Fun Things in Accounting

1. Welcome!Washington State ChapterCOMMUNITYASSOCIATIONSINSTITUTEThe leading professional organization providingeducation, resources, and advocacyfor community association living.

2. FunThings in Accounting Part 1 • Gayle L. Cagianut, CPA • June 14,2012 – Managers Only Day

3. The Life of a Manager Then…to TOP it off …Accounting Fun!

4. Bad Debt, Foreclosure & Collection Issues • Accounting for Collection Costs • Bad Debt Write-Off • Allowance for Bad Debts • Recording Foreclosures/Sheriff’s Sale

5. Accounting for Collection Costs • Our recommendations when asked ~ • Legal Fee income is billed directly to the unit owner as the Association is billed. • Legal Fee income is in a separate income account OR in a Legal Fee Reimbursement Account (contra expense). • Legal Fee expenses for collection matters is a separate expense account from general legal expenses • Legal Fee Income and Legal Fee – Collection Expense should net to zero in the same accounting period.

6. Bad Debt Write-Off • From an internal control standpoint, the Board should be aware of and approve any significant bad debt write-offs. If write-offs are approved based upon the attorney’s advice, then get that legal advice in writing. • For bad debt write offs – be sure and give adequate detail. This internal control procedure is important for the Board, manager and auditor.

7. Allowance for Bad Debts Very important because ~ • It is required by GAAP • It ensures that the assets of the Association are not overstated • It shows that the Board and manager are actively managing the Association and are aware of the potential for uncollectible accounts • It gives a better financial picture for cash flow management and future budgeting.

8. Computing the Bad Debt Allowance We generally make determination by individual unit owner accounts. Suggested three standards: • 100% Collectible – no allowance needed • Probably/Possibly Collectible – 50% allowance • Uncollectible – 100% allowance (less 6 months) Alternately, you could use a percentage of assessments or a percentage of past due at 60 days, 90 days, and/or 120 days, or give actual known/estimated amounts by account. • Be prepared to defend it!

9. Foreclosures/Sheriff’s Sale • Asset on financial statements? • Does it have value? Is it “impaired” by a mortgage or redemption period? • Monthly assessments on foreclosed units? • Continued assessment & write-off to unit expense • Rental of unit • Capture all expenses associated with rental • TAXABLE income • Other Issues • Bank payout to Association - TAXABLE • True gain by Association if sold?

10. Special Assessment Accounting • Special Assessments with Payment Terms • Special Assessment #1 • There is a special assessment of $1,200 payable at the rate of $100 per month for twelve months.   • Special Assessment #2 • There is special assessment of $100 a month for twelve months. • Does $100 per month get recorded as income OR $1,200 at the onset of the SA??

11. Special Assessments with Payment Terms Including Interest or Financing Fee (or Discount) • Special Assessment #3 • There is a special assessment of $1,200 payable at the rate of $100 per month for twelve months or the unit owner can make one payment of $1,100 now. • Special Assessment #4 • There is another special assessment of $1,200 due now or the unit owner can make payments of $105.50 per month (computed with an interest rate of 10%) each month Record $100 per month, $105.50 per month, $1,100, $1,200 or $1,305.50??

12. Special Assessment Accounting ISSUES • Multiple amortization schedules when there are varying monthly payment amounts and/or owners choose to pay more or less than schedule • When special assessments are tied to loans • Timing of beginning of SA and beginning of loan • Paydown of loan principal when payoff occurs • Reamortization of loan when payoffs occur

13. MORE Special Assessment Accounting ISSUES • Deferred Income – per GAAP • Separate FUND – alternative to deferred income • RECOMMENDED – when large enough and SA lasts more than one year.

14. Controls on Other Income • Separation of duties • Independent reconciliation • Random testing • Board approval/verification We are testing what is NOT there!

15. Separation of duties • Best – when two separate people are involved in any accounting process Examples: • One persons keeps the calendar of events, another person collects the money • One person makes the deposit, another person reconciles the deposit with the calendar

16. Independent reconciliation • When one independent document is reconciled with actual monies Examples: • A calendar of rentals is compared with deposits. • An expense related to the income is compared with the income (e.g. maid service with guest suite income) • A record is kept of all name changes and compared with Move-In fees

17. Random testing • Random testing by an unrelated party to the transaction to ensure that the records are complete Examples: • Board member looks at event calendar and checks out the event location • Unannounced visits to guest suite when calendar shows open nights

18. Board approval/verification • This is probably the weakest control, but if the entire Board sees the income monthly they will monitor events as they see them – either Move In/Out, Room Rentals, etc. • The Board also should take responsibility for determining the best method to ensure completeness of income.

19. Audit Process • Independence & The Auditor • Client Representations • Adjusting Journal Entries – Why should you care? • Reading the Audit Report • Report of Internal Control

20. Independence & The Auditor • An auditor must be independent to issue an opinion on the financial statements • We cannot audit our own work…thus, we cannot do accounting or reconciling • We can post standard adjusting journal entries, propose corrections of errors, and assist in the drafting of financial statements • We cannot do “management” type of consulting

21. Independence & The Auditor • The auditor must approach the audit with an “Attitude of Skepticism” • GAAS requirement – Don’t take it personally! • We are always looking for errors and fraud • Reminder – the Association is our client

22. Client Representations • Financial Statements belong to the client • Representation letters are required • Receipt of signed letters signals audit is approved and ready for final • Adjustments/changes must be made within 60 days of draft report date

23. Adjusting Journal Entries • Why do you care (or should you care) about the AJEs?? • GAAP-prepared, full accrual, “official” financial statements • Required that the Board take responsibility for the financial statements, as adjusted. • May find errors in accounting procedures or in financial statement presentation.

24. Reading the audit report • Read the footnotes…they should tell you important things about the numbers on the financial statement • The most recent reserve study recommended monthly funding of $5,022 in 2009. The actual monthly reserve funding was $3,400. However, at the end of the year three months had not been funded so there is an amount of $10,200 showing as due from the operating fund to the replacement fund.

25. Look at Operating Fund – What is the Association’s “Net Worth” • ASSETS MINUS LIABILITIES = FUND BALANCE • We recommend 1-3 months of operating expenses • (This is found on the Balance Sheet – also known as retained earnings or members equity)

26. Report of Internal Control • Required by GAAS (generally accepted auditing standards) • Two levels of deficiencies: • Significant Deficiency • Material Weakness • Use this report to strengthen controls within your management company or Association

27. So…do you now agree that Accounting & Auditing of Associations is more FUN than the CIRCUS???

28. CAI and theWashington State Chapter of CAI Working Together to Serve You Locally and Nationally www.WSCAI.org 425-778-6378 www.CAIONLINE.ORG 1-888-224-4321