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  1. 303 Member Assessments, Other Income, and Receivables

    Overview of Accounting Standards

    303.1 Accounting standards for
    receivables relate primarily to the valuation of receivables and their
    appropriate classification in the financial statements. Accordingly,
    they relate to determining
    • (a) the amount of the receivable
    • that is due to the CIRA, (b) when the receivable should be recognized as
    • an asset, and (c) whether the receivable should be adjusted to reflect
    • the possibility that it may not be collected. In addition, GAAP requires
    • certain disclosures to be made about amounts due from related parties,
    • amounts that may be uncollectible, amounts representing concentrations
    • of credit risk, and the fair value of certain receivables.
  2. Member Assessments

    303.2 The CIRA's annual budget is
    the basis for establishing the annual assessment required from each unit
    owner to cover the CIRA's operating expenses, plus a potential
    allocation to the replacement fund (see discussion beginning at
    paragraph 303.10).
    The assessments (sometimes referred to as “maintenance fees,” “carrying
    charges,” or, in the case of cooperatives, “rent”) typically are
    payable monthly, usually on the first of the month (but may also be
    billed quarterly or annually), and should be reported in the CIRA's
    financial statements in the period that they are assessed as either
    revenue or deferred revenue. (However, time-share developments typically
    bill their dues on a quarterly or annual basis.) As discussed in
    Chapter 5,
    in certain circumstances, if assessments at the end of the year exceed
    actual expenses, the excess is not taxable if the association members
    elect to either (a) refund the excess to the members or (b) apply the
    excess against the following year's assessments. For financial
    reporting, however, the excess assessments should be recorded as
    revenue. The members' tax election should be treated as follows in the
    CIRA's financial statements:
    • • If the members elect to refund the excess assessments, the
    • authors believe that the refund should be shown as a reduction of equity
    • in the statement of changes in fund balance (or statement of changes in
    • members' equity if the CIRA presents its financial statements using a
    • nonfund approach) in the period in which the refund is authorized. In
    • other words, equity should be debited, and cash or a payable account
    • should be credited.

