners upon the identification of the actual funding deficit.   Either way, the Association clearly has an asset under the accounting standards.