Utah Approved Continuing Education Credits by Events Unlimited

Advanced Accounting Issues in Community Associations
By
Donald W. Haney, CPA, MBA, MS(Tax)
June 24, 2009 - Salt Lake City, Utah

Mr. Haney’s presentation focused on the following standards and issues:

The American Institute of Certified Public Accountant’s (AICPA) Common Interest Realty Association (CIRA) Audit and Accounting Guide (the Guide) – its history, issues and current state.

The fundamentals of the accounting model.

The application of the Financial Accounting Standards Board (FASB) loss recognition rules in the CIRA environment

The accounting and funding issues and risks associated with Major Repair and Replacement Studies (Reserve Studies).

An in depth review of an AICPA compliant Financial Forecast (Budget).

What follows is a brief summary of each topic.

The CIRA guide was effective for accounting periods beginning on or after September 15, 1991. However, effective June 30, 2009 the Guide was effectively discontinued as an authoritative source and replaced by the FASB Accounting Standards Codification (ASC) Topic 972. However, the Guide and PPC’s Guide to Homeowners Association will continue to serve as sources of information for practitioners.

Mr. Haney indicated that the AICPA staff was never comfortable with several major concepts when the Guide was issued namely – the fund accounting preference (later removed from not for profit standards) and the failure to determine the accounting nature of CIRA’s obligation to maintain the common areas. He indicated that the Guide standards were developed over 20 years ago and when the industry accounting issues were not well understood by the standard setting bodies. Since then, CIRAs’ obligations to maintain common areas and the related funding issues have become more apparent to all stakeholders. Therefore, practitioners must adapt to stakeholders increased expectations regarding disclosures about current financial conditions, results of operations and future cash flow requirements.

He expressed his concern that a high percentage of community managers and directors seem to have a very low financial literacy level. He presented the fundamental duties of Directors, Accountants, and Auditors. He then described the fundamental accounting model of the total Assets (things we own) =3rd Party Claims against those assets (Liabilities) plus the Owners’ Claim (Members Equity, Net Assets, Retained Earnings, Etc.). He explained the nature of the income statement and its relationship to the Balance Sheet. Finally, he pointed out the various replacement funding models – Prefund, Musical Chairs and Debt.

Next on the agenda was the introduction of the accounting standard related to recording losses and expenses. Mr. Haney expressed significant concern that many HOAs maintain their books and records using the “check book” method and not the “accrual basis” method. His major concern was the failure by practitioners to record liabilities. Therefore, significant obligations were not being disclosed to stakeholders primarily buyers.

He then proceeded to present the rules for recognizing (recording on the books) losses and expenses as required by FASB-ASC 450 (formerly FAS 5). The rule is straight forward:
A loss or expense shall be recorded if two conditions exist:

It is probable that an asset has been impaired or a liability incurred at the date of the financial statements; and

The amount of the loss can be reasonably estimated.

He suggested a number of situations when such losses or expenses should be recorded in the CIRA environment – construction defects, pest damage, fire damage, bad debts law suits, special assessments, and major repairs and replacements. He then reviewed a white paper he produced making the case for accruing CIRAs’ Major Repair Replacement Obligations.

He then presented a detailed example of various Major Repair and Replacement recognition and funding models including component inventory, forecasted expenditures, and funding. His presentation included the pros and cons of several funding techniques-cash flow, straight line and sinking fund.

Finally, he presented and reviewed an AICPA compliant Financial Forecast (Budget). This twenty-three page document included forecasted balance sheets; cash flow statements; income statements; major repair and replacement components and related funding plan; and extensive notes and disclosures.

He presented the information with a degree of humor and professionalism that was well received by the attendees. If you want to obtain copies of his various presentations, white papers and other work products, request them from him by email to dw@haneyinc.com.

