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Subject: Accrual Accounting
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Author Messages
ChuckB5
(Florida)

Posts:4


01/01/2020 1:54 PM  
My Florida HOA has utilized cash basis accounting since 1985, plus they have never performed an audit even though Fl statutes required a compilation. We finally hired a bookkeeper that will be certified by the end of February, has 7 year’s experience, AA degree in finance and currently working towards an MBA in Business. I am so thankful. I would like to switch them from a cash basis to accrual accounting, to account for prepayments, track delinquencies and reserves, and just to get a better picture of the health of the HOA. Chapter 720.303 does not specify the method of accounting and reads in part “…shall prepare or cause to be prepared a complete set of financial statements in accordance with generally accepted accounting principles as adopted by the Board of Accountancy”. I impute this to mean accrual accounting but that may be wishful thinking.

Here is my question: I seem to remember reading once, per Florida Administrative Code (I think) that a certified or licensed bookkeeper must abide by GAAP and thus must use accrual accounting. Is this correct?
KellyM3
(North Carolina)

Posts:1529


01/01/2020 2:25 PM  
Hi Chuck,

Seems you have a headstart on the rest of the board regarding Accrual accounting at Florida Law. Why not teach us what you learn? It's an interesting policy decision.
GenoS
(Florida)

Posts:3924


01/01/2020 7:06 PM  
Chucj, this webpage agrees with you. The last comment on the page by "Dan T" says in relation to "accrual" that:

"It's referred to in the section regarding annual financial reporting > refers to GAAP, does not specifically say accural - but this is what it means."

Both the condo and the HOA statutes say the same thing (FS 718 and FS 720 respectively).

When we switched to the bookkeeping services of a management company at the beginning of 2019, we noticed our monthly financial statements looked different than the ones we had been getting from the previous bookkeeper. When we asked the management company about it they said they employed a "modified accrual" scheme. Apparently they did this for all of their client associations despite the fact that a modified accrual accounting system DOES NOT COMPLY WITH GAAP.We terminated the management company after only 6 months for that and other reasons. A few people wanted to file an official complaint with the state's "Division of Business and Professional Responsibility" against both the company and our CAM. That idea didn't appeal to enough people on the board, however, so we never did file any complaints.
MarkW18


Posts:1290


01/01/2020 7:39 PM  
I used the modified accrual system as well as every MC I ever worked for. You reference says not generally used for "public" companies. HOA's are NOT public, but private corporations.
GenoS
(Florida)

Posts:3924


01/01/2020 7:56 PM  
Under Special Considerations it says it's not commonly used by public companies since it doesn't comply with GAAP. It's the "comply with GAAP" part that's relevant because FS 720.303(7)(a) says,
"An association that meets the criteria of this paragraph shall prepare or cause to be prepared a complete set of financial statements in accordance with generally accepted accounting principles as adopted by the Board of Accountancy."

Note that GAAP compliance seems to be required. Now that section is in relation to the year-end financial report. I'm no accountant. Is it possible to provide modified-accrual reporting for the year and then whip the year-end reports into accrual (GAAP) shape?

We did find the monthly financials prepared according to modified accrual accounting methods more difficult to digest than the ones we had been used to getting.
MarkW18


Posts:1290


01/01/2020 8:13 PM  
Posted By GenoS on 01/01/2020 7:56 PM
Under Special Considerations it says it's not commonly used by public companies since it doesn't comply with GAAP. It's the "comply with GAAP" part that's relevant because FS 720.303(7)(a) says,
"An association that meets the criteria of this paragraph shall prepare or cause to be prepared a complete set of financial statements in accordance with generally accepted accounting principles as adopted by the Board of Accountancy."

Note that GAAP compliance seems to be required. Now that section is in relation to the year-end financial report. I'm no accountant. Is it possible to provide modified-accrual reporting for the year and then whip the year-end reports into accrual (GAAP) shape?

We did find the monthly financials prepared according to modified accrual accounting methods more difficult to digest than the ones we had been used to getting.



I had used it for many years and the CPA's we used NEVER had an issue when doing the year-end review, using GAAP standards. Very simple system to understand.
KellyM3
(North Carolina)

Posts:1529


01/02/2020 10:45 AM  
Just a note....people are coming onto this forum and having you do their homework.
TimB4
(Virginia)

Posts:16850


01/02/2020 11:50 AM  
Both cash accounting and accrual accounting methods are approved and seen as GAAP (generally accepted accounting principals) compliant.

Most HOAs that I've seen are on a cash basis accounting.