    • • If the members elect to apply the
    • excess against the following year's assessments, no entry should be
    • made in the CIRA's financial statements, and the excess of revenue over
    • expenses for financial reporting in the current year will exceed amounts
    • reported in the CIRA's tax return. (The difference between assessments
    • for financial and tax purposes should be shown as a Schedule M-1 or M-3
    • adjustment if the CIRA files Form 1120.) Section 311 discusses providing deferred income taxes on the difference between financial and tax amounts.
  3. If the strict criteria discussed beginning in paragraph 503.28 are met, members may elect to transfer the excess to replacement funds
    In that case, the transfer should be recorded as described beginning in paragraph 306.5 in the period in which it is authorized.
  4. 303.3 Most unit owners pay their assessments on a timely basis since unpaid assessments constitute a lien on the units.
    • Thus, at the balance sheet date,
    • assessments receivable usually are not material and may only represent
    • billings for the most recent month. A significant balance in assessments
    • receivable at the balance sheet date generally signals delinquent
    • accounts.
  5. 303.4 Delinquent Assessments
    A CIRA's governing documents normally specify penalties for delinquent
    assessments, such as late fees, service charges, or interest. Fees for
    delinquent payments should be recorded in a separate income account,
    such as “Late fees” or “Interest on delinquent assessments.” (If they
    are not material, however, fees for delinquent assessments may be added
    to revenue from member assessments.)
    • The CIRA's accounting records
    • should segregate revenues from late fees and interest on delinquent
    • accounts from other interest not received from members, such as interest
    • on investments, because separate types of income are subject to
    • different tax treatment. (See Exhibit 5-9.)
    • For financial statement presentation, however, late fees and interest
    • on delinquent accounts may be combined with other interest and presented
    • as one line item, such as “Interest and late fees.” In some cases, the
    • documents may provide that default in payment of assessments accelerates
    • the remaining assessments for the year, and the entire balance is due
    • and payable.
  6. 303.5 FASB ASC 310-10-35-9 through 35-11 (formerly SFAS No. 5, Accounting for Contingencies)
    requires losses from uncollectible receivables to be accrued if a loss
    is probable and the amount of the loss can be reasonably estimated.
    • The accrual must be made even though the particular receivables that are
    • uncollectible may not be identifiable. Some accountants believe,
    • however, that an allowance for uncollectible receivables need not be
    • recorded in a CIRA's financial statements since their governing
    • documents provide various other remedies for delinquent assessments,
    • including the filing of liens, foreclosing on the unit owner, and
    • obtaining judgment on other assets of the unit owner. However, liens do
    • not ensure the collectibility of the receivables. Since liens filed by
    • the CIRA for unpaid assessments may be subordinate to tax liens and
    • unpaid amounts on first mortgages, an allowance for uncollectible
    • accounts may be necessary if it is doubtful that sufficient equity in a
    • unit exists to support the collectibility of past due amounts
  7. 303.6 Critically evaluating
    collectibility is especially significant if the CIRAs are geographically
    located in areas of the country that have suffered economic downturns.
    • When such economic downturns
    • occur, delinquencies of member assessments have occasionally been so
    • severe that some CIRAs faced going concern problems. Delinquent
    • assessments also are common in the time-share industry due to the large
    • number of owners in a development. Even in a good economy, significant
    • construction defects can diminish the value of a development by causing
    • very high expense in the form of repairs and litigation costs, which
    • could potentially motivate members to stop paying their assessments due
    • to the drop in value of their units. Optimistically, however, the recent
    • passage of the Bankruptcy Abuse Prevention and Consumer Protection Act
    • of 2005 is expected to have a positive impact for CIRAs by increasing
    • the amount of delinquent assessments that will be collectible from unit
    • owners who file for bankruptcy. See the discussion of bankruptcy
    • legislation in section 101.
  8. 303.7 Generally accepted accounting principles require uncollectible accounts to be accounted for using the allowance method.
    • The specific write-off method,
    • which is generally required for tax purposes, is a departure from GAAP.
    • Thus, in GAAP financial statements, the specific write-off method is
    • appropriate only if estimated uncollectible assessments at the balance
    • sheet date are not material.
  9. 303.8 FASB ASC 310-10-45-4 (formerly APB Opinion No. 12)
    states that allowances for losses on receivables should be deducted
    from the related receivables (rather than reporting them as liabilities)
    and that the allowances should be disclosed. The disclosure usually is
    made by expanding the caption for receivables in the balance sheet. For
    Assessments receivable, less allowance for uncollectible assessments of $5,800 $ 22,300
  10. 303.9 Assessments Received in Advance Some unit owners may pay their assessments in advance. As mentioned in paragraph 303.2,
    time-share developments typically bill their dues on a quarterly or
    annual basis. (Other CIRAs may also bill their assessments less
    frequently than monthly.) Often
    • the annual dues billing is made 60 days before the budget year actually
    • begins. Many members prepay the entire amount. Prepaid amounts at the
    • balance sheet date should be classified as a liability—deferred revenue.
    • (If a classified balance sheet is presented, it generally would be
    • appropriate to classify assessments received in advance as a current
    • liability.) The authors do not believe that amounts billed but not
    • received by year end should be recorded as receivables because the
    • services the assessments pay for will not have been rendered by year
    • end.
  11. 303.10 Allocating Assessments to Replacement Funds
    If CIRAs assess their members for future repair and replacement of
    the common property, their budgets generally will specify the portion of
    the assessments to be allocated for that purpose. (Sometimes, however,
    they will levy special assessments for repairs and replacements. See
    discussion beginning in paragraph 303.12.) Amounts assessed for normal operations should be accounted for
    • separately from amounts assessed for future major repairs and
    • replacements. Thus, as assessments are billed, assessment revenue, which
    • is based upon budgets should be allocated between operations and the
    • replacement fund as budgeted (regardless of the amount transferred to
    • the replacement fund). If the CIRA prepares its financial statements on a
    • fund basis, the portion of assessments allocated for repairs and
    • replacements should be reported as revenue of that fund. If a nonfund
    • approach is used, assessment revenue should be allocated to separate
    • accounts in the statement of revenues and expenses, such as “Member
    • assessments—operations” and “Member assessments—future major repairs and
    • replacements.
  12. 303.11 Assessment revenue is
    allocated between operations and repairs and replacements, but
    assessments receivable, assessments received in advance, and late
    charges and interest for delinquent assessments are typically considered
    to relate solely to operations. Thus,
    • for example, financial statements
    • of the replacement fund would record cash (or a combination of cash and a
    • receivable if the budgeted allocations had not already been
    • transferred) from the operating fund equal to the amount of assessments
    • for repairs and replacements actually assessed as authorized in the
    • budget. Transfers between operating and replacement funds are discussed
    • beginning in paragraph 306.5.
  13. Special Assessments

