How should reserve funds be accounted for when used

Started by SusanW15 • 13 replies • 463 views

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SusanW15 (Texas)
Posts: 10

Posted:

Our HOA has an annual operating budget for routine, recurring expenses. After the operating income and expense section we have a section to show the expense line item for the portion of dues set aside and transferred to our reserve each month. When capital expenditures are made for items covered by the reserve funds, are reserve funds credited against the repair expense in the operating section or should these capital expenditures be charged elsewhere so we don't look like we're blowing out the operating budget? For example we've incurred $12K of wall repairs and these costs were charged to Repair and Maint in the operating section. Now our operating budget looks blown! What is the proper accounting for these costs? Thank you for any guidance!

TimB4 (Tennessee)
Posts: 21,059

Posted:

In my HOA, all bills were paid from the operating account (checking).

If the bill was associated with a reserve item, then we would transfer funds from the reserves (savings) into the operating account and pay the bill. The transfer into the account was shown on it's own line and the payment was shown on it's own line item.

I've attached an old budget summary that might illustrate it better.

Hope this helps,

Tim

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MaxB4
Posts: 3,513

Posted:

I have any item reserve related paid straight out of the reserve account. It makes for easier accounting on our behalf. I don't have to transfer any funds back into the operating account, and the expenses are separated for reserve line items. It also makes it easier for auditors doing year-end reviews and audits.

SusanW15 (Texas)
Posts: 10

Posted:

Thank you, TimB4. I think this will work for us. It keeps the repairs shown at gross, the transfer of funds from the reserve is clearly reflected and the bottom line operating budget is not affected.

SusanW15 (Texas)
Posts: 10

Posted:

thanks Max. We have only one checking account but what you're saying makes sense if your reserve account has check writing features.

MichaelS56 (Minnesota)
Posts: 859

Posted:

Minnesota law does not allow for Reserve funds to be transferred into the Operating fund for payment. We do what others indicated and that is we pay out of the Replacement Reserve Account.

JohnC46 (South Carolina)
Posts: 14,265

Posted:

Quote:

Posted By MichaelS56 on 09/24/2021 4:46 PM
Minnesota law does not allow for Reserve funds to be transferred into the Operating fund for payment. We do what others indicated and that is we pay out of the Replacement Reserve Account.

I question your belief the State of MN dictates how accounts are managed/listed. Could you please show me.

CathyA3 (Ohio)
Posts: 6,299

Posted:

We do what Tim does, transfer the dollars to the operating account, with the transfer transactions clearly indicated and appearing on our financial statements.

If you can't do that, you'll need to have check-writing or similar capabilities on your reserve account. This means you'll need to have the necessary funds in a money market type account and not in CDs that can pay higher interest rates. It may depend on how soon you think you'll need the money and whether or not you can tie it up in the CDs.

MaxB4
Posts: 3,513

Posted:

All my accounts will have at least a money market account tied to their reserve funds, some will have CD accounts also. My software will allow checks to be generated from a money market account. Mistakes will happen when transferfing funds back and forth.

As part of reserve planning, I make sure that adequate funds are in the money market account for componenets that are due to be replaced, not necesarily needing to be replaced.

CathyA3 (Ohio)
Posts: 6,299

Posted:

Quote:

I do know many states say that you can't use reserve funds for operating expenses. But that's not the same thing as saying that you can't transfer funds for legitimate reserve spending into the operating checking account for a check to be drawn.

I do agree it will create some extra steps for auditors.

SusanW15 (Texas)
Posts: 10

Posted:

Thank you all for your replies. My focus is really on the income statement presentation, as opposed to which bank account the funds come from. I'm going to use a line item on the income statement to reflect the use of reserve funds as TimB4 suggested. This accomplishes exactly what I'm trying to do. Thanks!

JohnC46 (South Carolina)
Posts: 14,265

Posted:

We have two Reserve Funds. One called General Reserve and one called Roofing Reserves. Our MC can deposit money to either account but they cannot withdraw any money from either account. To withdraw/transfer any reserve money takes the signature of the Pres. and Treasures (myself). It actually takes a bank visit but we have never had to transfer any.

MichaelS56 (Minnesota)
Posts: 859

Posted:

Minnesota State Law: 515B.3-1141 Part (3)

JohnC46 (South Carolina)
Posts: 14,265

Posted:

Quote:

Posted By MichaelS56 on 09/26/2021 5:56 AM
Minnesota State Law: 515B.3-1141 Part (3)

I saw this:

(3) The association shall keep the replacement reserves in an account or accounts separate from the association's operating funds, and shall not use or borrow from the replacement reserves to fund the association's operating expenses, provided that this restriction shall not affect the association's authority to pledge the replacement reserves as security for a loan to the association.

I think we were talking about paying an invoice for an item(s) that replacement reserves would cover versus shore up operating funds, which I agree with.

Not an issue. Thanks for the link.

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