Cash basis, in a nutshell, is you have funds when money/checks are deposited and you pay expenses when you write a check.

Accrual basis, in a nutshell, at the start of the year, you have all the funds you expect to receive (regardless of actually receiving any assessments). All expenses are considered spent when you sign a contract for the services (regardless when the actual bill arrives and check is written).

In other words, cash basis is how most of us run their household funds (I gain money when I get paid and I lost money when I spend it).


For more info, see:

Cash Basis Accounting vs. Accrual Accounting



Personally, unless you have a lot of assets (condos perhaps) I think cash basis is the way to go.
ChuckB5
(Florida)

Posts:4


01/02/2020 11:52 AM  
After a little more digging, I’ve finally determined that the only accounting method accepted by GAAP is the accrual basis accounting method. Which is what GinoS (Florida) has confirmed. I have experience with three different management companies and they each tell me they only use accrual basis accounting. I suspect I’ll have to reach out to a CPA specializing in HOA’s for confirmation that a licensed bookkeeper must conform to GAAP accounting principles and by default use accrual accounting. I am on other boards so I’ll see what I can conclude and share my findings.
MarkW18


Posts:1290


01/02/2020 12:33 PM  
I had worked for a number of MC's and had my own company. Everyone used a modified cash accrual system.

In a modified cash accrual system, income is realized when billed and expenses are realized when paid. HOA's bill the same amount to owners on a monthly basis. Expenses get paid once funds are received.

Smaller HOA's may use cash basis because they don't have a lot of experience with accounting. Smaller accounting firms or bookkeepers may use Quickbooks to do their accounting.

We set the software up as accrual for receivables and cash for payables.
GenoS
(Florida)

Posts:3924


01/02/2020 1:44 PM  
Posted By ChuckB5 on 01/02/2020 11:52 AM
After a little more digging, I’ve finally determined that the only accounting method accepted by GAAP is the accrual basis accounting method. Which is what GinoS (Florida) has confirmed. I have experience with three different management companies and they each tell me they only use accrual basis accounting. I suspect I’ll have to reach out to a CPA specializing in HOA’s for confirmation that a licensed bookkeeper must conform to GAAP accounting principles and by default use accrual accounting. I am on other boards so I’ll see what I can conclude and share my findings.

Yes, please do share whatever you find out, Chuck.

In my HOA we have a "XYZ HOA Accounting and Financial Procedures" document enacted by the board almost a decade ago. It was written by a board member at the time who was a CPA. Before he retired he worked for over 20 years in the accounting department of a Fortune 100 company at its headquarters. On the first page it says,

"The accounting procedures used shall conform to Generally Accepted Accounting Principles (GAAP) and the Florida Statutes governing Homeowners Associations to the extent possible to ensure accuracy of information and compliance with external standards. These standards shall be adhered to by the Treasurer and/or others acting on behalf of the XYZ HOA as well as any employees or outside organizations employed to perform accounting and financial services."

"The XYZ HOA shall use the accrual basis of accounting. The accrual basis is the method of accounting whereby revenue and expenses are identified with specific periods of time, such as a month or year, and are recorded as incurred. This method of recording revenue and expenses is without regard to date of receipt or payment of cash."

The management company we hired was aware of this policy before we hired them. When we pointed out that the modified-accrual basis of accounting they were using was at odds with our long-standing policies and procedures, they refused to acommodate us. They were supposed to be working for us, not the other way around. That was about 50% of the reason we got rid of them.
ChuckB5
(Florida)

Posts:4


01/02/2020 1:55 PM  
I can't imagine any management company not using accrual accounting, they have to meet Florida requirements, thereby GAAP, of which any modified accounting is not recognized by GAAP.
ChuckB5
(Florida)

Posts:4


01/02/2020 1:56 PM  
I understand but when you want to true picture of the financial health of a company, accrual is the way to go, it provides information not available in cash accounting. It’s even more necessary when you have receivables, payables, doubtful accounts, reserve accounts, etc.

I reached out to a CPA for another property and this is what I got. Per Fl Statutes it has to be accrual accounting for required annual compilation but can be cash accounting for all other reports. Thus the answer to my question is: A certified or licensed bookkeeper must use accrual accounting for the annual compilation to be in compliance with GAAP rules but can use cash accounting at all other times.

Thanks for everyone’s input!
JohnC46
(South Carolina)

Posts:9672


01/02/2020 4:14 PM  
While far from an accounting person, most of us personally and many small businesses operate on a Cash Basis which is money in, money out regardless of when in/out.