    303.12 CIRAs generally have the
    authority to levy special assessments, subject to unit owner approval in
    some circumstances, as specified in their governing documents or state
    statutes. Frequently, CIRAs levy special assessments to fund future
    major repairs and replacements as an alternative to or in addition to
    regular monthly assessments. They also may levy special assessments to
    • operating deficits or other
    • significant expenses, such as litigation costs, or to provide for
    • unanticipated expenses (sometimes referred to as contingency reserves).
    • Unanticipated expenses can include (a) funds to cover a specific
    • unanticipated event, such as to replace leaking pipes, and (b) funds to
    • build up or repay the CIRA's contingency reserves. Special assessments
    • should be reported as revenue in the CIRA's financial statements in the
    • period they are levied unless the special assessments are designated for
    • specific expenditures that have not yet been incurred. The special
    • assessment revenue should be reported separately from assessments for
    • normal operations, if material. If the CIRA prepares its financial
    • statements using fund accounting, the special assessment activity should
    • be recorded in the fund for which the activity is most associated.
    • Assessments for future major repairs and replacements and for litigation
    • costs of developer suits for warranty claims generally are recorded in
    • the replacement fund.
  14. 303.13 FASB ASC 972-430-25-1 (formerly the AICPA guide, Paragraph 4.12)
    does not provide detailed guidance on the criteria for recognizing
    special assessments as either revenue or deferred revenue beyond stating
    that deferred revenue may be recorded for special assessments
    designated for specific costs that have not yet been incurred, and that
    such amounts should not be reported as revenue unless the corresponding
    liabilities and expenses are reported. The authors believe that special
    assessments should
    • be recorded as revenue in the period they are levied except in the
    • limited circumstances when the CIRA has identified the need for specific
    • future expenses, but they have not yet been incurred. In the authors'
    • opinion, the key to determining whether it is appropriate to defer
    • special assessment revenue depends on the specificity of the need to
    • make future expenses. For example, if the CIRA levies special
    • assessments at the time a particular major repair or replacement of the
    • common property is needed, such as roof repair, the special assessment
    • revenue generally should be reported as deferred revenue until the
    • corresponding liabilities for the repair are incurred. In contrast, if
    • the CIRA levies special assessments periodically over the estimated life
    • of the common property for as yet undetermined repairs that will be
    • required in some future period, the special assessment revenue generally
    • should be reported as revenue in the period levied.
  15. 303.14 Generally, expenses for
    which special assessments are levied are expected to be incurred within a
    relatively short period after the assessments are levied, such as a
    year. (An exception can occur when debt financing, which is secured by
    special assessments, is incurred by the CIRA. See discussion beginning
    at paragraph 309.7.) However, the length of the period between
    • levying the special assessment and incurring the related expenses is not
    • necessarily a determining factor for recording the assessments either
    • as revenue or as deferred revenue. For example, a CIRA involved in a
    • lawsuit may levy special assessments to cover the expected costs of
    • litigation. The authors believe the special assessment revenue should be
    • deferred in that case and recognized as revenue as the related
    • litigation costs are incurred, even though settlement is not expected
    • until several years in the future.
  16. 303.15 Applying the preceding
    criteria obviously involves judgment, and gray areas exist. However, the
    authors believe special assessments levied for the following purposes
    should be recognized as revenue in the period they are assessed:
    • Special assessments to cover operating deficits or to raise additional working capital

    • Special assessments for unanticipated expenses (that is, for “contingency reserves”)

    • • Special assessments to fund a program for major repairs and
    • replacements of the common property (rather than for specifically
    • identified repairs)

