Am I screwed? my HOA balance sheet and income statement

JdW (Texas)
Posts: 40

Posted:

I already closed on this place, cash only, and my agent- my own buyer's agent- sent me earlier in the sales process the top portion just under "assets" showing Total Assets of $401,021.02 and said the place was in strong financial condition. However I was not shown the "liabilities and capital" section of the balance sheet until I looked through it after I got the condo resale binder.

When I look at the complete balance sheet, I feel alarmed about the large negative retained earnings and the construction loan.
I know the complex has had trouble in recent years and had a $3000 assessment in 2014, on about 140 units that compromise the complex. I can also see that many owners are paying that off monthly. There's a new roof and many other improvements visible and there's supposedly more repairs underway.

In addition, I was alarmed when I looked at the Income Statement (2nd attachment) as it appears that the special assessment revenue is being used to pay regular recurring monthly expenses and I don't see any entry that shows the construction loan is being paid down.

While the Total Assets appear positive, I don't know what to make of this total picture. I'm kind of pissed off that my agent only accepted at face value the "assets" and didn't do anything else in protect my interest or to get more information that might have been relevant to my evaluation of the place before I bought it.

I'd appreciate if anyone with experience in understanding the Balance Sheet and Income Statement could comment and clarify what they think is actually happening with this HOA's financial. Some details would help other than "you're screwed" or "you're fine".

Thanks ...

Pictures of the statements at:

http://imgur.com/a/e0RXP

RichardP13 (California)
Posts: 3,868

Posted:

Bottomline, sorry "you're screwed"

Here are areas of concern I can see.

Balance Sheet:

1) You have about $19K in homeowner delinquencies
2) You have ONLY $12.5K in reserves
3) Loss in Retaining Earnings is scary. That means the association, as this year shows, has been operating at a loss for years.

Income and Expenses

1) I am assuming, based on the revenues, you are operating on a cash, not accrual basis.
2) Your expenses don't match your budget, monthly and yearly. Why?

Because of the VERY LOW amount in reserves, any other reserve project is going to be funded by a construction loan or special assessment.

Being these numbers are through September, what does the budget look like for 2016 and was there a dues increase involved.

That is from looking at the numbers for 5 minutes.

JdW (Texas)
Posts: 40

Posted:

Thanks (sort of)

Can you explain what the "loss of retained earnings" actually means in context of an HOA? I've looked up definitions for it but it's always explained in the context of other kinds of corporate business entities. The place already has a $295,000 (outstanding) construction loan.

Other comments certainly welcome.

RichardP13 (California)
Posts: 3,868

Posted:

The retaining earnings is the cumulative, year after year, profit/loss of an HOA, based on the numbers from the income statement.

In theory, if your association has been around for 20 years, they have been operating at a loss of $9500.00 per year.

Another thing to look at is the yearly budget on the income statement. You are running at at $16.3K loss, just from the budget. At the very least the revenue and expense, on the budget, should zero out.

JdW (Texas)
Posts: 40

Posted:

Quote:

Posted By RichardP13 on 01/01/2016 5:43 PM
The retaining earnings is the cumulative, year after year, profit/loss of an HOA, based on the numbers from the income statement.

In theory, if your association has been around for 20 years, they have been operating at a loss of $9500.00 per year.

Another thing to look at is the yearly budget on the income statement. You are running at at $16.3K loss, just from the budget. At the very least the revenue and expense, on the budget, should zero out.

Maybe I misunderstand, but it sounds like the retained earnings is a mostly a "paper" notation. Is that so? (There's a $200k outstanding special assessment receivables gradually being paid in addition to the monthly dues.)

The loss for the year is there although it's not extreme large - I'm more wondering about the special assessment payments that appear to making a significant part of the recurring monthly costs. That doesn't sound good. And there's no monthly payment toward the $295k construction loan that has me puzzled.

RichardP13 (California)
Posts: 3,868

Posted:

The retained earnings may not be that big of a thing. It may happened in one year for all anyone knows. They are real numbers, but the situation may have righted itself or been corrected. Without looking at history, who know?

You would need all the financials, not just the balance sheet and income statement to get a real understanding of how the obligations are being paid off.

KerryL1 (California)
Posts: 14,550

Posted:

Along with Richard's take on your situation, why not make an appointment with your HOA's property manager, sit down side-by-side, and have her/him explain the situation to you? If not PM, perhaps your Board treasurer would be willing to sit with you.

JdW (Texas)
Posts: 40

Posted:

Quote:

Posted By KerryL1 on 01/01/2016 7:33 PM
Along with Richard's take on your situation, why not make an appointment with your HOA's property manager, sit down side-by-side, and have her/him explain the situation to you? If not PM, perhaps your Board treasurer would be willing to sit with you.

That's a good idea. More feedback is still appreciated by anyone who is use to looking at HOA financials, on what I pointedly, specifically should ask about. The current management company has been running the place for about two years and supposedly before then there was no management company and the previous HOA board was fired by the owners. Whatever is going on, it seems like it'll be multi-year project to turn the place around, both physically and financially. Luckily, our local economy is crazy strong right now.

NpS (Pennsylvania)
Posts: 4,216

Posted:

$3000 assessment on 140 units = $420k. But construction loan is for $295k. Looks like you have $110k in accounts with WF where you apparently took out the construction loan. Also looks like you collected $10k in special assessments and have an additional $200k in special assessment AR. Please get a better explanation of how these amounts tie together.

Have never seen HOA Balance Sheet where reserves are treated as a LT liability. Should there be $47.3 + $12.5 = $59.8 in reserves. I can't tell.

