Financial Rules for Community Associations: GAAP, Taxes, and Legal Matters

1. All Things Financial(BTW – Financials are FUN!!) Presenter: Catherine L Kuhn, CPA - Cagianut & Company, CPA

2. Rules for Today • Questions will be taken during each topic • Will need to limit the number of questions, however, in order to have time to get through everything • Keep the questions as general as possible so that many can relate • Specific questions will be answered after the presentation • Go ahead – you can try and stump the CPA • Have fun!!

3. GAAP • Will be addressed • Tax • Will be addressed • Legal • Get a legal opinion!

4. Financial Matters Matter • How much time is spent on the Treasurer’s report at each Board meeting? • Does the manager and/or Board really review the financials before the meeting? • Are “real” financial items discussed or is it just a routine reading of the balances? • Be honest!!

5. GAAP and Washington State Law for Community Associations WHEN IS AN ANNUAL GAAP FINANCIAL STATEMENT REQUIRED, and AN ANNUAL AUDIT?? • Old Act Condos (pre 7/1/90) • Financial statements: no mention of “GAAP”. But C&C strongly recommends GAAP • Audit: defaults to New Act requirements, UNLESS the governing docs state otherwise

6. GAAP and Washington State Law for Community Associations WHEN IS AN ANNUAL GAAP FINANCIAL STATEMENT REQUIRED, and AN ANNUAL AUDIT?? • New Act Condos • Financial statements: GAAP required • Audit: 50 or more units – annual audit Less than 50, required, but 60% waiver • Developer Transition audit required (at date of transfer) – unless 2/3 waive

7. GAAP and Washington State Law for Community Associations WHEN IS AN ANNUAL GAAP FINANCIAL STATEMENT REQUIRED, and AN ANNUAL AUDIT?? • Homeowners Associations • Financial statements: GAAP not required, however “…..true statement of financial status….” C&C strongly recommends GAAP • Audit: Assessments $50,000 or more (not “income”) 67% waiver

8. The Ten Commandments of Internal Control for Associations 7. Thou shalt update signature cards in a timely manner whenever there is a change in board members or change in management personnel. The board may want to consider having a board member deliver or mail the signature cards to the bank. 8. Thou shalt require approval of write-offs of A/R balances by a person other than the person making the deposits and reconciling the banks. The board shall approve all write-offs over a certain amount. 9. Thou shalt review all bank statements and reconciliations at least quarterly for ALLbank accounts - including certificates of deposit. 10. Thou shalt receive complete financial statements at least quarterly (monthly, is even better). 1. Thou shalt not sign blank checks, nor leave blank check stock unsecured. 2. Thou shalt deposit all checks in a timely manner (preferably daily). If a deposit is not made daily, then the Undeposited funds should be adequately secured. 3. Thou shalt not accept cash. If absolutely necessary to accept cash, then do so only with 2 witnesses, and then generate a receipt for the files. 4. Thou shalt not make checks payable to “Cash”. 5. Thou shalt require invoices, or other type of verification of the expense, on all paid bills. That invoice should be “canceled” in some manner after payment to avoid duplicate payment. 6. Thou shalt have two Board signers on reserve withdrawals. Thou shalt not allow telephone withdrawals of reserve funds.

9. Reading Financial Statements10 Questions to Ask • Is the cash protected by FDIC/US Government? • If not FDIC insured, does the Association have an investment policy? • Does the bank statement & reconciliation agree with the cash balance on balance sheet? • Are there old, outstanding items on the recon? • Does assessment income agree with budget?

10. Reading Financial Statements10 Questions to Ask • Is there a large AR balance? • If so, has the Board addressed collection measures? • Have they considered a bad debt allowance or write-off? • Is there other unusual income? E.g. settlements, insurance proceeds, etc. • Are there expenses that are significantly over or under budget? Are there checks or expenses that are unusual?

11. How much $$ is enough?? Balance Sheet Replacement Fund (Reserves) • Look to Reserve Study • Percent Funded • Funding Plan Operating Fund (Members Equity) • CAI/Industry standards • 1-3 months of operating expenses • Contingencies & Cash Flows

12. Reserves vs. Operating • Categorizing reserve vs. operating expenses • Annual vs. long-term? • Op budget or reserve study? • BOD discretion – but document! • Use of reserve money for operations • Sacred money – be careful! • RCW 64.34.384 “May withdraw funds… to pay unforeseen or unbudgeted costs unrelated to… reserve component

13. Reserves vs. Operating • Due Between Funds – documenting repayment • Budgeted reserve allocations not deposited creates DBF • Money taken out of the reserve cash account creates DBF • Borrowing and not repaying • “Transfer between funds” • “BOD decision- document” • Impact on RS

14. Foreclosed Units • How do I account for a unit that has been foreclosed upon by the Association – as we wait for the bank? • Balance Sheet – be conservative – do not inflate value • How is rent recorded? • Separately capture all rental income and related unit expenses in the Income Statement with separate, designated account. • What about the monthly assessment? • Keep recording the assessment with an offset to “foreclosed unit expense” • See C&C website for other tips and FAQ’s • Seek legal advice before renting • Rental intercept issues.

15. Tax Options – 1120 vs. 1120-H • What are the differences? • Member/Non-member vs. Exempt/Non-exempt income • An 1120 is a regular corporation return so “net member income” is taxed where “User Fees” are taxed on an 1120H • When is one better than the other? • Complex area. Work with a tax advisor • 1120 is a “risky” return – but can offer lower tax rates • Several qualifiers to file an 1120 • What is Revenue Ruling 70-604 and why should I care? • Moves “net member income” from year 1 to year 2 • Cannot be used two years in a row

16. Anything Else Financial??? Your Questions

17. Thank You! Articles, FAQ’s, presentation and other information is shared