    • Special assessments to cover any expenses that have already been incurred
  17. 303.16 Financial Statement Disclosures FASB ASC 972-605-50-1 (formerly Paragraph 4.22 of the AICPA guide) requires the proposed use for funds collected from special assessments to be
    • disclosed. If special assessment revenue is deferred, the authors also
    • recommend disclosing an estimate of when the related expenses are
    • expected to be incurred.
  18. 303.17 Refunds of Excess Special Assessments
    Sometimes special assessments may exceed the specific expenses for
    which they were levied, and the CIRA may elect to return the excess to
    its members. In those circumstances, the authors believe
    • that the refund should be reported
    • only in the statement of changes in fund balance (or the statement of
    • changes in members' equity, if the CIRA uses a nonfund reporting
    • approach) as a return of capital in the period in which the refund is
    • authorized. (See paragraph 310.4.)
  19. 303.18 Income Tax Considerations
    For income tax purposes, special assessments may be treated as
    contributions of capital provided certain criteria are met. (See
    discussion beginning in paragraph 501.11.)
    • In those circumstances, a permanent difference between financial and tax
    • reporting is created since the special assessments will never be
    • reported as income in the CIRA's tax return, and deferred income taxes
    • are not required.
  20. Developer Receivables

    303.19 Assessments As explained in Chapter 2,
    prior to the initial sale of each unit, developers are the legal owners
    of any unsold units. Thus, they generally are responsible for their
    proportionate share of the assessments relating to those units. The
    precise nature of their responsibilities varies and is detailed in
    • state laws and the CIRA's governing documents. In addition, the
    • calculation of assessments due from the developer may vary with the
    • phases of the development project. Accordingly, accountants should look
    • to those governing documents and the current development status of the
    • CIRA when determining whether developer receivables have been
    • appropriately recognized in the CIRA's financial statements. Similar to
    • member assessments, developer assessments should be recognized in the
    • financial statements in the period they are assessed.
  21. 303.20 FASB ASC 850-10-50 (formerly SFAS No. 57, Related Party Disclosures)
    requires amounts due from or to related parties to be disclosed. CIRAs'
    financial statements generally make that disclosure by using
    • a balance sheet caption such as “Assessments receivable—developer.”
    • Other disclosures are also required about related party transactions,
    • which are usually provided in the notes to the financial statements. For
    • example, if the developer or any other individual party provides 10% or
    • more of a CIRA's total revenue (i.e., assessments revenue from the
    • developer on unsold lots), that fact and the amount of revenue from each
    • such source should be disclosed. Financial statement disclosures are
    • addressed in the disclosure checklist for CIRAs at HOA-CX-13.
  22. 303.21 Legal Settlements
    CIRAs may file suit on behalf of the unit owners against the developer
    for damages arising from defective construction (see discussion
    beginning at paragraph 304.38)
    or from payment of inadequate assessments relating to units held by the
    developer before their initial sale. Accounting for gain contingencies
    is governed by FASB ASC 450-10 (formerly SFAS No. 5). Contingencies that might result in gains should
    • not be accrued and reported in the financial statements until the gain
    • is realized. Accordingly, if the CIRA is awarded a settlement, it should
    • not be reported as revenue in the financial statements until the
    • developer has consented to the judgment and is not appealing the
    • verdict. (As indicated in paragraph 303.12,
    • legal settlements for warranty claims and related litigation costs
    • generally are reported in the replacement fund if the CIRA's financial
    • statements are presented using fund accounting. Alternatively, the
    • authors recommend that activity related to material legal settlements be
    • recorded in a separate fund, as discussed at paragraph 304.43.)
    • Gain contingencies are required to be disclosed, but the disclosure
    • should not lead to overly optimistic estimates of the likelihood of
    • realizing a gain. Accordingly, the authors believe that the financial
    • statements should not disclose gain contingencies when the possibility
    • of realizing a gain is remote.
  23. 303.22 For income tax purposes,
    developer settlements may be treated as a form of recovery of capital
    provided certain criteria are met. (See discussion beginning at
    paragraph 501.53.) In those circumstances
    • a permanent difference between financial and tax reporting is created
    • since the settlement will never be reported as income in the CIRA's tax
    • return, and deferred income taxes are not required.
  24. Disclosing Concentrations of Credit Risk

