CAGIANUT & COMPANY, CPA
ACCOUNTING SEMINAR 10-23-15
Presented by:
Gayle L. Cagianut, CPA
SUPER CHARGE YOUR
ACCOUNTING:
SPEED, POWER AND VICTORY!
A clean audit from start to finish!
Performance at its best ~
START YOUR
ENGINES!!
Before the Audit Process Begins
DO:
• Make sure you have documentation or
explanation for all material balances on
the financial statements.
• Have year-end statements for ALL (that
means ALL) cash and investments
DON’T:
• Expect the auditor to “fix” the financial
statements.
• Do NOT make adjustments after issuing
reports.
• Do not give us reports that don’t agree.
GETTING
READY…
DO’S &
DON’TS
GETTING THE GREEN
FLAG
Starting the Audit Process
GETTING THE DOCUMENTS TO
AUDITOR
Electronic
• Using C&C DropBox
• E-mail
• Allowing C&C Access to System
Paper Files
• Shipped at C&C expense
• In a few cases, picked up by C&C
Most importantly – take the time to ensure
that the files are complete
COMMUNICATION DURING THE
AUDIT PROCESS
• Who – your end??
– We try and ask the right questions of the right people. If we miss it – let
us know!
• Who – our end?
– Tax extension, starting audit process, preauditor, auditor & reviewer
• Timeliness is VERY important
– Let us know if this is not a good time for you so
we can put the audit aside and not keep bugging you.
– Within 2-3 days seems reasonable to us
CAUTION!!!
YELLOW FLAG
Warning: Crash Ahead or
Debris on the Track
Those Accounting Issues That Get
Us Off Track
WHAT BRINGS OUT THE YELLOW
FLAG:
• Bad Debts
• Foreclosures, etc.
• Per Use Fees
• Fixed Assets
• Insurance Claims
• Management Transitions
• Fund Reconciliations
• Special Assessments
BAD DEBTS
• Determining the Allowance for Bad Debts
– It is an ESTIMATE
– Must be made by the Association, not us
• Writing off the Bad Debt
– Board decision
– Write off to expense or against allowance?
• Adjusting the Allowance During the Year
– Depends
• Bad Debt Recovery
– Current year income
FORECLOSURES, ETC
• Is it an Association asset?
• How to account for the Receivable at the time of possession
• Continuing Monthly Assessments
• Other Costs
• Renting out the unit - from an accountant’s standpoint
• What if additional monies are received from bank?
• When the units sells…and there is a profit
PER USE FEES
• Types of Per Use Fees
• Accounting for Per Use Fees
• Internal Controls
• Taxation of Per Use Fees
PER USE FEES
• Types of Per Use Fees
–Move In/Out Fees
–Guest Suite Rentals
–Parking/Storage Rentals
–Other Amenity Usages
–Laundry
PER USE FEES
• Accounting for Per Use Fees
–Separate income category for
significant amounts
–Offsetting expenses should clearly
be identified in a separate expense
account
PER USE FEES
• Internal Controls
–Completeness is the objective
–Fraud OR Error
–Independent verification
–Reconciliation, Review or Random
–Document
PER USE FEES
• Taxation of Net Per Use Fees
–Form 1120-H – Taxable unless
charged annually
–Form 1120 – Nonmember income
is taxable
FIXED ASSETS
• GAAP – Real Property
– Real Property Directly Associated with Units
– Real Property Not Directly Associated with Units
– Removing Real Property from Financial Statements
• GAAP - Personal Property
• Accounting
– Operating Fund
– How to account when reserve monies are used to purchase asset
• Depreciation
• Capitalization policy
INSURANCE CLAIMS
• Segregate Accounting
• Reconcile to Insurance Claim Documents
• Defer Insurance Proceeds when
appropriate
• Excess Insurance Proceeds
MANAGEMENT TRANSITIONS
• What to DO
– Enter financial statement balances exactly as shown on
the last financial statement/general ledger
– Include ALL A/R as shown on the prior aging report
– Verify that equity agrees
– Enter year-to-date income statement balances.
– Enter transition adjustments in a separate equity
account
– Keep documentation and backup of the transition
reports , reconciliations and adjustments
MANAGEMENT TRANSITIONS
• What NOT to do
– Enter the bank balance and not the reconciled bank
balance
• Do not ignore outstanding checks, deposits in transit and
other reconciling items
– Use a financial statement that is not the final from
prior management company – different cut-off dates
Let’s agree to cooperate with one another!
FUND RECONCILIATIONS
• Fund Accounting is not required, but recommended
– FASB – More informative to users
– Recommended by CAI and most CPAs
• Accounting Basics
– Keeping the Fund in Balance!
• Due Between Funds
• Transfer Between Funds
Accounting – Provide the Reconciliation so the
Board, with Management’s input, can decide!
SPECIAL ASSESSMENTS & LOANS
Basic Scenario
• The Association has a major project.
• It is decided that there will be a special assessment.
• The members have the option of paying their portion in
full or over time.
• The Association gets a bank loan for those members that
are financing
• The unit owners who pay over time pay interest per loan.
• The bank loan is repaid at the same rate as the special
assessments are billed/paid.
SPECIAL ASSESSMENTS & LOANS
Accounting Basics
• A 3rd Fund should be considered.
• Separate cash account and chart of accounts set up.
• Loan is recorded on books & adjusted monthly.
• Additional principal payments are sent to the bank to
reduce the loan.