Most important question - Who is doing the books? Is a professional involved? Does not look like this person knows how to do fund accounting. I would like to have someone explain the $25k Paid In Capital line & AR line on the Balance Sheet.

Looks like reserve expenditures (apparently listed as Cap Expenditures) are coming out of operating account. Reserve Expenditures looks like around $40k. Looks like they were supposed to put in $37.5 in hydrants this year but didn't do it. I would want to know more about this.

Why is your insurance expense $15k over budget?

Why did you have only $2.4k budgeted for Common Area Maintenance and spend $18.2k? How could anyone have budgeted only $2.4k?

Information presentation is incredibly weak. You would have to be an insider to know what's going on.

Sikubali jukumu. Read all posts at your own risk.

PitA
Posts: 1,416

Posted:

textbook example of a case where you should:

run

run fast

run far

next time ~ caveat emptor

JonD1
Posts: 2,350

Posted:

Without actual details and explanations for the numbers provided it would be impossible to judge the financial health or handling of this property.

Before you hit the panic button I would suggest you tap your brakes and attempt to gather information in the form of facts and explanations from either the MC or perhaps your board. Myself I might try a one on one private conversation with the board president or treasurer. Not throwing out question after question suggesting you have discovered evil doings.

And I would proceed with an open mind and hold off on the "am I screwed" attitude as it might leave a sour taste in the mouths of some. Before you conclude there is something to be concerned with perhaps you should gather the pertinent facts.

The attachment you provided does NOT provide a clear financial picture of this property. To draw conclusions based solely on the two pages you provided
Would IMO be foolishness.

KerryL1 (California)
Posts: 14,550

Posted:

Jon hits the nail on its head, JdW. Every part of his observations seems right.

PitA
Posts: 1,416

Posted:

your HOA is PRESENTLY in the hole for approx. 200,000 (did not bother with calculator)

a construction loan is listed in the ASSETS section - OMG

now I change my advice:

RUN

RUN FAST

RUN FASTER

JonD1
Posts: 2,350

Posted:

Quote:

Posted By PitA on 01/02/2016 1:12 PM
your HOA is PRESENTLY in the hole for approx. 200,000 (did not bother with calculator)

a construction loan is listed in the ASSETS section - OMG

now I change my advice:

RUN

RUN FAST

RUN FASTER

Hence the reason you might wish to get some explanations. I am not impressed with the content or breakdown of the financial information provided.
Did the volunteer treasurer put together these numbers? Or was it the MC? A brief conversation with someone in the know would resolve this one way or the other.

Before you jump ship best to make sure the ship is in fact at risk to sink.....

KerryL1 (California)
Posts: 14,550

Posted:

Say JdW, PiTa actually gives good support & advice...sometimes. Guess he's chosen to start off the New Year with the opposite.

LarryB13 (Arizona)
Posts: 4,099

Posted:

I am not much of an accountant so I am not sure how well this balance sheet reflects the true financial situation.

The big problem that I see is that the entire balance of the construction loan is listed under long term liabilities while all the assets are only current assets. I do not know what the time frame is for paying off the loan, but if it spans multiple years there will be additional future income (not shown) that will offset the balance.

I am not sure how well this reflects the actual financial situation but I see little reason to panic . . . except for the fact that they took out a loan and then levied an assessment to pay for the loan. It does not seem like sound planning but without knowing more about the background of this no solid conclusion can be drawn.

Bottom line: I would not sweat it.

NpS (Pennsylvania)
Posts: 4,216

Posted:

Quote:

Posted By NpS on 01/01/2016 9:45 PM
$3000 assessment on 140 units = $420k. But construction loan is for $295k. Looks like you have $110k in accounts with WF where you apparently took out the construction loan. Also looks like you collected $10k in special assessments and have an additional $200k in special assessment AR. Please get a better explanation of how these amounts tie together.

Have never seen HOA Balance Sheet where reserves are treated as a LT liability. Should there be $47.3 + $12.5 = $59.8 in reserves. I can't tell.

Most important question - Who is doing the books? Is a professional involved? Does not look like this person knows how to do fund accounting. I would like to have someone explain the $25k Paid In Capital line & AR line on the Balance Sheet.

Looks like reserve expenditures (apparently listed as Cap Expenditures) are coming out of operating account. Reserve Expenditures looks like around $40k. Looks like they were supposed to put in $37.5 in hydrants this year but didn't do it. I would want to know more about this.

Why is your insurance expense $15k over budget?

Why did you have only $2.4k budgeted for Common Area Maintenance and spend $18.2k? How could anyone have budgeted only $2.4k?

Information presentation is incredibly weak. You would have to be an insider to know what's going on.

Bottom line. I would seek explanations on each of these issues.

Sikubali jukumu. Read all posts at your own risk.

DouglasK1 (Florida)
Posts: 2,046

Posted:

I agree with others that it's hard to tell the complete picture from the reports shown, but the fact that you only have 12k in reserves doesn't bode well for any future maintenance requirements. I would not be surprised if one or more additional special assessments were to occur over the next several years.

Escaped former treasurer and director of a self managed association.

RichardP13 (California)
Posts: 3,868

Posted:

As I previously mentioned, my real initial concern would be the lack of overall reserves, and the large negative retained earnings, but that could be explained if the complex is over twenty years old.

I am not sure exactly what documents are to be provided by the association during a resale. Yours is a little more unique, in that you may have bypassed the escrow process. Some people, say in Alabama, would argue you are not allowed any of the information as you are not yet an owner, you have no rights, so to speak.