    303.23 FASB ASC 825-10 (formerly SFAS No. 107, Disclosures about Fair Value of Financial Instruments)
    primarily requires certain entities to disclose (a) fair values of
    financial instruments for which it is practical to estimate fair values
    and (b) concentrations of credit risk. Disclosure about market risk of
    financial instruments is encouraged,
    • but not required by GAAP. 15 Paragraph 303.24 begins a discussion of the definition of a financial instrument, paragraph 303.27 discusses the definition of credit risk and market risk, and paragraph 303.28
    • begins a discussion of the unique issues related to financial
    • instrument disclosures related to CIRAs. The “CIRA Disclosure Checklist”
    • at HOA-CX-13 includes the relevant disclosures for financial instruments.
  25. 303.24 What Are Financial Instruments?

    A financial instrument represents
    cash, evidence of an ownership interest in an entity, or a contractual
    obligation that requires the exchange of cash or other financial
    instrument (including exchange of a financial instrument on potentially
    unfavorable terms) to another entity. Common types of financial
    instruments include the following:
    • • Cash
    • • Time deposits
    • • Accounts and notes receivable or payable
    • • Investments in common stock
    • • Loans
    • • Accrued expenses receivable or payable
    • • Loan commitments
    • • Financial guarantees
  26. 303.25 Contractual obligations
    that will be settled for consideration other than cash or financial
    instruments are not financial instruments. For example:
    • • A deferred revenue for
    • membership assessments received in advance is settled by providing
    • services for the period covered by the payment. Since settlement is not
    • for cash, the deferral is not a financial instrument. But assessments
    • receivable recognized by the CIRA for expired periods are financial
    • instruments.

    • • Prepaid expense recognized for an
    • advance payment of an insurance premium is settled by receiving coverage
    • for the period covered by the premiums and, therefore, is not a
    • financial instrument. But a billing for a rate adjustment for an expired
    • period is a financial instrument for both the insurer and the insured.
  27. 303.26 Similarly, obligations that
    ultimately will be settled in cash are only considered to be financial
    instruments if one party has a contractual right to receive cash and the
    other party has a contractual obligation to pay cash at the balance
    sheet date. Thus, an accrued liability for compensation is a
    • financial instrument because the
    • employer has an obligation and the employee has a right at the balance
    • sheet date that will ultimately be settled in cash. On the other hand,
    • an accrued liability for a probable loss from a lawsuit is not a
    • financial instrument. Although the defendant has an obligation at the
    • balance sheet date, the plaintiff does not have a right. The liability
    • for a settled lawsuit in which the settlement amount has been accepted
    • is a financial instrument, however.
  28. 303.27 Definition of Credit Risk and Market Risk FASB ASC 825-10-50-20 through 50-22 (formerly SFAS No. 107)
    requires certain disclosures related to credit risk and encourages
    other disclosures related to market risk. Credit risk is the
    • possibility that a loss may occur from the failure of another party to
    • perform according to the terms of the contract. Market risk is the
    • possibility that future changes in market prices may make a financial
    • instrument less valuable or more onerous.
  29. 303.28 Unique Disclosure Considerations for CIRAs
    In the authors' opinion, the financial instruments of most CIRAs will
    be recorded in their financial statements; only infrequently will they
    have financial instruments with off-balance-sheet risk, such as
    financial guarantees. Accordingly, in most cases, market risk associated
    with financial instruments need not be disclosed. Required disclosures
    generally will be limited to concentrations of credit risk associated
    with the following financial instruments:
    • Member assessments receivable

    • Developer receivables

    • •Cash invested in certificates of deposits or money market accounts
    • that is not insured or that is in excess of amounts insured

    • Investments in bonds
  30. 303.29 The most common disclosure
    that CIRAs will be required to make relates to the concentrations of
    credit risk associated with member assessments receivable if that amount
    is material at the balance sheet date. The concentrations of credit
    risk occur since the receivables are from individuals located within the
    same geographic area, and thus the collectibility of the receivables
    would be adversely affected by similar economic conditions. Although
    disclosure is required, it is not onerous. For example, the CIRA's
    financial statements might include the following disclosure in its
    summary of significant accounting policies:

