transfer between funds

Report
Association FinancesReserves and Other Fund
Things
WSCAI-Spokane
11/02/13
Catherine Kuhn, CPA
Cagianut & Company, CPA
Catherine Kuhn, CPA, manages the Bellevue office of
Cagianut & Company, CPA, which is devoted exclusively to
serving the financial needs of close to 600 Community
Associations in Washington. C&C has over 20 years of
experience in serving Community Associations.
Fun thingsPriest Lake
My favorite place on Earth!
Outline Today:
 What is Fund Accounting and should we be using it? Is it required or
recommended?
 What are the accounting implications if our budget doesn’t match
our reserve study?
 What happens if we miss reserve deposits that are budgeted for?
 What are the accounting issues if we don’t pay back
the missed reserve deposits?
Questions to Answer
 Why do operating and reserve expenses need to be segregated?
 What impact do the “new” Washington reserve study disclosure
laws have on the audit report?
 What is disclosed in the audit report about our reserve study?
 How do I read our financial statements to recognize if these
issues exist in our association?
Which Hat to Wear?
 GAAP (Generally Accepted Accounting Principles) as
defined by FASB
 RCW – Washington law for condominiums and HOAs
 IRS – Internal Revenue Service rulings and guidance
 Industry Standards – Prevalent industry practices that
are commonly held to be accepted
What is Fund Accounting??
 Records financial activity by fund (operating fund,
construction fund, reserve fund, insurance fund, special
assessment fund)
 Specific dollars earmarked for specific projects
Sample Fund Balance Sheet
Sample Income Statement
Sample Fund Income Statement
GAAP Standards:
 Assessments for major repairs and
replacements (reserves) must be
reported separately from operations.
 Fund reporting not required – but is
“more informative to users”
 If no fund reporting - shown as
“appropriation of retained earnings”
Types of Funds
 Operating
 Replacement
 Insurance – NOT Reserve
 Property
 Other – Special Project, Settlement
Why Fund Accounting?
 Know when reserve deposits are not made
 Know when expenses are paid out of the
wrong fund
 Know when monies are borrowed or
transferred between funds
 Have a usable operating fund net income
statement that can be used as a comparative
with the budget
 Better information for decisions
Fund Accounting
in the Industry
 Fund accounting is definitely the industry standard
 Trending to fund accounting in Washington
Questions on Fund Accounting??
Fun Thing….
HOOPFEST!!
What if Budget Does NOT Equal the
Reserve Study?
 Does your association budget’s reserve
contribution MATCH the Reserve Study annual
contribution recommendation?
 What happens if your annual budget contributions
don’t match the study?
 Is there an accounting “issue” if it doesn’t?
What if Budget Does NOT Equal the
Reserve Study?
 There is NO accounting (books) issue if your
annual budget does not match the RS
 There IS a possible audit report disclosure issue if
the annual budget contribution doesn’t match the
study
What if we MISS Budgeted
Reserve Deposits?
 GAAP: Requires that the budgeted reserve
allocation (contribution) be shown as the “revenue”
on the reserves Income Statement, regardless if
“paid” into the fund, or not. (ie “accrual method”)
 GAAP: If not paid to reserves, it will show as a
“payable” to reserves, or, a “Due Between Funds”.
“Due Between Funds”
 When one fund owes another fund money
 Can be a result of ~
•
•
•
•
•
•
•
Reserve deposits not made
Expenses not paid out of right fund
Wrong amounts – either deposited or paid
Wrong coding of expense
Monies borrowed
Interest not properly posted
Accounting errors (e.g. journal entries)
Due Between Funds Example
Example:
 Not all reserve allocations were transferred during the year.
 Interest was earned on reserve cash and posted to reserve fund
 Expenses were coded to reserve expenses, but were paid out of
operating cash.
Operating Cash owes Reserve Cash $1,200
What if we don’t pay back the
missed Reserve Deposit?
 GAAP: Considered a “transfer between funds” and a
“permanent transfer” is made from the reserve fund to the
operating fund.
Transfer Between Funds
When one fund moves assets from one fund
to another
Can be a result of:
• Moving cash permanently between funds
• “Forgiving” loans
• “Forgiving” amounts Due Between Funds
Due Between Funds vs.
Transfer - GAAP
How to determine for GAAP? True
Receivable and Payable?
• Intention to repay?
• Documented plans to repay?
• New Reserve Study?
• Ability to repay?