Because this was a cash purchase, I would check with the Board or the management company to make sure they have the proper documents to transfer ownership on their end and they have an address in order to properly bill assessments.

The two or three pages of financials is generally what the homeowners get. The Board will have a packet of financials that would amount to 50 or 60 pages to back up all the figures. They may have multiple bank reconciliation sheets, general ledgers, reserve statements, check ledgers fro all bank accounts, etc.

So a couple of questions I might ask:

1) How often have there been dues increase?
2) How often have there been special assessments?
3) Any of the two scheduled for the immediate future?
4) Did any large negative net loss occurred, or was the retained earnings loss built up over time.
5) When was the last reserve study done?
6) What percentage is the association's reserves now funded?

JdW (Texas)
Posts: 40

Posted:

I appreciate all the replies.

Next week I plan to go the management company and to get all the recent board minutes and anything else I can get my hands on and also to meet with the property manager- there's a specific guy - and find out what's really going on.

I'll update when I know more, in the interest of those who gave thoughtful input.

PitA
Posts: 1,416

Posted:

the fact that it is a new year does NOT mean that my advice is bad

..... but the fact that you only have 12k in reserves doesn't bode well for any future maintenance requirements .....

translation: MORE special assessment(s) on the near horizon

OP:

either

eat the future assessments

or

run now

run fast

run far

you will NOT get satisfactory answers from people who

a. can not print a readable balance sheet
b. underfund KNOWN future expenses
c. place loan proceeds in the asset column so they can be 'visibly offset' by the liability column

you have received the best advice you are likely to get in 2016

HAPPY NEW YEAR

DavidW5 (North Carolina)
Posts: 565

Posted:

Quote:

Posted By NpS on 01/01/2016 9:45 PM

Have never seen HOA Balance Sheet where reserves are treated as a LT liability. Should there be $47.3 + $12.5 = $59.8 in reserves. I can't tell.

Every balance sheet I have seen is divided into two sections: Assets and Liabilities. The Reserve Fund Balance has ALWAYS been shown in the Liabilities section under the heading "Owner's Equity - Fund Balance". The funds set aside in the reserve fund are earmarked for the replacement of common elements. They are not available for other purposes, therefore they cannot be an Asset.

JonD1
Posts: 2,350

Posted:

Quote:

Posted By JdW on 01/02/2016 8:51 PM
I appreciate all the replies.

Next week I plan to go the management company and to get all the recent board minutes and anything else I can get my hands on and also to meet with the property manager- there's a specific guy - and find out what's really going on.

I'll update when I know more, in the interest of those who gave thoughtful input.

Let me suggest that as a service provider to the property in many cases the MC might be less familiar with the financial details and history of the than the serving board members.

Some MCs might be reluctant to provide details and explanations outside the documents. As the board sets the agenada it would seem to me in most cases they might be better equipted to offer insight into the property's finances.

Our MC manages 12 properties. I would doubt they would have the time or desire to sit and have a Q&A session with a single homeowner to their satisfaction.

Myself, I know for a fact I am more familiar with our finances than our MC. The MC takes direction from the board. They do not act as financial advisors.

Good luck.

NpS (Pennsylvania)
Posts: 4,216

Posted:

Quote:

Posted By DavidW5 on 01/03/2016 7:49 AM
Posted By NpS on 01/01/2016 9:45 PM

Have never seen HOA Balance Sheet where reserves are treated as a LT liability. Should there be $47.3 + $12.5 = $59.8 in reserves. I can't tell.

Every balance sheet I have seen is divided into two sections: Assets and Liabilities. The Reserve Fund Balance has ALWAYS been shown in the Liabilities section under the heading "Owner's Equity - Fund Balance". The funds set aside in the reserve fund are earmarked for the replacement of common elements. They are not available for other purposes, therefore they cannot be an Asset.

I stand by my statements.

1. I said that the preparer did not seem to have a grasp of fund accounting (which is the only approach that a CPA would use for a non-profit corporation). Under fund accounting, the Replacement Fund (or whatever label it's given) and the Operating Fund (or whatever label that's given) are broken out separately. Also, under fund accounting, there is no line for "Paid In Capital". Go look at your own HOA's Balance Sheet and see if it's there.

2. There are 3 (not 2) sections of every Balance Sheet. For non-fund accounting, it's Assets, Liabilities, and Retained Earnings. For fund accounting, it's Assets, liabilities, and Fund Balance.

3. When presented in the financials, it may look like only 2 sections because there are 2 totals that are always equal: Assets must always = Liabilities + Retained Earnings (or Assets = Liabilities + Fund Balance). But however it's presented, there are always 3 sections.

Sikubali jukumu. Read all posts at your own risk.

NpS (Pennsylvania)
Posts: 4,216

Posted:

Quote:

Posted By NpS on 01/03/2016 8:22 AM
Posted By DavidW5 on 01/03/2016 7:49 AM

Posted By NpS on 01/01/2016 9:45 PM

Have never seen HOA Balance Sheet where reserves are treated as a LT liability. Should there be $47.3 + $12.5 = $59.8 in reserves. I can't tell.

Every balance sheet I have seen is divided into two sections: Assets and Liabilities. The Reserve Fund Balance has ALWAYS been shown in the Liabilities section under the heading "Owner's Equity - Fund Balance". The funds set aside in the reserve fund are earmarked for the replacement of common elements. They are not available for other purposes, therefore they cannot be an Asset.

I stand by my statements.