    Assessments Receivable

    • Association members are subject to monthly assessments to provide funds for the
    • Association's operating expenses, future capital acquisitions, and major
    • repairs and replacements. Assessments receivable at the balance sheet
    • date represent fees due from unit owners. The Association's policy is to
    • retain legal counsel and place liens on the properties of unit owners
    • whose assessments are thirty days or more delinquent.
  31. 303.30 Material developer receivables also represent concentrations of credit risk requiring disclosure under FASB ASC 825-10-50 (formerly SFAS No. 107). The authors believe, however, the disclosures
    required by FASB ASC 850-10-50 (formerly SFAS No. 57, Related Party Disclosures) provide all of the information required by FASB ASC 825-10-50 (formerly SFAS No. 107).
  32. 303.31 Disclosing Concentrations of Credit Risk for Cash Deposits
    Cash deposits with banks, broker-dealers, and other financial
    entities are financial instruments with credit risk. Significant
    concentrations of credit risk are required to be disclosed at each date
    for which a balance sheet is presented. Credit risk that exists between
    balance sheet dates, such as the risk associated with a large settlement
    check that is deposited in one account and left there for a period of
    time before it is disbursed, does not have to be disclosed if the risk
    no longer exists at the date of the financial statements. In considering
    the nature of the disclosure, there are three principal issues:
    • What constitutes a significant concentration?

    • •Should the amount of credit risk be based on the balance reported by
    • the financial institution or the financial statement balance?

    • Is the amount of credit risk reduced by FDIC or similar insurance?
  33. 303.32 GAAP does not define significant concentrations of credit risk. The authors believe that whether concentrations of credit risk are significant should be
    • evaluated in the context of the
    • maximum loss that could result. Thus, they believe that disclosure is
    • required if the concentration is significant, regardless of the
    • likelihood of loss. Normal guidelines for evaluating financial statement
    • materiality can be used in evaluating the significance of the maximum
    • loss that could result from the concentration of credit risk.
  34. 303.33 Disclosures about
    concentrations of credit risk for cash deposits should provide
    information about the credit risk caused by maintaining cash deposits in
    financial institutions. That risk is the amount for which the financial
    institution has performance responsibility. The bank generally has no
    • performance responsibility for
    • deposits in transit. Similarly, the substance of outstanding checks is
    • the same as accounts payable, and, in the event of loss, the bank may
    • fail to honor outstanding checks. Thus, the authors believe that the
    • credit risk for cash deposits is for the balance reported by the
    • financial institution.
  35. 303.34 Some deposits with banks
    are insured by the Federal Deposit Insurance Corporation (FDIC). GAAP
    does not address whether the credit risk for cash deposits can be
    reduced by insurance; it does imply that general insurance contracts
    acting as financial guarantees do not reduce the credit risk of loans
    receivable. However,
    • the authors believe that there is a
    • significant difference between guarantees provided by federal and
    • private insurance. Federal insurance will fail only in the event of a
    • national financial catastrophe, and the authors believe that such a
    • negligible risk should be ignored for purposes of disclosing
    • concentrations of credit risk. Furthermore, in a Technical Practice Aid (TIS 2110.06), the AICPA stated that bank statement balances in excess of FDIC-insured amounts represent a credit risk, and that uninsured
    • cash balances should be disclosed if they represent a significant
    • concentration of credit risk. The TPA further states that while a
    • material uninsured cash balance with a single bank should generally be
    • disclosed, numerous immaterial uninsured cash balances on deposit with
    • several banks may not require disclosure. Judgment is necessary to
    • determine whether the aggregate materiality of numerous immaterial
    • uninsured cash balances on deposit with several banks should be
    • disclosed. Accordingly, in the authors' opinion, credit risk for cash
    • deposits should be reduced by related FDIC insurance, and the excess of
    • cash deposits over insured amounts should be disclosed when material.
  36. 303.35 The Securities Investor
    Protection Corporation (SIPC) provides insurance for deposits with
    broker-dealers that is similar to that provided by the FDIC for bank
    deposits. Although the SIPC was created by federal law, it is not a
    federal agency; instead
    • it is a not-for-profit corporation
    • funded by its broker-dealer members. It is permitted to borrow up to $1
    • billion from the U.S. Treasury through the Securities and Exchange
    • Commission if its funds are insufficient. Nevertheless, the authors
    • believe that insurance provided by the SIPC is more analogous to FDIC
    • insurance than to private insurance, and, thus, they believe that SIPC
    • insurance, like FDIC insurance, reduces credit risk for cash deposits.
    • However, such arrangements should be disclosed in the notes to the
    • financial statements to describe the SIPC insurance covering the
    • association's brokerage accounts
  37. 303.36 Some banks are now offering
    other private insurance to cover deposit amounts above the FDIC limit
    as an inducement to get associations to keep larger balances deposited
    with their banks. Generally, these banks will purchase blanket insurance
    coverage to protect the balances of their association customers that
    exceed the FDIC limit.
    • This insurance is purchased by the
    • bank at a “bank” level, as opposed to a “customer” level. (That is, the
    • bank may purchase $100,000,000 of private deposit insurance intended to
    • cover all of its association customers.) In such a situation, the
    • authors believe the practitioner should obtain written confirmation from
    • the bank whether the total additional insurance coverage exceeds the
    • bank's aggregate privately insured deposits in excess of the FDIC
    • limitation. Additionally, the concentration of credit risk footnote
    • should be modified to describe the private insurance and to disclose the
    • amount of the association's deposits above the FDIC limit subject to
    • such private insurance.
  38. 303.37 Credit Risk Associated with Other Financial Instruments
    If a CIRA has material amounts invested in bonds, the related
    concentration of credit risk should be disclosed. The authors believe
    disclosures are not required for amounts invested in Treasury bills. In
    their opinion,
    • since the face amount of the
    • Treasury bill is guaranteed, the investment is similar to insured cash
    • deposits. There is no credit risk associated with investments in
    • marketable equity securities, only market risk, because the issuer has
    • no performance obligation under the equity instrument. Since the maximum
    • loss on the marketable equity securities is limited to the amounts
    • recorded in the financial statements, disclosure about credit risk is
    • not required. However, certain disclosures are required by FASB ASC 320-10-50 (formerly SFAS No. 115).
  39. Ancillary Operations

