Financial Statement
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FINANCIAL STATEMENTS

A "Financial Statement" is a report on the financial activities of the association. It identifies all income and expenses for the reporting period.

Annual Financial Statement. At the end of the fiscal year, a CPA prepares a written report of the financial condition of the association based in part on management representations. This annual financial statement of the association's assets and liabilities, including any litigation that could have an unfavorable outcome for an association (pursuant to FASB Statement No. 5, Accounting for Contingencies) and is done on an accrual basis using GAAP as required by Civil Code §5305. If the association's gross income exceeds $75,000, the report is either audited or reviewed, depending on which level is called for in the association's governing documents. If an association's documents are silent, at a minimum a "review" must be performed. (Civ. Code §5305.)

  1. Distribution of Statement. A copy of the review of the financial statement shall be distributed to the members within 120 days after the close of each fiscal year. (Civ. Code §5305.) Board members and owners should pay particular attention to any opinions expressed by the CPA in the financial statement.
  2. Method of Delivery. Boards cannot merely notify members that the report is available, they must physically deliver the report by one of the following methods (Civ. Code §5305; §4040):
  • first-class mail, registered or certified mail, express mail, or overnight delivery by an express service carrier;
  • email, facsimile, or other electronic means, if the recipient has consented, in writing, to that method of delivery.

Quarterly/Monthly Statements. In addition to annual financial statements, boards should receive interim statements either quarterly or monthly.

ASC 606 - Reserve Revenue Recognition. There has been a controversial change in accounting standards that took effect with fiscal years beginning after December 15, 2018. The change deals with revenue recognition in deferred replacement fund liabilities. It treats reserve revenue differently from operating revenues and is a radical departure from how reserve revenues were recognized over the prior forty years. Many find that financial statements using the new interpretation are difficult to understand and misleading. CPAs split into two camps with one side adamant the new standard applied to associations and the other side equally adamant it did not. Neither FASB nor the AICPA has taken a position on whether ASC 606 applies to homeowner associations.

Prepare without ASC 606. Since there is no consensus on the applicability of the new standard, boards can ask their CPA to prepare the association's annual financial statement using prior GAAP standards for reporting reserve revenues, not ASC 606 standards. Annual financial reports are the association's not the CPA's. As long as their preferred presentation complies with GAAP and is not misleading, the statement can be prepared without using ASC 606 standards. 

Definitions. Following are a few important definitions:

  • AICPA: American Institute of CPAs
  • FASB: Financial Accounting Standard Board. The governing body that establishes U.S. Accounting Standards.
  • ASC: Accounting Standards Code. 
  • GAAP: General Accepted Accounting Principles. The ASC which establishes GAAP to which all CPA attest products must comply (CPA audits, reviews, compilations, etc.) 

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Adams Stirling PLC