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At the close of this session, you will be able to:




Understand the concept behind the due to/due from
funds
Understand the importance of managing the
contributions and expenses for the replacement reserve
fund
Tax implications of due to/due from replacement
reserves
Better educate the Board on the significance of the due
to/due from funds
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 This
occurs when the replacement reserve
equity does not balance with the
corresponding assets and liabilities on the
balance sheet
 When
there is not enough cash to pay
operating expenses some associations will
“borrow” from reserves to pay normal
operating expenses
 If
funds are borrowed from the reserves,
plans should be made to repay the reserves
as soon as practicable
3
 If
the association does not have the ability
to repay borrowed funds by the end of the
fiscal year, then a budget line needs to be
set up to “payback those funds in
subsequent years
 Annually
evaluate assessment in regards to
budgeted contributions
 Annually
evaluate reserve contributions per
reserve study
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Balance Sheet - Assets

Reserve cash



Reserve investments





Savings account
Money markets
Certificates of Deposit
Treasury bills and other securities
Prepaid expenses
Accrued interest – reserves
Other reserve receivables
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Balance Sheet – Liabilities & Equity

Liabilities



Reserve – accounts payable
Reserve – notes payable
Equity


General replacement reserves
Restricted reserve funds
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Statement of Revenues, Expenses and
Changes in Fund Balances



Reserve contributions
Reserve interest income
Other contributions to reserves




Roadway reimbursements
Energy savings reimbursement
Special assessments
Reserve expenditures
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



Have a current reserve study done by an
independent engineering firm (recommended
every five years)
Have enough cash in the replacement reserve
for future major repairs and replacements
Set assessments to an adequate level to fund
according to the reserve study
Cash and investments accounts need to be
designated as operating OR reserves
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


Transfer reserve contributions on a monthly
basis
Reimburse operating cash account monthly
for reserve expenditures
Recognize interest earned on reserve cash
and investments in the replacement reserves
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
Form 1120
 Federally taxed at a rate of 15% on nonmembership revenues
 IRS strict on what is classified as a reserve
expenditure

Form 1120-H
 Federally taxed at a rate of 30% on non-exempt
revenues
 IRS more lenient on what can be classified as a
reserve expenditure
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 This
occurs when the replacement reserve
equity does not balance with the
corresponding assets and liabilities on the
balance sheet
 When
there is not enough cash to pay
operating expenses some associations will
“borrow” from reserves to pay normal
operating expenses
 If
funds are borrowed from the reserves,
plans should be made to repay the reserves
as soon as practicable
15
 If
the association does not have the ability
to repay borrowed funds by the end of the
fiscal year, then a budget line needs to be
set up to “payback those funds in
subsequent years
 Annually
evaluate assessment in regards to
budgeted contributions
 Annually
evaluate reserve contributions per
reserve study
16





The concept of the due to/from is comparing the
replacement reserve fund with the corresponding assets
and liabilities
Because of the timing of transfers, it is often necessary to
track the due to/due from on the financial statements
Significant due to/from can result in tax implications and
SAS115 comments
It is vital to know the advantages and disadvantages of
filing Form 1120 versus Form 1120-H
Due to/from allows the Board to assess whether the
funding of their replacement reserves is adequate
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