Reserve Fund Accounting?

In our income statement for the operating account, the reserve contribution is shown as an expense. The balance sheet carries the reserves as a liability.

Thanks David, that helps a lot.

And Frank, that's the problem we have now. The prior board (of which I was also a member) didn't take the steps of determining how much reserve we should have or by what point in time. Nor did we have a separate account for such expenses. We allocated a portion of what's been our operating fund (the only account we have) for such purposes without any analysis. I'm trying to fix that and set it up the proper way. We did a reasonable job of being fiscally conservative, so I think we have enough to set up and fund a proper reserve fund while maintaining an adequate operating fund.

I appreciate the information
Dave

I'm navigating our HOA board through a similar situation in that Reserves aren't clear as they need to be yet the board has been fiscally conservative for several years now. Our budget currently lists "Reserves (Income - Expenses) as if the Reserve Fund gets "leftover" budget money. I've grown to learn this is flawed philosophy. Reserves are a definite expense item, as important as utilities to me.

Good luck, it's clear you're on top of the situation.

Here's what we've done in the past month:

1. Sized up our Reserve Fund needs to include the covered amenities. Our paving jobs are the beast and our board has been a bit asleep on the matter (but asphalt just sits there and crumbles slowly as the "silver lining")

2. We created a money market fund and labeled it "Operating Expense Money Market." This holds the majority of our regular cash flow.

3. Our property manager will only transfer enough cash from the Operating Expense money market into the checking account to pay our regular monthly bills and budgeted repairs. The checking account is a pass-through so that our residents, if they care to look, will see cash sitting in only two places - Operating Expense Money Market or Reserve Fund Money Market accounts. (No "muddy" checking account cash balances as all cash has a resting place)

4. The Reserve Fund will be the first expense listed in our operating budget, not the last expense to be paid "if we've not spent the money already."

The goals:

1. The reserves will be taken seriously as a monthly expense payment as opposed to the current sentiment

2. The Operating Expense money market will be the account that slowly builds to handle those expensive maintenance jobs that cannot be covered by Reserve Fund cash.

3. The Operating Expense money market can grow, with fiscal prudence, to reach the cash equivalent of at least two months HOA cash in-flow.

4. By clearing defining an operating expense account, the board creates the "lock box" for Reserve Funds. Any board member votes would then have to willingly violate ethics and good sense to raid reserve funds for operating budget overspending. In years past, some boards have had a weakness for expanding rotating flower beds while ignoring the pool, clubhouse mold, etc. simply because Reserve Fund deposits reflected that the HOA made a "profit".

Yeah, right.

Dave,

Think of it this way. Your operating fund is the checking account and the Reserve fund is your savings account.

All assessments received go into the checking account.

The commitment to transfer x money per year from the checking account to the savings account is considered an expense when drafting the annual budget. This is because you are physically (or on paper) taking money out of the checking account so you don't spend it now but will save it for a later use.

When you need to spend money (say $100) to repair something the reserves are set up to pay for, you would transfer the money from the savings account back into the checking account. You would then write the check to pay for the repair.

Tim's reply is accurate as well. Pulling money from the Reserve Fund - for qualified projects - boosts your operating cash temporarily until you can pay for the reserve project.

Cash in gets documented.

Cash out gets documented.

Operating budget stays in balance.

Reserve Fund cash drops.

Reserve study liabilities are reduced since you restored some value by installing a new amenity.

Like a scale, I guess.

Thanks for the input, but I'm still not clear on how the reserve fund is accounted for. Seems like there may be different opinions.

Do I book the contribution to the reserve fund as an expense? If so, how do I then show the reserve fund? Is it carried as an asset? Do I need to carry the current value of the replacement cost as a liability to zero them out?

i.e. Reserve fund is at $900 and I put $100 more in for the current year. That looks like $1000 on hand. If the current year balance of the amortized replacement cost is $1000, do I carry it as a liability to offset the reserve fund?

btw, we're using accrual accounting, not cash

Kelly, as far as I know, North Carolina only requires a disclosure stating the current reserves balance and the amount in the budget allocated to reserves. However, for institutions looking to approve mortgages, you may be asked to provide more information in the future about your reserve funding allocations and schedule for replacements and repairs to determine if the account is underfunded and a potential liability for the perspective buyer because of future assessments.

Do you have many repair and replacement items to consider for your reserve account funding?

Sharing reserve funding information should be limited to only that which is requested and permitted to be requested according to your state laws. If your property manager does not prepare it properly, a lending institution may through up flags and request more than you are prepared to supply. Sounds like your state does not require extensive reporting.

If you have an iPad, at some point I can privately and freely share our process of calculating and presenting reserve study data. I sounds like you need to gather up all of your potential reserve account possibilities and make a current list. That list should start with the year you expect the repair or replacement to occur, the estimated expense for it at that time, the normal life of that item in years, and of course a brief explanation about it to distinguish it from other similar ones.

As far as the IRS is concerned, money you put into a reserve account is not an expense.

Think of it this way: Once you spend the money and it is no longer available to use for something else, it is an expense.

As long as the money is available for use, no matter where it is (operating account or reserve account) there is no expense. The expense happens when you spend it.