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Annual Meetings: Riotous or Reserved?
By Robert Johnson, CPA/PFS Picture a room full of 100 condo owners. You and your fellow directors are on stage. You are not wearing bulletproof vests. Security has left the room. The president announces that the prior directors did not anticipate certain road repairs, and each member has to pony up $1,000 for improvements. The murmuring starts. Members grumble loudly. Furniture that is not bolted down starts flying around the room . . . A horrific thought isn't it? You and your fellow board members were being the good guys to take the reins of the association. But what you didn't do was work asset replacement and repair into your association's income statement. The Reserve Method The reserve fund for replacement method is directors' best guess of future asset replacement and repair costs. The best way we've found to show owners the cost of replacement is to include each line item in the income statement. The reserve method helps directors address these items annually. Annual budgets will come from the association's capital improvement plan, which may stretch over 20 years, listing anticipated dates and amounts for asset purchases and repairs. A good reserve system spotlights capital budgeting and levels out dues and special assessments. For example, the following are costs that associations may choose to set up a reserve: Reserve for Replacement Expense Road & water lines Pumps Roof Motor Vehicles Wells General Painting One of our clients has such a good handle on reserves and operating expenses that there is no need for special assessments. The annual dues include special assessments. No one has been injured by flying furniture at any of their meetings. Reserve Accounts: How do they work? The reserve for replacement is the estimation of replacement and repair costs, similar to those listed above. For example, in a 100-unit association, annual dues are $2,000 per unit and the association has reserved $500 of the $2,000 dues for road repairs. Selected year-end balance sheet and income statement accounts follow: Balance Sheet
Asset Restricted cash - Reserve for replacement = $ 50,000 Liability Reserve for replacement = $ 50,000 Income Statement
Income Dues=100 units x $2000 = $200,000 Expense Reserve for replacement 100 units x $500 = $ 50,000 Think of the reserve for replacement as estimated accounts payable. The association estimates road repairs at $50,000 and sets aside $50,000 in current cash dues to pay for these repairs. The reserves must be reviewed annually, and there is no guarantee reserves will equal actual. Do a bad job budgeting reserves or operating expenses, and expect the furniture to fly. For all CPAs and accountants, you're right, this is not Generally Accepted Accounting Principles (GAAP). I believe condo associations need to focus not only on operating budgets but on asset replacement and repair as well. The reserve method is superior for associations because asset replacements, repairs and operating expenses run through the income statement. Directors are forced to budget both capital and operating expenses together, and everyone gets to see the whole picture. From: Condo Management, New England, June, 1997. (Finance) Revised 12/28/2005 © Robert L. Johnson, a CPA/PFS (Personal Financial Specialist), has been advising clients since 1970. His tax business and personal financial consulting firm is located in North Conway, NH and Wells ME. Articles on this site are general information and not tax advice. Please see your professional tax advisor. Top |