1. I said that the preparer did not seem to have a grasp of fund accounting (which is the only approach that a CPA would use for a non-profit corporation). Under fund accounting, the Replacement Fund (or whatever label it's given) and the Operating Fund (or whatever label that's given) are broken out separately. Also, under fund accounting, there is no line for "Paid In Capital". Go look at your own HOA's Balance Sheet and see if it's there.

2. There are 3 (not 2) sections of every Balance Sheet. For non-fund accounting, it's Assets, Liabilities, and Retained Earnings. For fund accounting, it's Assets, liabilities, and Fund Balance.

3. When presented in the financials, it may look like only 2 sections because there are 2 totals that are always equal: Assets must always = Liabilities + Retained Earnings (or Assets = Liabilities + Fund Balance). But however it's presented, there are always 3 sections.

4. I have never seen Reserves treated as a Long Term Liability.

Sikubali jukumu. Read all posts at your own risk.

PitA
Posts: 1,416

Posted:

OP,

?see what I mean?

NO volunteer knows how to operate an HOA.

RUN

ps. wish I had RUN after I first moved in, only would have cost me $8,000, now i'm buried

RichardP13 (California)
Posts: 3,868

Posted:

NpS

The management company may outsource their financials to a third party, that may or may not specialize in HOA accounting. What sets an HOA apart from other corporations is that there is no appreciation and they don't pay dividends to shareholders.

IF, the reserves as listed as an asset is $12,537.25, then there should be an outset liability of the same number. These are monies allocated to reserve components, but the number is off by $35K. It should be treated as a long term liabilities.

Bottomline, this is not HOA accounting. It is something that came out of Europe.

PitA
Posts: 1,416

Posted:

... out of Europe ...

as the founding fathers did

we can twist

we can squirm

the HOA's sole purpose is to maintain the engineered storm water facilities and (if a condo) the building's structure

all else is merely 'lipstick on the pig' (including any 'pool' or 'clubhouse')

the key word being 'pig'

which is being 'fattened' by a bunch of volunteers

for the eventual slaughter

as in:

'special tax district' for which ANY RESIDENT (not necessarily an owner) will be entitled to vote

RichardP13 (California)
Posts: 3,868

Posted:

Quote:

Posted By PitA on 01/03/2016 11:16 AM
... out of Europe ...

as the founding fathers did

we can twist

we can squirm

the HOA's sole purpose is to maintain the engineered storm water facilities and (if a condo) the building's structure

all else is merely 'lipstick on the pig' (including any 'pool' or 'clubhouse')

the key word being 'pig'

which is being 'fattened' by a bunch of volunteers

for the eventual slaughter

as in:

'special tax district' for which ANY RESIDENT (not necessarily an owner) will be entitled to vote

Need to get a refill on your meds.

NpS (Pennsylvania)
Posts: 4,216

Posted:

Quote:

Posted By RichardP13 on 01/03/2016 10:55 AM
The management company may outsource their financials to a third party, that may or may not specialize in HOA accounting. What sets an HOA apart from other corporations is that there is no appreciation and they don't pay dividends to shareholders.

IF, the reserves as listed as an asset is $12,537.25, then there should be an outset liability of the same number. These are monies allocated to reserve components, but the number is off by $35K. It should be treated as a long term liabilities.

Bottomline, this is not HOA accounting. It is something that came out of Europe.

There is fund accounting and there is non-fund accounting. Period. In general we are all used to non-fund accounting because that's the accounting used with for-profit organizations - and we generally see more of those than anything else. Unlike for-profits, governments and non-profits use fund accounting. Because HOAs are non-profits, fund accounting is used. If you are outsourcing to someone who doesn't know the difference, then outsource to someone else. This is Accounting 101.

Assets is the value of what you have. Liabilities is what you owe. Retained Earnings (if you are using ordinary non-fund accounting) is the amount you have left over after subtracting Liabilities from Assets - It's the amount available for distribution to shareholders (even if you don't actually distribute it). Fund Balance (if you are using fund accounting) is the amount you have left over after subtracting Liabilities from Assets - It's the amount available for investment in the HOA. The formula for figuring out how much you have available is:
RE = A - L for ordinary non-fund accounting, or
FB = A - L, for fund accounting.
The RE formula is Accounting 101. The FB formula is Accounting 201. But you should note that the formula is essentially the same.

I disagree that there should be an offsetting amount in the Liabilities section just because there is a $12.5k reserve amount in Assets. All that Asset means is that there is a bank account with $12.5k in it. It doesn't mean that there should be a matching number in Liabilities. Matching does not occur at that level. The matching occurs when you run the formula stated above. Calculate the Assets. Calculate the Liabilities. Subtract Liabilities from Assets. What's left over is available to spend on distribution or reserves. Accounting 101 again.

I have no idea what you mean by "something that came out of Europe." The standards used in the US come from the American Institute of Certified Public Accountants (AICPA) which has been around for over 100 years. Europe uses an international standard which is different.

Also, not sure what you mean by "no appreciation."

I agree that MCs don't have to be specialists in accounting. Shame on them if they outsource to someone who doesn't follow basic accounting principles.

Sikubali jukumu. Read all posts at your own risk.

NpS (Pennsylvania)
Posts: 4,216

Posted:

Correction for anyone interested:
FASB (the Financial Accounting Standards Board) is the organization that sets GAAP (Generally Accepted Accounting Principles). US GAAP is different than European GAAP.

