Accounting for Fines and Violations

I closely review our HOA finances and noticed a new line item in the Liability section of our Balance Sheet titled, Deferred Income - Fines/Violations. I asked the HOA controller about this line item and was told it is used to track uncollectable fines and violations. He said residents and banks have been billed for the violations of HOA rules and the fines have been included on the B/S as an Accounts Receivable but instead of including all the funds as revenue he determines how much is likely to be uncollectable and tracks it as Deferred Income. When asked if there have been prepaid fines/violations collected that may be returned making these funds a liability, the controller said none of these funds have been collected but instead of including these potentially uncollectable funds as revenue, it is "normal HOA practice" to track them as a liability to avoid overstating revenues. This "practice" violates accounting principles as uncollectable receivables should be a contra-asset and included as part of the bad debt allowance. Is anyone aware of this "normal HOA practice" claimed by our controller? He also said the auditor has no problem with it. I realize this may be a minor issue but I often hear the controller make these comments about "normal HOA practice" and it does not sit well with me so I want to try to verify or discredit his claim.

I was treasurer of our HOA and we didn’t have this on our balance sheet. I’m not an accounting expert, but this doesn’t sound like a legitimate line item for a balance sheet. I understand and agree with accounts receivable being money owed the association – you can roll up delinquencies and fines in that because that number will change every month.

However, if you count fines as deferred income, people start looking for stuff to ding people with, which isn’t a good use of time. Your budget should be based on assessments only, along with things like prepaid expenses, inventory and fixed assets.

Our income/expense statement had a line item for miscellaneous income and that’s where fines would be listed if we had them (which we don’t). We would put reimbursement for legal costs incurred in pursuing delinquencies in this category.

I would politely ask this controller to show you examples from real HOAs, an article from an accounting expert or something else that supports his point. You don’t say if you’re a board member, but if you are, this would also be a good question for the association accountant. If there’s nothing that shows this is a typical business practice, the controller may need to come up with a better reason for doing this than “everyone does it.”

PS- can you use shorter paragraphs next time - this was a little hard to read

Our POA, in Florida, has fined, via the FS process, for the first time, so this is timely.

My understanding of fine, is that if they are unpaid, the only way to collect, is via the court system ... usually Small Claims Court.

And, since FS does not allow them as the basis for a lien, it seems to me there is no absolute reason, absent the courts, to believe they will be paid - and, they may not have legal standing until such case is brought against the owner?

Ergo, to me, the fine would not be deferred income - unless the HOA always took these fines to court, and then had some expectaction of collecting.

It's a good idea to have your HOA's books audited periodically, and this may even be a requirement in your by-laws.

Do you know if the books have been audited recently? If not, push to have this done. That way a professional, who presumably has seen plenty of HOA records, can give you an opinion on whether this is typical for HOAs and, if it's not, then a better way to do it.

We do not carry unpaid fines as owed. Fines are kept separately and when paid, do go down as Misc Income. That said in my HOA we are taking less than $200 per year. More noise than anything else.

I agree this needs to be explained since it's new. Annual audits make shenanigans less likely but not impossible.

It may be nothing more than the board deciding to get serious about violations and collections when they realized how much was outstanding and that the dollars hadn't been tracked properly in the past. The details about these things are typically kept confidential, and homeowners who are not on the board will not know about them. They may know the bottom line (ie. the total outstanding and numbers of owners involved) but they won't know the detail making up the bottom line.

Of course justifying additional spending based on dollars not collected is probably not such a good idea, unless the spending is on collection costs.

Not strictly true in Florida. There are exceptions to what the homeowners may see if they ask. Monthly accounts receivable and aging owner account balances are not among those exceptions and if an owner asks to see those things then asserting that they are "confidential" will not fly in Florida.

Looks like our fines are recorded as revenue in the Other Income section of the Income Statement, and recorded as receivable on the resident's ledger until paid.