Accrual Accounting

My Florida HOA has utilized cash basis accounting since 1985, plus they have never performed an audit even though Fl statutes required a compilation. We finally hired a bookkeeper that will be certified by the end of February, has 7 year’s experience, AA degree in finance and currently working towards an MBA in Business. I am so thankful. I would like to switch them from a cash basis to accrual accounting, to account for prepayments, track delinquencies and reserves, and just to get a better picture of the health of the HOA. Chapter 720.303 does not specify the method of accounting and reads in part “…shall prepare or cause to be prepared a complete set of financial statements in accordance with generally accepted accounting principles as adopted by the Board of Accountancy”. I impute this to mean accrual accounting but that may be wishful thinking.

Here is my question: I seem to remember reading once, per Florida Administrative Code (I think) that a certified or licensed bookkeeper must abide by GAAP and thus must use accrual accounting. Is this correct?

Chucj, this webpage agrees with you. The last comment on the page by "Dan T" says in relation to "accrual" that:

"It's referred to in the section regarding annual financial reporting > refers to GAAP, does not specifically say accural - but this is what it means."

Both the condo and the HOA statutes say the same thing (FS 718 and FS 720 respectively).

When we switched to the bookkeeping services of a management company at the beginning of 2019, we noticed our monthly financial statements looked different than the ones we had been getting from the previous bookkeeper. When we asked the management company about it they said they employed a "modified accrual" scheme. Apparently they did this for all of their client associations despite the fact that a modified accrual accounting system DOES NOT COMPLY WITH GAAP.We terminated the management company after only 6 months for that and other reasons. A few people wanted to file an official complaint with the state's "Division of Business and Professional Responsibility" against both the company and our CAM. That idea didn't appeal to enough people on the board, however, so we never did file any complaints.

Under Special Considerations it says it's not commonly used by public companies since it doesn't comply with GAAP. It's the "comply with GAAP" part that's relevant because FS 720.303(7)(a) says,
"An association that meets the criteria of this paragraph shall prepare or cause to be prepared a complete set of financial statements in accordance with generally accepted accounting principles as adopted by the Board of Accountancy."

Note that GAAP compliance seems to be required. Now that section is in relation to the year-end financial report. I'm no accountant. Is it possible to provide modified-accrual reporting for the year and then whip the year-end reports into accrual (GAAP) shape?

We did find the monthly financials prepared according to modified accrual accounting methods more difficult to digest than the ones we had been used to getting.

Just a note....people are coming onto this forum and having you do their homework.

After a little more digging, I’ve finally determined that the only accounting method accepted by GAAP is the accrual basis accounting method. Which is what GinoS (Florida) has confirmed. I have experience with three different management companies and they each tell me they only use accrual basis accounting. I suspect I’ll have to reach out to a CPA specializing in HOA’s for confirmation that a licensed bookkeeper must conform to GAAP accounting principles and by default use accrual accounting. I am on other boards so I’ll see what I can conclude and share my findings.

Yes, please do share whatever you find out, Chuck.

In my HOA we have a "XYZ HOA Accounting and Financial Procedures" document enacted by the board almost a decade ago. It was written by a board member at the time who was a CPA. Before he retired he worked for over 20 years in the accounting department of a Fortune 100 company at its headquarters. On the first page it says,

"The accounting procedures used shall conform to Generally Accepted Accounting Principles (GAAP) and the Florida Statutes governing Homeowners Associations to the extent possible to ensure accuracy of information and compliance with external standards. These standards shall be adhered to by the Treasurer and/or others acting on behalf of the XYZ HOA as well as any employees or outside organizations employed to perform accounting and financial services."

"The XYZ HOA shall use the accrual basis of accounting. The accrual basis is the method of accounting whereby revenue and expenses are identified with specific periods of time, such as a month or year, and are recorded as incurred. This method of recording revenue and expenses is without regard to date of receipt or payment of cash."

The management company we hired was aware of this policy before we hired them. When we pointed out that the modified-accrual basis of accounting they were using was at odds with our long-standing policies and procedures, they refused to acommodate us. They were supposed to be working for us, not the other way around. That was about 50% of the reason we got rid of them.

I understand but when you want to true picture of the financial health of a company, accrual is the way to go, it provides information not available in cash accounting. It’s even more necessary when you have receivables, payables, doubtful accounts, reserve accounts, etc.

I reached out to a CPA for another property and this is what I got. Per Fl Statutes it has to be accrual accounting for required annual compilation but can be cash accounting for all other reports. Thus the answer to my question is: A certified or licensed bookkeeper must use accrual accounting for the annual compilation to be in compliance with GAAP rules but can use cash accounting at all other times.

Thanks for everyone’s input!

I've worked with MCs that have used cash, modified accrual, and accrual accounting. It depended on the needs and desires of the association in question. I managed a medium-sized association with a fair bit of assets and amenities, and some "strange" assessment issues; that community was definitely set up as accrual (especially since we wanted the tax advantages of "write-offs"). Where I live (and worked for the MC), we have fewer than 65 homes and a total budget of less than $30K; we use cash accounting as we have no amenities and have few bills (landscaping, street lights, insurance, MC).

Here's an article to spin your heads a bit more.

https://lsc-pagepro.mydigitalpublication.com/publication/?i=640591&ver=html5&p=36#{%22page%22:%2236%22,%22issue_id%22:640591,%22publication_id%22:%2220613%22}

NP,

that is not entirely accurate. Accrual basis is required to satisfy GAAP for most, but not all cases.

See:

https://www.cliffsnotes.com/study-guides/accounting/accounting-principles-i/principles-of-accounting/generally-accepted-accounting-principles

You are probably right, and your accountant will indeed use accrual accounting if that is the law of the state of Florida.

You are probably right, and your accountant will indeed use accrual accounting if that is the law of the state of Florida. You know, the first commenter is correct. I won't mind hearing more about the laws if you know the subject. I'm very far from that and have always used a simple and uncomplicated https://www.paystubcreator.net/ to help me keep track of my company's spending. Of course, we have an accounting department, but I prefer to double-check all expenses. What do you say about that? Can we hear from you about your experience in Florida?