GAAP is recognized and accepted by the AICPA (American Institute of Certified Public Accountants) and by the SEC (Securities & Exchange Commission). The SEC is the government entity that oversees US Stock Market activity. The AICPA sets GAAS (Generally Accepted Auditing Standards).

If someone isn't using GAAP and GAAS, they should have a good explanation why not.

Sikubali jukumu. Read all posts at your own risk.

RichardP13 (California)
Posts: 3,868

Posted:

NpS

So, if you have $1M spread over CD's and Money Markets, how would you offset those dollars on the balance sheet?

PitA
Posts: 1,416

Posted:

Quote:

Posted By RichardP13 on 01/03/2016 11:21 AM
Posted By PitA on 01/03/2016 11:16 AM
... out of Europe ...

as the founding fathers did

we can twist

we can squirm

the HOA's sole purpose is to maintain the engineered storm water facilities and (if a condo) the building's structure

all else is merely 'lipstick on the pig' (including any 'pool' or 'clubhouse')

the key word being 'pig'

which is being 'fattened' by a bunch of volunteers

for the eventual slaughter

as in:

'special tax district' for which ANY RESIDENT (not necessarily an owner) will be entitled to vote

Need to get a refill on your meds.

? Which part is inaccurate ?

? Have you never heard of the implementation of a special tax district ?

As when the 'Feds' or the state mandate storm water work which the HOA can not fund (due to chronic understated assessments).

As when the county steps in and institutes the vote for the formation of the district as opposed to a receiver or other court ordered funding for the MANDATED and REQUIRED work.

However, I will admit to being GRUFF and FORWARD in my manner of presenting the facts.

ps. the fact of any resident, not merely owner, voting is 'as American as apple pie'

PitA
Posts: 1,416

Posted:

Quote:

Posted By NpS on 01/03/2016 12:06 PM
Correction for anyone interested:
FASB (the Financial Accounting Standards Board) is the organization that sets GAAP (Generally Accepted Accounting Principles). US GAAP is different than European GAAP.

GAAP is recognized and accepted by the AICPA (American Institute of Certified Public Accountants) and by the SEC (Securities & Exchange Commission). The SEC is the government entity that oversees US Stock Market activity. The AICPA sets GAAS (Generally Accepted Auditing Standards).

If someone isn't using GAAP and GAAS, they should have a good explanation why not.

Their explanation is:

"What do you want from me, I'm only a volunteer ?!"

That was given to me as I was instituting QB as the new treasurer and 'forcing same down their throats'.

THEN, I 'tossed' all the legal paper scraps and photostats of RECEIVED checks.

They were no longer needed as we now had an actual list of actual owners/members and not merely residents.

Wow, I even submitted 7 years of back 1120(h)s.

And forced a '5 year plan', a/k/a reserve study, to be 'self done'. (at least now we have SOMETHING)

I am most unpopular and was not re-elected (thank the creator) because of the assessment increases therefrom.

However, the plan is now 'engraved in stone' from an accounting perspective OR the 'Feds" will want $55,000+ in back taxes.

RichardP13 (California)
Posts: 3,868

Posted:

Forget the meds, reserve a room at Bellevue.

NpS (Pennsylvania)
Posts: 4,216

Posted:

Quote:

Posted By RichardP13 on 01/03/2016 12:11 PM
So, if you have $1M spread over CD's and Money Markets, how would you offset those dollars on the balance sheet?

On a typical fund accounting Balance Sheet, there are 4 columns. 1. Operating Fund. 2. Replacement Fund. 3. Total (Operating plus Replacement. 4. Total from prior year.

The following comments only deal with the Replacement Fund. Column 2 doesn't usually have a lot of info in it because almost all of the transactions occur in the Operating Fund.

The $1M in the CDs and Money Markets would of course be listed as Assets in Column 2. These are real assets that are convertible into cash.
No entry is made under Liabilities unless you had capital improvements done and still owe the vendor for the work. Those would be real debts that can be collected on. They are real Liabilities.
That's it. Liabilities get subtracted from Assets - and what you have left is the Fund Balance (or Retained Earnings using different terminology). That's the amount that would be available to fund reserves - If it makes you more comfortable, you could label it "Funds Available for Reserves".

Now some questions for you: If your HOA is responsible for roof replacement, and you just spent $1M on new roofs, where does that $1M go on your balance sheet? Should you depreciate your $1M in new roofing over time in your financials? Where and how?

Sikubali jukumu. Read all posts at your own risk.

RichardP13 (California)
Posts: 3,868

Posted:

NpS

The OP didn't present a year end audited financial, but one done on a monthly basis. This is what I am referencing also. I have attached a Balance Sheet from my old association as an example.

To answer your question about the expenditure for the roof, first each asset account has their own reconciliation setup and the general ledger has separate GL Codes for all the assets. The $1M is removed from Assets and also from Liability, as there are no more funds allocated to roofs. The fund will now need to be rebuilt.

I do this for a living.

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PitA
Posts: 1,416

Posted:

Quote:

Posted By RichardP13 on 01/03/2016 12:40 PM
Forget the meds, reserve a room at Bellevue.

Been there, done that.

They released me.

Seriously.

ps. It is NOT pleasant having an IQ of 177

NpS (Pennsylvania)
Posts: 4,216

Posted:

Quote:

Posted By RichardP13 on 01/03/2016 1:36 PM
The OP didn't present a year end audited financial, but one done on a monthly basis. This is what I am referencing also. I have attached a Balance Sheet from my old association as an example.

Looking at your BS, it's broken down into two Funds - Your Operating Fund and Your Reserve Fund. This breakdown shows up in both the columns and the rows of your BS.

