Hurricane Costs- Operating Budget or Operating Reserve

Started by JoyceW4 • 6 replies • 1073 views

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JoyceW4 (Virginia)
Posts: 10

Posted:

Relatively new Treasurer for small 44 unit condo complex in Va Beach that incurred about $20 K repair cost from Hurricane Mathew in 2016.

Our Mgt Co wanted to deduct it directly thru the Operating Reserve - as such, the $ 20k would not flow thru the 2016 operating expenses.

I believed that it should be charged to the 2016 operating expenses and at year end, we could fund any net operating loss from the Operating Reserve. We ended the year with a net operating loss of $3k.

What is the proper accounting treatment for such unbudgeted repair cost from hurricanes? How does your Association handle such cost?

TimB4 (Tennessee)
Posts: 21,059

Posted:

Joyce,

Reserves are for the maintenance, repair and replacement of common elements.

I would pay the insurance deductible from operating funds (unless you established a line item within the reserves).

If you did not have insurance or could not meet the deductible, you could utilize reserves. Remember to recalculate useful life, etc. on those items that were repaired and adjust the funding accordingly.

There is no standard that I am aware of.

RichardP13 (California)
Posts: 3,868

Posted:

The funds should have come from reserves. You said it was to repair, and I assume it was to the common elements. What did Tim say, the reserves are used for maintenance, repair and replacement of common elements should sum it up.

But, if this is normal, annual occurrence, then the proper thing to do is have a line item in the operating budge so the monies are readily available.

JoyceW4 (Virginia)
Posts: 10

Posted:

Thank you both for your replies.B NNHNN

The hurricane repairs were for replacing shingles blown off the room of buildings (common elements). We choose not to file an insurance claim as our community is located directly on the Chesapeake Bay and small claims can led to cancellation of our policy - which is not advised given that few carriers will underwrite Policies for bay front communities .

If we had charged the repairs directly to our Operating Reserves, we would have reported a net income of about $8K for the year in our operating budget. Thus, this is why I thought that it would be more reasonable to charge the hurricane repairs to our regular operating budget and then just fund the annual net loss of $3K to the Operating Reserve at year end.

Really in the long run it likely makes no difference because if we had charged the repair cost directly to Reserves - the $8K yr end income would be transferred to Operating Reserves anyway. I guess there is a reporting benefit charging such expenses to Reserves - because it does identify such costs as extraordinary and unbudgeted.

GenoS (Florida)
Posts: 4,276

Posted:

I guess I don't understand the term, "Operating Reserves". There should be an operating budget and a reserves budget. In Florida, at least, never the twain shall meet. Reserves aren't necessarily for extraordinary and unbudgeted costs, either. Reserves are meant to fund things that are perfectly ordinary.

When I see "operating reserve" what I read is "slush fund". Not that that's what you're doing, in fact I think what you're doing is fine, all things considered. I do disagree with some of your terminology.

KerryL1 (California)
Posts: 14,550

Posted:

Right, I don't know what "operating reserves" are either.

In our operating budget, we have a line item called contingency and IT is used for "extraordinary" "unbudgeted" expenses.

RichardP13 (California)
Posts: 3,868

Posted:

Where I lived, I sent up two type s of reserve account, one short term, one long term. Any reserve component needing to be repaired or replaced within three years was designated short term, all others designated long term. We had $1.3M in long term CD's and $200K in money market fund, no penalty for early withdrawals. Every year, short term components would be re-evaluated.

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