Accrual Accounting, preferred by CPA's and accountants, is more of a structured basis. As an example, an HOA expects to collect $12K per year in dues thus $1K per month. The months income/expenses are shown/compared to the expected $1K per month versus how do we stand for that month.

I am now in over my head..........LOL
EdC5
(Florida)

Posts:116


01/03/2020 7:27 AM  
I've worked with MCs that have used cash, modified accrual, and accrual accounting. It depended on the needs and desires of the association in question. I managed a medium-sized association with a fair bit of assets and amenities, and some "strange" assessment issues; that community was definitely set up as accrual (especially since we wanted the tax advantages of "write-offs"). Where I live (and worked for the MC), we have fewer than 65 homes and a total budget of less than $30K; we use cash accounting as we have no amenities and have few bills (landscaping, street lights, insurance, MC).

Edward J Cooke, CMCA, LCAM
HansE
(California)

Posts:9


01/08/2020 10:33 AM  
Hello,

BS in Accounting (no not CPA)
Not sure about Florida Code but in general there are no hard laws about following GAAP (Generally accepted accounting principles) while most companies follow some of the rules almost no company follows ALL of the rules.

To be honest you really only need to follow an accrual basis method if you have net 30 or longer terms (vendor or customer) or if you are depreciating assets (although that one can be tricky).

Though technically most of what an HOA has is an asset; in reality most amenities function more like a liability (like a deferred payment) as you have to replace and make them whole (roof, fence, paint ect.). There could be some notable exceptions like club houses where you charge a fee to use them, or a golf course. In business accounting you really want to see an asset associate itself with a direct revenue stream. A building apricates in value over time, a truck gets you to the job, a machine produces a part that you sell (ect.). In the case of an HOA all of the assets depreciate and then must have that value (relatively speaking) put back in. Making them function like a liability as they do not add value to association (from the perspective of the books) they only take value away.

This is why many HOA's have bad reserve accounts and massive special assessments. They see assets but don't get that they are not producing revenue; only expenses.

I could go into more depth if you would like.

NpS
(Pennsylvania)

Posts:3987


01/08/2020 7:15 PM  
Here's an article to spin your heads a bit more.

https://lsc-pagepro.mydigitalpublication.com/publication/?i=640591&ver=html5&p=36#{%22page%22:%2236%22,%22issue_id%22:640591,%22publication_id%22:%2220613%22}

Sikubali jukumu. Read all posts at your own risk.
NpS
(Pennsylvania)

Posts:3987


01/08/2020 7:23 PM  
"The only accounting method accepted by GAAP, or generally accepted accounting principles, is the accrual basis accounting method. This method applies the matching principle by recording revenue when it is earned and expenses as they occur. Accrual basis, however, isn’t the only accounting method used for presenting financial statements. Cash basis, modified cash basis and income tax basis are other accounting methods, and the financial statements derived form these are called other comprehensive basis of accounting, or OCBOA, statements."

Source: https://yourbusiness.azcentral.com/accounting-method-accepted-under-gaap-9814.html

But if FL requires the use of Generally Accepted Accounting Principles (GAAP), then I would say that OCBOA statements are not sufficient.

Sikubali jukumu. Read all posts at your own risk.
TimB4
(Virginia)

Posts:16850


01/08/2020 8:12 PM  
NP,

that is not entirely accurate. Accrual basis is required to satisfy GAAP for most, but not all cases.

See:

https://www.cliffsnotes.com/study-guides/accounting/accounting-principles-i/principles-of-accounting/generally-accepted-accounting-principles

NpS
(Pennsylvania)

Posts:3987


01/08/2020 8:33 PM  
Posted By TimB4 on 01/08/2020 8:12 PM
NP,

that is not entirely accurate. Accrual basis is required to satisfy GAAP for most, but not all cases.

See:

https://www.cliffsnotes.com/study-guides/accounting/accounting-principles-i/principles-of-accounting/generally-accepted-accounting-principles



Possibly true but I don't think it applies to HOAs.

In fact, according to the article I linked to in my 1st post to this thread, FASB made the largest change to HOA accounting in 30 years. If you get a chance, please read it.

Per the article, the new rules require revenue recognition for Reserves to take place at the time that the money is spent (a.k.a. accrual-based). Every set of HOA books I've seen in the past handle Reserves on a cash-basis. But no. It looks like that's not good anymore. The article goes into quite a bit of detail.

I'd be interested in hearing your thoughts after you've read the article Tim.

Thanks.

Sikubali jukumu. Read all posts at your own risk.
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