You have 3 columns - Operating, Reserve, and Total. The first column is the BS for your Operating Fund. The second column is the BS for your Reserve Fund. Your third column is the total of both funds. This is in line with what I described previously. Note that the OP has only one column for everything, which makes it difficult to decipher.

Horizontally on your BS, your Bank accounts (accounts 1000 and 1100) and your Fund Balance entries (accounts 2470 and 3010) also distinguish between Operating (1000 and 3010) and Reserve (1100 and 2470) amounts. The OP's only provides the cash in the reserve account. Yours is an interim statement. So is the OP's. I don't see where it makes any difference for purposes of this discussion that it's an interim or year-end BS. I can look at your BS and see what's going on quite easily. I can't say the same for the OP's.

Note that the second major heading on your BS is "Liabilities and Fund Balances", not just "Liabilities". Beneath this is 3 headings: "Short Term Liabilities", "Operating Fund", and "Reserve Fund". Then there's a "Subtotal Equity" line which is the sum of your "Operating Fund" and your "Reserve Fund" amounts. Then there's the final line called "Liabilities and Fund Balances" that is the sum of "Short Term Liabilities" and the "Subtotal Equity" lines.

Once again, a BS is always comprised of Assets, Liabilities, and Equity. It's never just Assets and Liabilities. Equity is always determined by subtracting Liabilities from Assets.

Whether you know it or not, yours is a classic Fund Accounting presentation. Accounts 2470 and 3410 are Equity (a.k.a. Fund Balance) accounts, not Liability accounts. They were not labeled Liabilities by the preparer. They are Equity, not Liabilities.

Quote:
Posted By RichardP13 on 01/03/2016 1:36 PM
To answer your question about the expenditure for the roof, first each asset account has their own reconciliation setup and the general ledger has separate GL Codes for all the assets. The $1M is removed from Assets and also from Liability, as there are no more funds allocated to roofs. The fund will now need to be rebuilt.

It was a trick question. Your explanation is a classic example of how things are done when using Fund Accounting (except that you mislabel Equity as Liability). For Fund Accounting, things move on and off the balance sheet freely because it's the Fund that you are tracking, not the actual value of the Assets. This would never happen with for-profit accounting unless there was a sale or a write-off, and those would be specifically identified somewhere in the financials. With ordinary accounting, moving stuff on and off the books would be a big deal. With fund accounting, it's commonplace. It's obvious that you are familiar with how it's done even though you may no know what it's called.

Quote:
Posted By RichardP13 on 01/03/2016 1:36 PM
I do this for a living.

In my career, there were many times when I got practical knowledge before I got formal training. I did the best I could - I had practical experience and I could smell things that didn't look quite right. I could explain information in ways that my customers and clients understood, but there were holes in my knowledge - So I went back to school later in life and filled those holes. I think I'm pretty solid on this stuff.

Sikubali jukumu. Read all posts at your own risk.

RichardP13 (California)
Posts: 3,868

Posted:

NpS

FYI

I own a HOA management company, and I happen to use the same software that created the Balance Sheet. The Balance Sheets can be presented in a number of different format, based on the specific needs of the HOA. Some are very basis, some more detailed, especially the breakout of the reserve assets.

I know the different formulas for the balance sheet. I know exactly where all the numbers from the general ledger go to create the different parts of the financials.

I teach classes on HOA finances for a local CAI chapter.

So, in 5 minutes, when reviewing the OP's three page financial, two things stood out, the large negative retained earnings and the low reserve amount.

When I bought into the HOA, I never received any information, governing documents, financials or minutes. So I went in blind. Turns out I left blind.

NpS (Pennsylvania)
Posts: 4,216

Posted:

Quote:

Posted By RichardP13 on 01/03/2016 5:07 PM
I own a HOA management company, and I happen to use the same software that created the Balance Sheet. The Balance Sheets can be presented in a number of different format, based on the specific needs of the HOA. Some are very basis, some more detailed, especially the breakout of the reserve assets.

I know the different formulas for the balance sheet. I know exactly where all the numbers from the general ledger go to create the different parts of the financials.

I teach classes on HOA finances for a local CAI chapter.

So, in 5 minutes, when reviewing the OP's three page financial, two things stood out, the large negative retained earnings and the low reserve amount.

When I bought into the HOA, I never received any information, governing documents, financials or minutes. So I went in blind. Turns out I left blind.

I'm not sure what point you're trying to make Richard. All I had to go on was the two sets of financial docs that you and the OP provided. My opinion was that yours was very well presented and the OP's wasn't.

The fact that your software can print reports in a number of different formats seems irrelevant. What you did share demonstrated that the software you use is set up to do Fund Accounting. Sure it can produce simpler reports. But the accounts are set up to enter and track information in Fund Accounting form. I doubt that any of the formats that your software prints out would assign a label of Liability to an Equity account.

I don't question your background and capabilities. I have the greatest respect for what you have accomplished.

Here's a bit on me. I swept floors in a factory. I owned my own business. I was an Officer of a public corporation. I've been buying and selling real estate for a very long time. When I took the CPA exam more than a dozen years ago, I didn't have an accounting degree. If I remember correctly, somewhere between 4,000 and 8,000 people sat for the exam in PA that year. I got a letter from the state saying that mine was one of the top 10 scores. I too have presented to and trained professionals. I don't think any of that makes me right or wrong - maybe just stubborn - or maybe just a bit wiser than I was way back when.

Sikubali jukumu. Read all posts at your own risk.

