HOA Accounting Rules

Does anyone know if there is some rule requiring HOA's in Florida to maintain their books on an accrual basis? I have searched high and low for a statute but can find none. The board of directors says they must maintain the accrual accounting method but would prefer the cash method.

I know corporations, which the HOA is, can maintain books on either accrual or cash basis. Of course, they must declare which method they use, and I believe, they can only change at the beginning of a new fiscal year.

Any help is appreciated. If you can site an authoritative source on the subject that would be a welcomed extra.

Tony,
You are correct "I know corporations, which the HOA is, can maintain books on either accrual or cash basis." I prefer cash but some HOAs use the modified accural method. The accounting method is required by the IRS not the state. Some state laws require HOAs to use GAAP but do not specify the accounting method so far as I know.

I'm not in Florida. None of the associations here that I've talked to use accrual and no management companies suggest that they do, neither do the cpas I've contacted. They all recommend that hoas use cash based because of the difficulty of understanding accrual. Accrual is for large manufacturing corporations rather than small businesses and hoas. CPAs and accountants might understand the accrual, but homeowners, who make up the boards, don't. Its more than a little confusing.

Thank you all for your input. Your information confirmed what I already believed to be true about accounting methods.

Now I am going to go pull some wires because the last time I had an electrician do it, he nearly burned down the house with the lousy work he did.

FYI. . .

Here is a very easy to understand explanation of the two methods:

Cash Basis records financial transactions based on cash flow and cash position. Revenue is recorded when received and expenses are recorded when made. Normally there are no accounts receivable and no accounts payable. However a modified cash basis can be utilized to show these two type accounts.

Accrual basis records revenue when it is earned regardless of when it is received. Expenses can be recognized without a payment being made. For example, the assn may have an insurance policy costing $1,200 per year with $100 monthly payments . The account Prepaid Insurance will be set up for $1,000. When the actual payment is made each month, $100 is debited to the expense account "Insurance Expense" and $100 is credited to "Prepaid Insurance".

Dave, you make a good point for an HOA with a multi-million dollar annual budget. For those I would use modified accural accounting. With acrual you will report some income before it occurs, such as for delinquent accounts. With modified acrual you can show income when received and expenses when committed.

Dave, are you saying the state of MA is requiring HOAs to use a specific modified accural based accounting method? I have never heard of such a thing! With regard to your example, the expense did occur in December so with accural or modified accural accounting I believe it should be recorded for December even though the bill was received in January. This can be done before closing the books for the year.

Using your example of the weakness in cash based accounting, we solve that by require vendors to provide any significant invoices before the end of the month and pay them by the end of that month. We think the most important consideration is to provide the accounting method which best communicates the financial status to the Board members. We have found that most Board members have no idea which accounting method is used; they are only concerned as to whether or not they can understand the financial reports with some degree of clarity

Dave,
The modified accounting method, is actually called the "modified cash method" (see definition below), and it does not mean that you can pick and choose if you will accrue a certain expense in one year and not accrue the same expense the next year, as it appears to me from your example is what happened. The auditor probably, it is my hope anyway, did not take issue with it because of a materiality issue. Auditors set a certain amount per category being tested to which they consider not material to affecting the financial statements if not booked in the manner in which it should have been. Therefore, if the amount that did not get accrued fell below their materiality level then they would not have counted that as a "finding" or had taken issue with it.

To help you understand the meanings of the methods and how they are used, below are definitions from the Wikipedia encyclopdia:

Cash-basis accounting is a method of bookkeeping that records financial events based on cash flows and cash position. Revenue is recognized when cash is received and expense is recognized when cash is paid. In cash-basis accounting, revenues and expenses are also called cash receipts and cash payments.

Cash-basis accounting does not recognize promises to pay or expectations to receive money or service in the future, such as payables, receivables, and prepaid or accrued expenses.

This is simpler for individuals and organizations that do not have significant amounts of these transactions, or when the time lag between the initiation of the transaction and the cash flow is very short.

Two types of cash-basis accounting exist: strict and modified. Strict cash-basis follows the cash flow exactly. Modified cash-basis includes some elements from accrual-basis accounting such as inventory and property capitalization.

Issues with cash basis
Cash-basis accounting is generally not acceptable for entities that must make their financial statements publically available. This is because most countries require companies to comply with the accruals basis of accounting. Cash-basis accounting is not considered to provide a true and fair view of the financial performance and position of an entity under GAAP and the IFRS.

Additionally, cash-basis accounting is not viable for cost accounting in manufacturing operations because expenses cannot always be correctly associated with product costs.

Accrual-basis accounting (a.k.a. accrual accounting) records financial events based on economic activity rather than financial activity. Under accrual accounting, revenue is recorded when it is earned and realized, regardless of when actual payment is received. Similarly, expenses are “matched” (a process known as matching or expense matching) revenue regardless of when they are actually paid. Accrual accounting is required by US GAAP US generally accepted accounting principles, IFRS International Financial Reporting Standards and legislation such the UK’s Companies Act 1985.

Comparison
Using cash-basis accounting, income and expenses are recognized only when cash is received or paid out.
Using accrual-basis accounting, receivables and payables are recognized when a sale is agreed to, even though no cash has been received or paid out as yet.
Cash-basis accounting defers all credit transactions to a later date. It is more conservative for the seller in that it does not record revenue until cash receipt. In a growing company, this results in a lower income compared to accrual-basis accounting

Companies that have extended or used credit significantly should use (and in the United States may be required by the Internal Revenue Service to use) the accrual-basis method of accounting. The U.S. Securities and Exchange Commission requires that all publicly traded companies follow GAAP, thus all publicly traded companies publish their financial statements using accrual-basis method.

For tax purposes, cash basis accounting is highly favored because it defers tax burdens until the cash is received and provides for automatic bad debt relief as revenue (and therefore profit) is not recorded until cash is received from the debtor. It is often used by small businesses and organizations that are not required to use the accrual method, both for tax reasons and for its simplicity.