Reserve Funds & Prepaid Assessments - Financial Statement Presentation

What is the proper way to disclose reserve fund activities on the Financial Statements? I am in process of performing a self review of our financials for the past 2 years and I'd like to know appropriate methods to account and present fund balances.

Currently, our Cash & Equivalents are distinguished between reserve funds and operating accounts by type of account (checking, CD, Money Market, etc.) Offseting the asset we have equity balances broken out by specific reserve item (i.e. painting, pool, clubhouse etc.). These amounts are equal and agree to the bank statements.

In summary 4 entries record funds allocated to reserves from regular assessments received. 1) Operating Cash is reduced, 2)Reserve Cash is increased. Entries are also made to 3) increase specific reserve fund balances (Credit to equity) and 4) Increase reserve expense (Debit Expense).

When specific disbursements are made from reserves to a vendor, the money comes out of the reserve cash account, with an offest (reduction) to reduce the specific reserve (equity) balance. (No P&L effect).

Our books are kept one way (modified accrual basis), but when financials are presented to homeowners certain amounts are reclassified to adjust and/or correct the QuickBooks database for reserves and prepaid assessments & receivables. The need to create a set of Excel financial statements is convoluted and questionable.

Recommendations are sought so I can prepare a set of recommendations to the board in conjunction with the self-review.

I am not an accountant, so I won't state the answer in a way that relates directly to your question.

However, whatever you do, don't mix the money from assessments and reserve funds. Make sure they don't go in the same bank account and then they are stated separately on the statements. If you mix the funds, then the reserve funds become the same as operating cash and they are taxable at the end of the year. The one tax break the IRS gives HOAs is that the reserve fund can be kept over the fiscal year without a tax burden.

There are some very specific tax rulings on this subject. I saw a reference in these forums recently to a white paper that was funny, but informative. Most accountants don't know these laws very well and it can really come back to bite you if you have an IRS tax audit.

I don't know if that even comes close to answer your question.