RichardP13 (California)
Posts: 3,868

Posted:

NpS

Not sure where you were going with this:
"I doubt that any of the formats that your software prints out would assign a label of Liability to an Equity account".

If you were referring to the OP's Balance Sheet, their use of Capital would be Equity. In researching that Balance Sheet, I came across a number of similar looking Balance Sheets that used Capital in place of Equity and it has roots in Europe.

So the OP's formula is Assets=Liabilities+Capital (Equity).

KerryL1 (California)
Posts: 14,550

Posted:

When you have your friendly sit-down with your property mgr (PM) or Management Co, (MC), JdW, perhaps you can ask who crunches their monthly numbers, i.e, who prepares the financial reports for your HOA's board.

Ours come from a CPA at our MC though our onsite PM has become very knowledgeable about ours in a short period of time. Our MC's head of their finance dept. is giving us 7 directors (4 are new) & Finance Committee members (1 of 5 is new) a seminar on our financials later this month. Yay.

TimB4 (Tennessee)
Posts: 21,059

Posted:

Quote:

Posted By JdW on 01/01/2016 4:40 PM

and my agent- my own buyer's agent- sent me earlier in the sales process the top portion just under "assets" showing Total Assets of $401,021.02 and said the place was in strong financial condition. However I was not shown the "liabilities and capital" section of the balance sheet until I looked through it after I got the condo resale binder.

Keep in mind that the idea of a buyers agent is just a use of words with no meaning.

The "buyers agent" is typically paid by the seller and receives a percentage of the sale price.

In my opinion, since the agent is paid by the seller, they do not really work for you (otherwise you would be paying them). They will take time to show you multiple properties, provide some insight on them and work with the sellers realtor to make a sale happen. For this, they should be compensated for and in fact are compensated (by the seller).

Therefore, the "buyers agent" has zero incentive to get you the lowest price. They only have incentive to get a price that can make the sale happen (so they can be paid by the seller).

Although I have been using a "buyers agent" I am very guarded on what info I provide as I have no way of knowing how they will use the information I provide. For example: If I say my top limit on this home is $x but offer $y, they may say that the buyer may be willing to come up a bit if the seller provides a counter offer.

Yes there are rules they must follow. Bottom line is, if I'm not paying them, they are not really working for me. They may be working with me, but not for me.

RichardP13 (California)
Posts: 3,868

Posted:

Quote:

Posted By TimB4 on 01/03/2016 7:36 PM
Posted By JdW on 01/01/2016 4:40 PM

and my agent- my own buyer's agent- sent me earlier in the sales process the top portion just under "assets" showing Total Assets of $401,021.02 and said the place was in strong financial condition. However I was not shown the "liabilities and capital" section of the balance sheet until I looked through it after I got the condo resale binder.

Keep in mind that the idea of a buyers agent is just a use of words with no meaning.

The "buyers agent" is typically paid by the seller and receives a percentage of the sale price.

In my opinion, since the agent is paid by the seller, they do not really work for you (otherwise you would be paying them). They will take time to show you multiple properties, provide some insight on them and work with the sellers realtor to make a sale happen. For this, they should be compensated for and in fact are compensated (by the seller).

Therefore, the "buyers agent" has zero incentive to get you the lowest price. They only have incentive to get a price that can make the sale happen (so they can be paid by the seller).

Although I have been using a "buyers agent" I am very guarded on what info I provide as I have no way of knowing how they will use the information I provide. For example: If I say my top limit on this home is $x but offer $y, they may say that the buyer may be willing to come up a bit if the seller provides a counter offer.

Yes there are rules they must follow. Bottom line is, if I'm not paying them, they are not really working for me. They may be working with me, but not for me.

I believe a number of Realtors would strongly disagree with you!

TimB4 (Tennessee)
Posts: 21,059

Posted:

Quote:

Posted By RichardP13 on 01/03/2016 7:43 PM

I believe a number of Realtors would strongly disagree with you!

I'm sure there are.

Won't change my opinion.

I don't consider them working for me if I'm not paying them OR if they are not on a flat fee (vs. a percentage of the sale) as some Realtors are doing now.

NpS (Pennsylvania)
Posts: 4,216

Posted:

Quote:

Posted By RichardP13 on 01/03/2016 7:19 PM
Not sure where you were going with this:
"I doubt that any of the formats that your software prints out would assign a label of Liability to an Equity account".

If you were referring to the OP's Balance Sheet, their use of Capital would be Equity. In researching that Balance Sheet, I came across a number of similar looking Balance Sheets that used Capital in place of Equity and it has roots in Europe.

So the OP's formula is Assets=Liabilities+Capital (Equity).

I was referring to your software. The point I was making is that I could tell from the report you shared that when you originally set up the HOA accounts on your software, you obviously set them up to do Fund Accounting. You could not have generated that report if the account listings and data entry weren't set up for Fund Accounting. You might be able to produce different reports, but those different reports will never label an Equity as a Liability. Capital is Equity, not Liability.

I have no problem with using "Equity" or "Capital" or "Retained Earnings" or "Fund Balance" or any other label - As long as it isn't labeled "Liabilities" - which is a separate classification entirely. The formula you present is correct - 3 classifications. A is separate. L is separate. E or C or RE or FB (whatever you choose to call it) is separate. You always calculate E or C or RE or FB by subtracting Liabilities from Assets.

There is no hard and fast rule about what labels you use. There are hard and fast rules about the formula, which always consists of 3 separate classifications.

