FL HOA - Cash or Accrual Method of Accounting (other state opinions welcome)

If a poll exists out there in Condo or HOA land, what method of financial reporting is most employed by HOA's? We are an HOA, Not for Profit, with annual revenue of approximately $275K.

I understand the details and the pro's and con's of each method so please do not elaborate on these details. I simply seek a consensus. And if there's a published report by state, kindly reference that in your reply.

I very much favor a modified accrual basis because of the need to track delinquencies and prepayments. I am against cash basis since this is a business with performance that's measured against a budget created using the accrual basis.

I also read that FS 718 requires Accrual method but FS 720 does not. I could not validate that as a fact. Does anyone else know?

Thank you in advance for your comments. KimB1

No offense to any board member out there but I've met very few Board Members in my 20 year living in an HOA that understand the difference between cash and accrual basis accounting.

Most corporations and business run on the accrual method which matches revenues with expenses in the period they are earned or expended. This gives you get a true picture of profitability. But you have to look at the Balance Sheet too! If you have a large amount of prepaid asssessments and increasing delinquencies, this needs to be tracked and reported properly (on the balance sheet) so that homeowners get a true picture of an associations statement of condition. Otherwise there's a false sense of profitability if more owners pay in advance than what may be due the Corp. If you are tracking delinquencies in your accounting application , you are already accounting for dues based upon the accrual method of accounting (not cash basis).

Budgets are also prepared on an accrual basis, therefore you should compare apples to apples with financial results using the same basis of accounting.

Since reserves (committed funds) are on the balance sheet (on both sidees) the only expense to the P&L is the portion that is transferred to reserves from assessments received. Expending reserves does not affect the income statement, but expenditures from reserves reduce amounts on the balance sheet by decreasing the investments (CD's) and decreasing fund balances classified as equity.

If receivables are not likely to be collected due to foreclosure limits, then a portion needs to be written off! And should be taken into consideration during the budget process.

I hope I answered your question. if not, I'll clarify later.

Kim,
You posted "I've met very few Board Members in my 20 year living in an HOA that understand the difference between cash and accrual basis accounting." I agree. Do you know any Board member, who is not an accountant, who understands financial reports based on accurual accounting?

I disagree with your posted advantages and disadvantages of HOAs using modified accrual based accounting vs cash basis. a) using cash basis income is booked when payment is received and expenses are posted when bills are paid;
b) using accrual basis income and expenses are booked before payments are received and before expenses are paid;
Note: large businesses with multimillion dollar budget their team of accountants use accrual based accounting to keep track of income and expenses by booking them immediately. This is referred to as the generally accepted accounting practice (GAAP), but IMO is usually not needed for HOAs unless required by law.

c) both can provide accurate financials and true profitablility, but cash basis for HOAsis more easily understood;
d) delinquencies and prepayments are accounted for using either method - no advantage;
e) with regard to your comments on reserve funds they also apply to cash basis - no advantage;
f) with regard to your comments on budgets they also apply to cash basis - no advantage.

Disclaimer: I am not an accountant but have learned a little from our highly qualified, degreed, experienced, accountant

I commented in my earlier response

The Executive Council of Homeowners (a California based HOA education company) advocates for the use of accrual basis accounting. Their rationale can be found here:

http://www.echo-ca.org/article/3-methods-hoa-accounting-and-how-they-effect-financial-statements

In summation, the California Civil Code requires that certain aspects of the an HOA's financial statements be accrual basis (pro forma budget namely). For comparison, it is simplest to maintain the entire HOA's accounting on accrual (not to mention it is a more complete report of an association's finances, but that has already been said.)

The site does offer commercial memberships, but the information is what I was intending to display, not advertisement. I know this is an old thread, but I believe any information available is a viable tool regardless if the original people of the thread are still using it.

Anyway, the thread was discussing accrual accounting methods, and in California, the income/expense budgets are required to be done on accrual. Therefore, it is my belief (as well as that of the article I linked to), that accrual accounting would be the simplest to maintain since all the financial statements would align. If one were to use cash basis or even a modified hybrid of the two, the income/expenses would not equate.