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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

• 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 TermsSpecial 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 incomeRECOMMENDED – when large enough and SA

lasts more than one year.

Controls on Other Income

• 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 statementThe 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 theWashington State Chapter of CAI

Working Together to Serve You

Locally and Nationally

www.WSCAI.org425-778-6378

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