Yes, the OP uses the formula A = L + C. I detailed my reaction to the OP's financials in prior posts. No sense in repeating that again here.

Get the feeling that I'm in a pissing contest. Not sure why.

Sikubali jukumu. Read all posts at your own risk.

RichardP13 (California)
Posts: 3,868

Posted:

Quote:

Posted By NpS on 01/03/2016 8:23 PM
Posted By RichardP13 on 01/03/2016 7:19 PM
Not sure where you were going with this:
"I doubt that any of the formats that your software prints out would assign a label of Liability to an Equity account".

If you were referring to the OP's Balance Sheet, their use of Capital would be Equity. In researching that Balance Sheet, I came across a number of similar looking Balance Sheets that used Capital in place of Equity and it has roots in Europe.

So the OP's formula is Assets=Liabilities+Capital (Equity).

I was referring to your software. The point I was making is that I could tell from the report you shared that when you originally set up the HOA accounts on your software, you obviously set them up to do Fund Accounting. You could not have generated that report if the account listings and data entry weren't set up for Fund Accounting. You might be able to produce different reports, but those different reports will never label an Equity as a Liability. Capital is Equity, not Liability.

I have no problem with using "Equity" or "Capital" or "Retained Earnings" or "Fund Balance" or any other label - As long as it isn't labeled "Liabilities" - which is a separate classification entirely. The formula you present is correct - 3 classifications. A is separate. L is separate. E or C or RE or FB (whatever you choose to call it) is separate. You always calculate E or C or RE or FB by subtracting Liabilities from Assets.

There is no hard and fast rule about what labels you use. There are hard and fast rules about the formula, which always consists of 3 separate classifications.

Yes, the OP uses the formula A = L + C. I detailed my reaction to the OP's financials in prior posts. No sense in repeating that again here.

Get the feeling that I'm in a pissing contest. Not sure why.

I have no clue what this discussion is about.

NpS (Pennsylvania)
Posts: 4,216

Posted:

Quote:

Posted By TimB4 on 01/03/2016 7:36 PM
Posted By JdW on 01/01/2016 4:40 PM

and my agent- my own buyer's agent- sent me earlier in the sales process the top portion just under "assets" showing Total Assets of $401,021.02 and said the place was in strong financial condition. However I was not shown the "liabilities and capital" section of the balance sheet until I looked through it after I got the condo resale binder.

Keep in mind that the idea of a buyers agent is just a use of words with no meaning.

The "buyers agent" is typically paid by the seller and receives a percentage of the sale price.

In my opinion, since the agent is paid by the seller, they do not really work for you (otherwise you would be paying them). They will take time to show you multiple properties, provide some insight on them and work with the sellers realtor to make a sale happen. For this, they should be compensated for and in fact are compensated (by the seller).

Therefore, the "buyers agent" has zero incentive to get you the lowest price. They only have incentive to get a price that can make the sale happen (so they can be paid by the seller).

Although I have been using a "buyers agent" I am very guarded on what info I provide as I have no way of knowing how they will use the information I provide. For example: If I say my top limit on this home is $x but offer $y, they may say that the buyer may be willing to come up a bit if the seller provides a counter offer.

Yes there are rules they must follow. Bottom line is, if I'm not paying them, they are not really working for me. They may be working with me, but not for me.

Like any other regulated profession, real estate agents are subject to their own State's rules of professional conduct. For example, an agent cannot be a seller's agent and a buyer's agent in the same transaction unless buyer and seller know about it and sign off on it. Agents can be made liable for certain things (usually procedural deficiencies), but those rarely happen.

In residential sales, 6% was traditionally paid in commissions. 1.5% to the selling agent. 1.5% to the selling agent's company. 1.5% to the buying agent. 1.5% to the buying agent's company.

On a house that's listed for $250k, the max the seller's agent and buyer's agent normally expect is $3,750 apiece in their own pockets. Let's say it sells for $230k. The two agents get $3,450 apiece. That $20,000 difference in price may be huge for the buyer and/or seller. But for the two agents, it's a guaranteed $3,450 vs a maybe $3,750. The $300 difference is not going to get the agents to fight for a better price one way or the other. Their priority is closing the deal. Don't think that flat rate vs percentage would change this dynamic.

Same agent will tell her buyers that it's a sellers market and tell her sellers that it's a buyer's market. Not uncommon. I've seen it too often.

Sikubali jukumu. Read all posts at your own risk.

NpS (Pennsylvania)
Posts: 4,216

Posted:

Quote:

Posted By RichardP13 on 01/03/2016 8:41 PM
I have no clue what this discussion is about.

Quote:
Posted By RichardP13 on 01/03/2016 10:55 AM
NpS

The management company may outsource their financials to a third party, that may or may not specialize in HOA accounting. What sets an HOA apart from other corporations is that there is no appreciation and they don't pay dividends to shareholders.

IF, the reserves as listed as an asset is $12,537.25, then there should be an outset liability of the same number. These are monies allocated to reserve components, but the number is off by $35K. It should be treated as a long term liabilities.

Bottomline, this is not HOA accounting. It is something that came out of Europe.

Richard
This post is where IMO the wheels came off the cart. While I agree with what you said in this thread before you made this particular post - I cannot agree where you say monies allocated to reserve components should be treated as a long term liability - I don't think you ever responded to my questions about what you mean about "HOA accounting" - and I don't understand why you've steered away from a discussion of "fund accounting" and how it differs from for-profit accounting.

These are the issues that I've focused on in my last few posts.

Sikubali jukumu. Read all posts at your own risk.