An Accounting and Budgeting Primer 

for Board Members of Homeowners’ Associations

 By Bruce Olson, MAS

 One of the biggest responsibilities for homeowners who get elected to the board of their condominium or townhome association, is the financial oversight of the affairs of the association.  Obviously most board members are not accountants, but all board members need a basic familiarity with the accounting statements for the association.  This paper is intended to provide some help.

 Accounting

 Homeowners are interested in knowing both how their assessments fees are determined and how such fees are spent.  An accounting system, which records, classifies and summarizes monetary transactions into various financial statements, helps to prepare a budget, shows the amount of assessment fees and how such fees are spent, and provides the basic information necessary for the preparation of income taxes. 

 Usually the annual accounting period coincides with the calendar year, but some associations may use a fiscal year that does not begin January 1 and end December 31.  

 Cash vs. Accrual

There are two main bases for accounting: cash and accrual. Under the cash basis of accounting, revenue (income) is recorded (counted) when cash (or a check) is received; expenses are recorded when they are paid in cash (or a check). The accrual basis of accounting records both revenues and expenses when incurred, or without regard to the time of receipt or payment. For example, a homeowner might pay June, July and August assessment fees on May 31. Under the cash basis, all three months of assessments would be counted as revenue in May since that was when the funds were received; the accrual basis would show assessment revenue in June, July and August, or during the months for which the assessments are due. On the expense side, a waste hauling bill for May services is paid on June 4. While the cash basis would record this as a June expense, a proper accrual basis would show this as an expense in May. 

 Some associations may even maintain their accounting records on a modified cash basis. Normally this would mean recording expenses on a cash basis but recording assessments on an accrual basis. The American Institute of Certified Public Accountants (AICPA), an authoritative body in the accounting world, put out a guide for practitioners stating that the financial statements for homeowner associations should be prepared on the accrual basis of accounting.

 

Financial Statements

There are three basic financial statements for homeowners associations: Balance Sheet, Statement of Revenues and Expenses and the Statement of Cash Flows. The Balance Sheet shows a “picture” of an association’s financial position on a given date, such as the end of the month or the end of the year. This statement shows how much cash is in a checking account, savings or other investments, the amount of uncollected assessments, any liabilities (such as unpaid bills) and shows the associations allocation of reserves. The Statement of Revenues and Expenses (usually called an “Income Statement”) covers information over a period of time, such as a month or a year. This statement lists the amounts of the sources of revenues: assessments, special assessments, interest, and possibly fines; and expenses: management fees, waste hauling, utilities, repairs and maintenance and other costs. Most often the Statement of Revenues and Expenses shows both the current month’s data and has a column noting the year to date totals. The Statement of Cash Flows indicates financial information over a time period and for many is the most complicated of the three financial statements. This document indicates cash flows from operating activities, investing activities and financing activities. Other financial information such as a listing of unpaid assessments and a comparison of the actual revenues and expenses and the budgeted revenues and expenses are important to homeowner associations.

Normally the Statement of Revenues and Expenses for the year (or fiscal year) serves as the basis for the annual income taxes. Homeowner associations are generally taxed as corporations. There are provisions in the tax laws for financial activities other than the normal homeowner association operations, such as fees for an extra parking space. 

Budgeting

 While a budget is not a required part of the homeowner association financial statements, an annual budget is important and may be required by law in Illinois, and may also be required by the association’s governing documents such as the by-laws. The budget is based on the cash system and shows the projected sources and amounts of both cash receipts and cash disbursements and also may include a provision for saving funds (reserve fund) for future repairs  and replacements of more expensive improvements. Budgets may be short-term, such as a year or less, and long-term, which might cover many years.

 Normally a proposed short-term or operating budget might begin with the previous year’s Statement of Revenues and Expenses. This indicates many normal, recurring income and expenses items noted previously. Any planned special projects, such as parking lots or sidewalks, would be incorporated into the budget. The length of timed savings instruments (certificates of deposit) or the sale of other investments may play an important place in providing the necessary and timely cash to make planned improvements. 

 A budget is a very important part of the oversight of a condominium association, as it helps the board project the revenues and expenses for the coming year, and thus is a tool for making better decisions.  A poor budget may lead to an unnecessary special assessment or important work being put off, because the money is not there (deferred maintenance).  The Illinois Condominium Property Act (Illinois Compiled Statutes, Ch. 765, Act 605 Sec. 9 [1]) provides as follows:

 (c) Budget and reserves.


(1) The board of managers shall prepare and distribute to all unit owners a detailed proposed annual budget, setting forth with particularity all anticipated common expenses by category as well as all anticipated assessments and other income. The initial budget and common expense assessment based thereon shall be adopted prior to the conveyance of any unit. The budget shall also set forth each unit owner’s proposed common expense assessment.

(2) All budgets adopted by a board of managers on or after July 1, 1990 shall provide for reasonable reserves for capital expenditures and deferred maintenance for repair or replacement of the common elements. To determine the amount of reserves appropriate for an association, the board of managers shall take into consideration the following: (i) the repair and replacement cost, and the estimated useful life, of the property which the association is obligated to maintain, including but not limited to structural and mechanical components, surfaces of the buildings and common elements, and energy systems and equipment; (ii) the current and anticipated return on investment of association funds; (iii) any independent professional reserve study which the association may obtain; (iv) the financial impact on unit owners, and the market value of the condominium units, of any assessment increase needed to fund reserves; and (v) the ability of the association to obtain financing or refinancing.

 

The Illinois Condominium Property Act provides other provisions related to budgets as well.  In most instances, proper budgeting can help a board manage the homeowner’s association’s affairs to provide stability and predictability for homeowners.  Homeowners likewise budget their personal finances, and are counting on the board to not unexpectedly surprise them with a huge special assessment.

 Boards that invest the time to prepare a thoughtful budget, are likely to make their job easier throughout the remainder of the year.  Each month, the income statement can be compared to the budget to see the accuracy of the budget, and make adjustments in spending or revenue as needed to keep the association in a good financial position.

 

 

Bruce Olson is an accountant for Enlan Condominium Management Company, a Chicago property management company specializing in providing management services for Chicago condominium and townhome associations.  Bruce has a Master in Accounting Science from the University of Illinois at Urbana, and passed the CPA exam.

 

http://www.enlan.com

 

Related Articles:

Capital Improvement Planning for Condominium Associations

www.condominium-property-management.com

   

Condominium Association Management Law

www.management-law.com

 

  

 



[1] The budgets for Master Association’s, which includes most townhome associations, are covered by Sec. 18.5 C 1 of the Illinois Condominium Property Act.