Financial Statements in Accordance with GAAP

Our association is keeping records on a cash basis. Virginia's Property Owners Association Act requires records be kept according to GAAP. I'm no accountant, but can records being kept on a cash basis be in compliance with GAAP? Our by-laws also require an annual CPA audit, but our board has decided that's not necessary. Wouldn't we need to amend our by-laws for that?

Could you define what you mean by cash basis? Are they charging for copies? This is acceptable if they do. It costs money to produce copies or to mail individual copies. An expense that quickly adds up. If your HOA is struggling for funds or are low on them, this is an expense they can pass onto those requesting the information.

However, as with many things in life there are free access to many of these documents one may seek. If you attend meetings the information should be there free to discuss and view. You can make arrangements with a board member or the management company to come view the documents at their convenience without being charged as long as you don't make copies. The documents of your HOA like the CC&R's and Incorporation documents are kept at the local courthouse. They may or may not charge for a copy or a viewing.

You can imagine the costs involved with providing an individual copy of documents can quickly add up with consideration of mailing supplies, stamps, copying costs, and labor. One mailing could easily add up to $5 a piece depending on how things are handled. Reports are NOT convenience items as I have stated in a previous post. They do cost money which comes out of the HOA's budget.

BjN,

As others have said, cash or accrual basis is the method of accounting for your finances. Providing proper records are kept (receipts for each check issued, reconciling the bank statements, tracking payments from members, copies of contracts, working with a budget, providing income and expense reports, etc.) then it's likely that generally accepted accounting procedures (GAAP) were used.

For those that might want more info:

Understanding Accounting Methods

Generally accepted accounting principles

Hope this helps,

Tim

My CPA says that GAAP can be cash based, accrual based, or modified accrual based.

Roger,

You may have asked the wrong question, or your CPA may have misunderstood, but accrual accounting is a central element of the generally accepted accounting principles (GAAP). Here is a list of the principles that currently comprise the GAAP:

1. Economic entity assumption
2. Monetary unit assumption
3. Full disclosure principle
4. Time period assumption
5. Accrual basis accounting
6. Revenue recognition principle
7. Matching principle
8. Cost principle
9. Going concern principle
10. Relevance, reliability, and consistency

These principles are dependent upon each other to a certain degree. For instance, in order to record costs in the same period as revenue (matching) for money yet to be received you need show accrued income (accrual basis accounting) in the current period (time period assumption).

None of this is relevant to cash basis accounting, where the reports show cash in and cash out for each period, without concern for matching revenues to cost. "GAAP" and an "Other Comprehensive Basis of Accounting (OCBOA)" such as cash basis accounting are mutually exclusive, which is why it is called an other basis of accounting.

Like Tim points out, for most homeowner associations, GAAP is not a requirement. You can generate perfectly acceptable and meaningful reports using cash basis accounting as an alternative to GAAP, and cash basis accounting is far easier to manage.

However, it looks like this may not be true for Property Owner Associations in Virginia. The relevant section of the Virginia Property Owners Association Act says:

§ 55-510. Access to association records; association meetings; notice.

A. The association shall keep detailed records of receipts and expenditures affecting the operation and administration of the association. All financial books and records shall be kept in accordance with generally accepted accounting practices.

This doesn't leave much wiggle room. Unless there is case law that establishes reasonable exceptions, in Virginia a POA must use the full set of accounting principles listed above.

In reading the Virginia statute again closely, I now see that it says "books and records shall be kept in accordance with generally accepted accounting practices." This is different from GAAP which is "Generally Accepted Accounting Principles."

It's only a difference of one word, but in the law one word can be significant.

This could mean that GAAP is not required in Virginia, and that cash accounting, being an accepted practice, can also be used.

I'm thinking now that Tim's advice is good to keep books in a way that will satisfy a periodic external review, whether or not it is up to GAAP.