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| Roger D. Perry Certified Public Accountant |
FINANCIAL REPORTING ISSUES
Many times I am asked should our association have an annual audit and my response is, “Barring any requirement by a state condominium act, what do your by-laws say?”
Usually the by-laws address the financial reporting requirements of the association to its members and may require annual financial statements to be audited, reviewed or compiled by an independent accountant.
AUDIT SERVICES - Provides the highest level of financial statement assurance. Audits are engagements where a CPA provides an opinion about the fairness of a financial statement that has been prepared according to generally accepted accounting principles (GAAP). The general structure and document requirements of an audit are governed by the American Institute of Certified Public Accountants (AICPA) and the Auditing Standards Board and are subject to strict peer review standards.
REVIEW SERVICES - Provides only limited assurance about the financial statements. Although a review is also governed by the AICPA and subject to peer review standards, it is substantially less in scope than an audit. It consists principally of inquiries of entity personnel and analytical procedures applied to the financial data. The limited assurance is in the form of negative assurance whereby the CPA will report that he is unaware of any material modifications needed in order for the financial statements to be in conformity with GAAP.
COMPILATION SERVICES - Provides no assurance about the financial statements. A compilation is an engagement where the CPA presents, in the form of financial statements, information that is supplied by the entity and performs few procedures outside file documentation. The accountant’s report provides no assurance and clearly states that the financials are the entity’s presentation.
BASIS OF ACCOUNTING - Another question that arises with associations is what basis of accounting should be used. The two methods of accounting that are usually used by associations are the cash basis or the accrual basis.
CASH BASIS - Revenue is recognized when received (when fees are deposited into the bank) and expenses are recorded when they are paid in cash. The most straightforward basis of accounting to practice and to understand.
ACCRUAL BASIS - Revenue is recognized when it is realized/earned/due without regard to when payment is received and expenses are recognized when incurred, without regard as to when payment is made. This method provides a better matching of revenues to expenses but requires specialized accrual based accounting procedures (integrated accounts receivable and accounts
payable details).
Most associations use the cash basis of accounting for their monthly or quarterly interim financial
statements. The majority of the homeowners and board of directors better understand this method.
If the association has an annual audit, review or compiled financial statement, general accepted accounting principles (GAAP) require the accrual basis of accounting.
TAX ISSUES - Many associations and board of directors think that their association is tax exempt for federal income tax purposes. This is incorrect. Only certain types of membership income are exempt.
Associations are taxed under Internal Revenue Code Section 528 or 277. There are opportunities for associations under either code section for tax planning but this should be done with the advice of a competent tax professional. I would recommend that any association that has a sale of common property or collects revenue from a source other than fees or assessments from its members consult with a competent tax advisor regarding the taxability of such revenues.