Enough operating cash/fund?
Due Between Funds vs.
Transfer - RCW
 Is not funding the same as borrowing?
 True borrowing –
must be repaid
within 24 months
(out of cycle res exp or a reserve component not yet in the
study is not a borrowing)
Due Between Funds vs.
Transfer - IRS
 Form 1120-H
• No impact
 Form 1120
• May fail the tests ~
•
•
Strict segregation of cash
Use of monies as intended
• May not be qualified to

filed form 1120 if large
Due Between Funds or Transfers
Questions?? Due to Reserves,
transfers, missed deposits~
Ready to
JUMP in to the
next section?
Priest Lake
Operating vs. Reserve Expenses
Is it a Reserve Expense?
GAAP: Major repair or replacement
Industry Standard:
 Major repair/replacement not an annual event
 Extends the life of common area component
 Included in the reserve study
 Board determination
Is it a Reserve Expense?
 RCW: “Infrequent and significant nature make them
impractical to be included in the annual budget”
 IRS: Must be “capital” in nature
Ops versus Reserve Expense?
Why Important?
 Reserve Study will not be accurate if operating and reserve
expenses are not segregated and improper expenses are
taken out of reserve cash
 Operating Income Statement analysis of Budget to Actual will
be inaccurate
 For IRS purposes, very important to segregate operating and
reserve expenses
Controls on Reserve Activity
 Funding in accordance with the budget
 Does your Board know when reserve deposits are missed?
 Reserve expenses
•
•
•
Operating or Reserve expense?
Paid from correct fund?
Approvals?
Controls on Reserve Activity
 Funding in agreement with Reserve Study
 Spending in agreement with Reserve Study
Changes in either not funding or not spending according to the
Reserve Study can significantly impact future cash flow projections.
Controls on Reserve Activity
 BOARD MINUTES – Very Important!
 Nature and amount of reserve expenses
 Decisions to repay reserves, payment plans
 Decisions to transfer funds (instead of repay)
 Why the budget does not match the Reserve Study
 Why reserve deposits are missed/plans --
Questions?
Operating/Reserve Expense:
Fun Things…
The View from Elkins Resort
@ Priest- Chimney Rock!
Fun Things…
Making it to the TOP of
Chimney Rock!
Audit Reports and Reserve
Disclosures
 Footnotes to the Audited Statements:
• Requirements to accumulate funds (statutes),
including FHA (RCW: no funding requirement)
• Funding Policy
• Reserve allocation for the year (Income Stmt)
• Reserve Study status
•
Reserve Study annual allocation – compared
to budget
Required (Unaudited)
Supplementary Information (RSI)
 Estimates of current or future costs of major repairs and
replacements for all existing components (i.e., Reserve
Study)
 Components, useful lives
 Funds accumulated (i.e. Reserve Fund Equity)

C&C adds: “Percent Funded”
Required (Unaudited)
Supplementary Information (RSI)
 Auditor’s Report:
 A statement that the RSI (Reserve Study) is included, or, a
statement that it has been omitted
 The Auditor’s Report is the only thing the CPA “owns” in the
financial statements- so this is on the first page
Required (Unaudited)
Supplementary Information (RSI)
 If a Reserve Study was presented in a prior audit report:
 The CPA is now required to COMPARE RSI to RSI: (Disclosed in
Reserves footnote)
•
Material changes in components
•
Material changes in estimated current/future costs
•
Material changes in component lives
•
Anything else the reader should know
New Reserve Study Requirements:
RCW 1/1/12
 Certain required disclosures now in the annual BUDGET
document (Talaga presentation)
•
Most of our 12/31/12 audit clients did NOT have this
disclosure in their 2013 budgets
•
Internal Control Report “comment” if not included in Budget
document
Questions?
Audit/Internal Control Disclosures?
Fun
Things….
BloomsDay!
2013 Corporate Cup
table with my sister,
daughters, nieces
Fun
Things….
AFTER
BloomsDay
2013!
Cousins taking a
break….
Reading Your Financials:
Spot the “Issues”
 The BOARD is responsible for the financial statements,
disclosures, reserve study
Reading Your Financials:
Spot the “Issues”
 Read Budget to Actual Income Statement each month

Helps identify misclassifications in operating and reserve expense
 Look for “Due Between Funds” (i.e. amounts owed to
reserves)


Easier to spot if you have Fund Accounting
ASK your Manager or Accountant if you
don’t understand!
Reading Your Financials:
Spot the “Issues”
 Transfers between Funds:
•
•
•
There shouldn’t be ANY changes in the equity/fund accounts each
month unless authorized/documented by the Board
DOCUMENT the reasons for any permanent funds transfers (ie
forgiveness of amounts owed to reserves)
Communicate with reserve preparer
DOCUMENT
 Document
 Document!

Document!!
Questions?
Spotting Issues….
Resource: hoacpa.com
[email protected]
FINAL “Fun
Thing…….”
CHOCOLATE!!

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