Phone: (801) 448-8670 | Toll-Free: (800) 218-8005 | Fax: (800) 218-8005
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Advanced Accounting Issues in Community Associations By Donald W. Haney, CPA, MBA, MS(Tax) June 24, 2009 - Salt Lake City, Utah Mr. Haney’s presentation focused on the following standards and issues: The American Institute of Certified Public Accountant’s (AICPA) Common Interest Realty Association (CIRA) Audit and Accounting Guide (the Guide) – its history, issues and current state. The fundamentals of the accounting model. The application of the Financial Accounting Standards Board (FASB) loss recognition rules in the CIRA environment The accounting and funding issues and risks associated with Major Repair and Replacement Studies (Reserve Studies). An in depth review of an AICPA compliant Financial Forecast (Budget). What follows is a brief summary of each topic. The CIRA guide was effective for accounting periods beginning on or after September 15, 1991. However, effective June 30, 2009 the Guide was effectively discontinued as an authoritative source and replaced by the FASB Accounting Standards Codification (ASC) Topic 972. However, the Guide and PPC’s Guide to Homeowners Association will continue to serve as sources of information for practitioners. Mr. Haney indicated that the AICPA staff was never comfortable with several major concepts when the Guide was issued namely – the fund accounting preference (later removed from not for profit standards) and the failure to determine the accounting nature of CIRA’s obligation to maintain the common areas. He indicated that the Guide standards were developed over 20 years ago and when the industry accounting issues were not well understood by the standard setting bodies. Since then, CIRAs’ obligations to maintain common areas and the related funding issues have become more apparent to all stakeholders. Therefore, practitioners must adapt to stakeholders increased expectations regarding disclosures about current financial conditions, results of operations and future cash flow requirements. He expressed his concern that a high percentage of community managers and directors seem to have a very low financial literacy level. He presented the fundamental duties of Directors, Accountants, and Auditors. He then described the fundamental accounting model of the total Assets (things we own) =3rd Party Claims against those assets (Liabilities) plus the Owners’ Claim (Members Equity, Net Assets, Retained Earnings, Etc.). He explained the nature of the income statement and its relationship to the Balance Sheet. Finally, he pointed out the various replacement funding models – Prefund, Musical Chairs and Debt. Next on the agenda was the introduction of the accounting standard related to recording losses and expenses. Mr. Haney expressed significant concern that many HOAs maintain their books and records using the “check book” method and not the “accrual basis” method. His major concern was the failure by practitioners to record liabilities. Therefore, significant obligations were not being disclosed to stakeholders primarily buyers. He then proceeded to present the rules for recognizing (recording on the books) losses and expenses as required by FASB-ASC 450 (formerly FAS 5). The rule is straight forward: A loss or expense shall be recorded if two conditions exist: It is probable that an asset has been impaired or a liability incurred at the date of the financial statements; and The amount of the loss can be reasonably estimated. He suggested a number of situations when such losses or expenses should be recorded in the CIRA environment – construction defects, pest damage, fire damage, bad debts law suits, special assessments, and major repairs and replacements. He then reviewed a white paper he produced making the case for accruing CIRAs’ Major Repair Replacement Obligations. He then presented a detailed example of various Major Repair and Replacement recognition and funding models including component inventory, forecasted expenditures, and funding. His presentation included the pros and cons of several funding techniques-cash flow, straight line and sinking fund. Finally, he presented and reviewed an AICPA compliant Financial Forecast (Budget). This twenty-three page document included forecasted balance sheets; cash flow statements; income statements; major repair and replacement components and related funding plan; and extensive notes and disclosures. He presented the information with a degree of humor and professionalism that was well received by the attendees. If you want to obtain copies of his various presentations, white papers and other work products, request them from him by email to dw@haneyinc.com.
Phone: (801) 448-8670 \| Toll-Free: (800) 218-8005 \| Fax: (800) 218-8005 HOME \| EVENTS \| REVIEWS \| ANNOUNCEMENTS \| LINKS \| SPEAKERS \| WEB SITE MAP \| CONTACT Copyright © 2009. Events Unlimited and Continuing Education. All rights reserved.