Managerial Accounting for Association Managers

By David Schuknecht, CMCA, AMS

Community association managers wear many hats, some of which are not even visible to the board members and the homeowners of the associations they manage. The board may never know of the phone call held with an owner that completely changed the way the owner felt about the community or the contractor who understood the expectations more clearly when the manager pulled them aside. One of such items that is more behind the scenes is the financials of the association.

Most board members and homeowners do not understand the attention to detail required and how all the transactions affect one another to produce the final product, with many not understanding the final product and merely read from the summary page prepared by the manager. This column will explore some of the more basic ideas to better understand the financials for both managers and board members.

"DEPENDING ON HOW THE INFORMATION IS MEANT TO BE SHARED AND ACTED UPON MAY DICTATE HOW THE FINANCIAL STATEMENTS ARE PREPARED."

The first thing that needs to be determined with the preparation and review of any financial document is the users the document is intended for and how the document was prepared. There will be three different users of financial documents, stakeholders, internal users, and external users, and External Users in any business. For a community association, the stakeholders are your homeowners as they have a vested interest in the financial health of the organization, the internal users would be the board members and management as they make decisions that directly affect the internal operations, and finally, the external users would be mortgage lenders, lenders to community associations, and prospective purchasers.

Depending on how the information is meant to be shared and acted upon may dictate how the financial statements are prepared. The first is the one people are most familiar with, financial accounting. Financial accounting focuses on developing and communicating information to external users by helping them determine whether the organization is in good financial health and if the operations are sustainable. On the other hand, managerial accounting is primarily concerned with reporting for internal users, especially management. The chart below provides a quick summary of the differences between the two.

Refer to visual article online for chart

Most community associations maintain their books on what is known as modified cash or modified accrual basis. What that means in simple terms is that the income is accrued while the expenses are tracked on a cash basis. However, when communities complete their annual financial review as required by Civil Code 5305 (Unless the governing documents impose more stringent standards, a review of the financial statement of the association shall be prepared in accordance with generally accepted accounting principles by a licensee of the California Board of Accountancy for any fiscal year in which the gross income to the association exceeds seventy-five thousand dollars ($75,000). A copy of the review of the financial statement shall be distributed to the members within 120 days after the close of each fiscal year, by individual delivery pursuant to Section 4040.) the US GAAP requirement is met.

Managerial accounting comes into play for community associations with another annually prepared report, the reserve study. The previous chart indicates the type of information included in managerial accounting to have project costing and estimates and a timeline for repair. CAI business partners such as SCT Reserve Consultants, Strategic Reserves, and Association Reserves are always willing to work with boards and managers to adjust various associations' assumptions and planning to reflect their goals best.

General Accounting Fundamentals

Most individuals understand the basics: the balance sheet and income statement, but many do not realize the relationship between the two. Below that information will be briefly laid out and how it relates to the excess income resolution (voted on annually by the membership) as annual meeting season begins for many associations.

The balance sheet reports at a certain point in time the resources available to the association (the assets), the association's financial obligations (liabilities), and the equity of the owners (equity). The formula followed is that Assets = Liabilities + Owner's Equity. In association record keeping very frequently, the only liability your association may have is prepaid assessments; in some situations, taxes payable, insurance payable, and accounts payables may be included as well.

Refer to visual article online for chart

The income statement reports, for a specific interval, the net assets generated through business (assessments and other income), net assets consumed (expenses), and the difference, which is referred to as net income.

Income Statement Revenue - Reserve Transfer = Gross Profit - Expenses = Net Income - Dividends = Changes in Retained Earnings for the Year

IRS Revenue Ruling 70-604 takes place in the final part of the Income Statement, Dividends, and Changes in Retained Earnings. The full text of the ruling is below:

"A condominium management corporation assesses its stockholder-owners for the purposes of managing, operating, maintaining, and replacing the common elements of the condominium property. This is the sole activity of the corporation and its by-laws do not authorize it to engage in any other activity.

A meeting is held each year by the stockholder-owners of the corporation, at which they decide what is to be done with any excess assessments not actually used for the purposes described above, i.e., they decide either to return the excess to themselves or to have the excess applied against the following year's assessments.

Held, the excess assessments for the taxable year over and above the actual expenses paid or incurred for the purposes described above are not taxable income to the corporation, since such excess, in effect, has been returned to the stockholder-owners."

The owners effectively vote as the corporation's shareholders to either return the money to themselves or carry the amount forward to offset future expenditures. If the owners elect to carry the funds forward to future years, then net income will equal the change in retained earnings; if they select to have the money returned to them, the money returned will be the difference between net income and retained earnings. Any change in retained earnings, positive or negative, will affect the balance sheet's equity portion. No different from the dividends for a corporation, any such return or distribution to owners can only occur in years with a positive net income.

David J. Schuknecht, CMCA, AMS, is a community manager at Personalized Property Management. He an be reached at (760) 3259500, Ext. 225.