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Washington State Chapter
COMMUNITY
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Fun
Things in Accounting
Part 1
• Gayle L. Cagianut, CPA
• June 14,2012 – Managers Only Day
The Life of a Manager
Then…to TOP it off
…Accounting Fun!
Bad Debt, Foreclosure
& Collection Issues
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Accounting for Collection Costs
Bad Debt Write-Off
Allowance for Bad Debts
Recording
Foreclosures/Sheriff’s Sale
Accounting for Collection Costs
Our recommendations when asked ~
• Legal Fee income is billed directly to the unit owner as the
Association is billed.
• Legal Fee income is in a separate income account OR in a
Legal Fee Reimbursement Account (contra expense).
• Legal Fee expenses for collection matters is a separate
expense account from general legal expenses
• Legal Fee Income and Legal Fee – Collection Expense
should net to zero in the same accounting period.
Bad Debt Write-Off
• From an internal control standpoint, the Board should
be aware of and approve any significant bad debt
write-offs. If write-offs are approved based upon the
attorney’s advice, then get that legal advice in writing.
• For bad debt write offs – be sure and give adequate
detail. This internal control procedure is important for
the Board, manager and auditor.
Allowance for Bad Debts
Very important because ~
• It is required by GAAP
• It ensures that the assets of the Association are not
overstated
• It shows that the Board and manager are actively
managing the Association and are aware of the
potential for uncollectible accounts
• It gives a better financial picture for cash flow
management and future budgeting.
Computing the Bad Debt
Allowance
We generally make determination by individual unit
owner accounts. Suggested three standards:
• 100% Collectible – no allowance needed
• Probably/Possibly Collectible – 50% allowance
• Uncollectible – 100% allowance (less 6 months)
Alternately, you could use a percentage of assessments
or a percentage of past due at 60 days, 90 days, and/or
120 days, or give actual known/estimated amounts by
account.
•
Be prepared to defend it!
Foreclosures/Sheriff’s Sale
• Asset on financial statements?
• Does it have value? Is it “impaired” by a mortgage
or redemption period?
• Monthly assessments on foreclosed units?
• Continued assessment & write-off to unit expense
• Rental of unit
• Capture all expenses associated with rental
• TAXABLE income
• Other Issues
• Bank payout to Association - TAXABLE
• True gain by Association if sold?
Special Assessment
Accounting
• Special Assessments with Payment Terms
Special Assessment #1
• There is a special assessment of $1,200
payable at the rate of $100 per month for
twelve months.
Special Assessment #2
• There is special assessment of $100 a month
for twelve months.
Does $100 per month get recorded as
income OR $1,200 at the onset of the SA??
Special Assessments with
Payment Terms Including Interest or
Financing Fee (or Discount)
• Special Assessment #3
• There is a special assessment of $1,200 payable at the
rate of $100 per month for twelve months or the unit
owner can make one payment of $1,100 now.
• Special Assessment #4
• There is another special assessment of $1,200 due now
or the unit owner can make payments of $105.50 per
month (computed with an interest rate of 10%) each
month
Record $100 per month, $105.50 per
month, $1,100, $1,200 or $1,305.50??
Special Assessment
Accounting ISSUES
• Multiple amortization schedules when there
are varying monthly payment amounts and/or
owners choose to pay more or less than
schedule
• When special assessments are tied to loans
• Timing of beginning of SA and beginning of loan
• Paydown of loan principal when payoff occurs
• Reamortization of loan when payoffs occur
MORE Special Assessment
Accounting ISSUES
• Deferred Income – per GAAP
• Separate FUND – alternative to deferred
income
RECOMMENDED – when large enough and SA
lasts more than one year.
Controls on Other Income
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Separation of duties
Independent reconciliation
Random testing
Board approval/verification
We are testing what is NOT there!
Separation of duties
• Best – when two separate people are
involved in any accounting process
Examples:
• One persons keeps the calendar of events,
another person collects the money
• One person makes the deposit, another person
reconciles the deposit with the calendar
Independent reconciliation
• When one independent document is
reconciled with actual monies
Examples:
• A calendar of rentals is compared with deposits.
• An expense related to the income is compared
with the income (e.g. maid service with guest
suite income)
• A record is kept of all name changes and
compared with Move-In fees
Random testing
• Random testing by an unrelated party to the
transaction to ensure that the records are
complete
Examples:
• Board member looks at event calendar and
checks out the event location
• Unannounced visits to guest suite when calendar
shows open nights
Board approval/verification
• This is probably the weakest control, but if the
entire Board sees the income monthly they
will monitor events as they see them – either
Move In/Out, Room Rentals, etc.
• The Board also should take responsibility for
determining the best method to ensure
completeness of income.
Audit Process
• Independence & The Auditor
• Client Representations
• Adjusting Journal Entries – Why should
you care?
• Reading the Audit Report
• Report of Internal Control
Independence & The Auditor
• An auditor must be independent to issue an
opinion on the financial statements
• We cannot audit our own work…thus, we
cannot do accounting or reconciling
• We can post standard adjusting journal entries,
propose corrections of errors, and assist in the
drafting of financial statements
• We cannot do “management” type of
consulting
Independence & The Auditor
• The auditor must approach the audit with an
“Attitude of Skepticism”
• GAAS requirement – Don’t take it personally!
• We are always looking for errors and fraud
• Reminder – the Association is our client
Client Representations
• Financial Statements belong to the
client
• Representation letters are required
• Receipt of signed letters signals audit is
approved and ready for final
• Adjustments/changes must be made
within 60 days of draft report date
Adjusting Journal Entries
• Why do you care (or should you care) about
the AJEs??
• GAAP-prepared, full accrual, “official” financial
statements
• Required that the Board take responsibility for the
financial statements, as adjusted.
• May find errors in accounting procedures or in
financial statement presentation.
Reading the audit report
• Read the footnotes…they should tell you
important things about the numbers on the
financial statement
The most recent reserve study recommended
monthly funding of $5,022 in 2009. The actual
monthly reserve funding was $3,400. However, at
the end of the year three months had not been
funded so there is an amount of $10,200 showing
as due from the operating fund to the replacement
fund.
Look at Operating Fund – What is the
Association’s “Net Worth”
ASSETS MINUS LIABILITIES = FUND
BALANCE
We recommend 1-3 months of operating
expenses
(This is found on the Balance Sheet – also
known as retained earnings or members
equity)
Report of Internal Control
• Required by GAAS (generally accepted
auditing standards)
• Two levels of deficiencies:
• Significant Deficiency
• Material Weakness
• Use this report to strengthen controls within
your management company or Association
So…do you now agree that
Accounting & Auditing of
Associations is more
FUN than the
CIRCUS???
CAI and the
Washington State Chapter of CAI
Working Together to Serve You
Locally and Nationally
www.WSCAI.org
425-778-6378
www.CAIONLINE.ORG
1-888-224-4321