• Amortization schedules are required for EACH owner
SPECIAL ASSESSMENTS & LOANS
Perfect World
• The special assessment and the loan amount agree at the onset.
• The loan date agrees with the date of the special assessment.
• As payoffs are made, the loan is reduced and/or monthly loan
payments are made at the same time as the special assessment
payments ~ the loan and special assessment receivable will be
reducing at the same rate and they will agree.
• The loan automatically re-amortizes.
• The loan interest coming agrees with the loan interest paid out.
• A true “matching” of monies in and monies out occurs.
SPECIAL ASSESSMENTS & LOANS
Real World - Part 1
• The loan and special assessment dates/amounts do not agree.
• The expenses are over a period of time and the loan is on a draw
system; thus, special assessment is being paid ahead of or behind
the actual expenses.
• The interest rates are not the same – either at the beginning or
the loan resets and the special assessment does not.
• The Board decides to pay down the loan but the special
assessments keep going on.
SPECIAL ASSESSMENTS & LOANS
Real World – Part 2
• An additional principal payment is made and is missed being
sent to the bank.
– Interest continues to accrue.
• There is a bad debt write-off and that additional amount is not
paid to the bank.
– Interest continues to accrue.
• A unit pays off (either “just because” or at escrow) and
accounting misses it and keeps billing the unit.
• Etc, Etc. Etc
SPECIAL ASSESSMENTS & LOANS
Full Receivable Method of Accounting for SA
• The “pro’s” of this method of accounting:
 No negative fund balance/equity (“perfect world”).
 The receivable is on the books so that everyone is aware of the
responsibility of the owner to pay this assessment over time.
• The “con’s” of this method of accounting
 Requires an elaborate accounting system – especially when
there are various amortization schedules for units
 AR systems may not be able to handle inclusion of the full AR
on the books – without trying to assess late fees, lien, etc.
SPECIAL ASSESSMENTS & LOANS
Annual Assessment Method
• The “pro’s” of this method of accounting:
– Bookkeeping is much easier.
– The financial statements may be easier to understand for
non-accountants.
– The assessment amount received should be what is
budgeted (except for payoffs).
SPECIAL ASSESSMENTS & LOANS
Annual Assessment Method
• The “con’s” of this method of accounting
– There is a large negative fund balance for the life of the
loan,
– The total receivable does not show on on the A/R ledger,
so separate “off books” ledgers must be kept to ensure
payoff at the time of sale of the unit.
– A separate reconciliation of remaining AR to loan balance
should be kept, or prepared at least annually, to ensure that
there are adequate monies to repay the loan and to ensure that
payoffs have not occurred and not been sent to the bank.
SPECIAL ASSESSMENTS & LOANS
Which Method is Correct??
– BOTH (for now)
– But..whatever method you choose
– do it right!
This is the #1 reason we cannot give an
audit opinion
CHECKERED FLAG
Taking It to the Finish Line
What to do at the End of the Audit
FINISHING THE RACE (AUDIT):
• Review the Internal Control Points
• Make sure the tax return is filed
• Post the adjusting journal entries
– Use One Balance Sheet Only Method
– Post ALL or NONE of the AJEs
– What to reverse
– RECONCILE EQUITY IF AJES ARE POSTED!
– If not posting AJEs look at carryover balances that make no sense.
REVIEW INTERNAL CONTROL
POINTS
• CFO/Lead Accountant should be receiving and reviewing
• Review while in DRAFT mode. Ask the following:
 Is there a process that needs to be revised?
 Are there controls that are missing?
 Does the staff need additional training?
 Did the auditor make an error in fact or judgment?
 Is there additional information that we neglected to provide ?
 Are there subsequent events that could mitigate the point?
• Use as Educational tool to better your firm and systems
MAKE SURE TAX RETURN
IS FILED
• And…
– Taxes are paid, if needed
– Estimated tax payments are set up to be paid, if
appropriate
POST ADJUSTING JOURNAL
ENTRIES…OR NOT
• # 1 Rule – Post ALL or None of the Entries
• If you post ALL the adjusting journal entries, be sure and reconcile equity.
The adjusted beginning equity should agree with the ending equity in the
audit.
• IF only posting a few adjustments – Separate equity account
– Document and Identify
POST ADJUSTING JOURNAL
ENTRIES…OR NOT
ONE BALANCE SHEET ENTRY (OBSE) – preferred
• The audit adjustments will have no impact on the current year’s
budget.
• The year-end financial statements were issued to the Board
• The OBSE highlights that beginning equity was revised.
• Interim financial statements are not GAAP anyway.
• In most cases, the impact to the operating expenses is not
material. Thus, we feel that the Board can manage to the
exception rather than re-stating the prior year reports.
POST ADJUSTING JOURNAL
ENTRIES…OR NOT
What/When to reverse audit entries?
• Leave on books all year
– Most common
– Explain to Board that these are audit adjustments.
• Reverse accruals and accrue as needed during year
– Prepaid Insurance, Accounts Payable, Prepaid Expenses, Other Liabilities,
Deferred Income
– Be sure and not distort next year’s income
• Reverse specific adjustments – to a separate equity account
WINNERS CIRCLE
(Some interesting facts about
this industry)
WASHINGTON
TH
– 9 IN THE US!!
GROWTH INDUSTRY
LOOK AT THE $$$ !!!
THIS IS YOUR INDUSTRY!
WWW.HOACPA.COM
Thank you!!!