An annual "Financial Statement" is a report on the financial activities of an association. When reviewed by a CPA for publication to the members of an association, it contains the following:
- Accountant’s Report (Nature & scope of work, Management’s Responsibilities, Auditor’s or Accountant’s Opinion or Conclusion, and any other matters of emphasis)
- Balance Sheet (Assets, Liabilities, Net Assets or Fund Balances)
- Revenue & Expense Statement
- Cash Flow Statement (Explains the change in cash & investments (reserves) from beginning of the year to the end of the year)
- Full Disclosure Notes (Specifically GAAP mandated plus client specific issues)
- Mandatory Supplemental information regarding Major Repairs & Replacement obligations and funding plan (reserves).
The report is based in part on management representations and includes disclosures regarding litigation that could have an unfavorable outcome for an association (pursuant to ASC 450-20-25, Accounting for Contingencies). It 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.)
- Distribution of Statement. A copy of the reviewed financial statement must be distributed to 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.
- Method of Delivery. Boards cannot merely notify members that the report is available, they must 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.
Associations with less than $75,000 in annual gross revenues have other annual financial reporting requirements as mandated by their governing documents and or the California Corporations Code. Boards should consult their association’s attorney and CPA for guidance on these requirements.
Duty to Review Finances. In addition to producing and delivering annual financial reports, Boards have a duty to review their association's financial records as prescribed by statute. See also, approving unaudited statements.
ASC 606 - Reserve Revenue Recognition. In December 2017 FASB issued Accounting Standards Code 606, “Revenue Recognition from Contracts with Customers” that took effect for accounting years beginning after December 15, 2018. HOA CPAs have divided into two camps as to how this ASC applies to HOA assessments, product purchases and user fees.
One group concludes that HOA owners are not “customers” in the usual and customary sense because they share in the risks and benefits of the HOA operation. Therefore, HOA assessments should be recognized (recorded) as income to the Association upon their levy or due date as has been the practice. In the case where HOA owners are in fact acting as customers typically “buying” certain products (key fob’s) or incurring user fees (Golf green fees) there would also be no change in when the revenue is recognized (recorded on the HOA’s financial reports).
The second group concludes that the portion of the HOA assessments that have been arbitrarily designated by the HOA for Major Repairs & Replacements (MRR, Reserves) should not be recognized as revenue until the HOA expends the funds to satisfy this “Contract Liability.” This method treats reserve revenue differently from operating revenues and is a radical departure from how HOA assessments were recognized over the prior forty years. Many find that financial statements using this interpretation are difficult to understand and are misleading.
Since neither FASB nor the AICPA has taken a position on how ASC 606 applies to homeowner association assessments, HOA boards can ask their CPA to prepare the association's annual financial statement using traditional methods for reporting assessment revenues. The Annual financial reports are the association's not the CPA's. If the HOA’s preferred presentation complies with GAAP, is not misleading, and reflects the community’s economic reality, it may direct its CPA as to accounting methods.
Definitions. Following are a few important definitions:
- AICPA: American Institute of CPAs. The national CPA governing body that sets and enforces CPA ethical rules and work product standards. It creates and administrates the nationwide uniform CPA exam. It provides ASC implementation guidance. Individual states have separate governmental agencies that grant, monitor, and revoke the CPA designation.
- FASB: Financial Accounting Standard Board. The governing body that establishes U.S. Accounting Standards as expressed in its Accounting Standards Code.
- ASC: Accounting Standards Code. The accounting “laws” to which all GAAP compliant work products must conform with one major exception. If when applying the applicable ASC code, the result is misleading or fails to reflect economic reality, the CPA is required to modify the reports to satisfy those two tests. Clear permission and requirement for the CPA to exercise professional judgment.
- GAAP: General Accepted Accounting Principles. The ASC establishes GAAP to which all CPA attest products must comply (CPA audits, reviews, compilations, etc.)
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