    303.38 Similar to commercial
    businesses, ancillary operations income is accounted for on the accrual
    basis. GAAP permits revenue and related receivables from other sources
    to be combined if they are not individually material (for example,
    “Miscellaneous income” and “Accounts receivable—other”). Even if other
    categories of income are immaterial in the aggregate, however
    • many CIRAs present them separately
    • in the financial statements to allow the CIRA to compare budgeted
    • amounts with actual revenue. For some CIRAs, other income can be
    • significant. Those CIRAs should ensure that their accounting systems are
    • adequate to track the income and expenses related to the ancillary
    • operations.
  40. 303.39 General Considerations
    When the concept of community associations first began to seriously
    develop in the 1960s, the primary purpose of associations was to provide
    a form of more affordable collective housing. This was accomplished by
    • “common areas” that were maintained
    • on a communal, rather than individual, basis. It did not take long,
    • however, for developers to realize that home buyers did not want to only
    • save money on communal maintenance to escape individual maintenance
    • responsibility; they also wanted to buy into a lifestyle. As a result, developers began to build communities centered around recreational amenities that provided a specific lifestyle.
  41. 303.40 The term ancillary operations
    describe any association activities other than the ordinary
    maintenance, security, governance, and administrative activities common
    to most associations. The scope of ancillary operations is limited only
    by the imaginations of the developers. Examples of ancillary operations
    commonly encountered include:
    • Golf courses

    • •Facility rental; for example, a day-care center that rents space in
    • the association clubhouse or a retail store that rents storefront space
    • from a condominium (see discussion of leasing transactions in section 1102)

    • Food and beverage operations, such as restaurants and bars

    • Marina and boating operations

    • Tennis and other recreational activities

    • Equestrian operations

    • Newsletter advertising
  42. 303.41 A key factor to consider is
    the marked difference between accounting rules and tax rules of CIRA
    ancillary operations. An important example of this difference occurs
    with the capitalization and
    • depreciation rules, discussed in more detail beginning in paragraph 303.49. In general, however, FASB ASC 972
    • (formerly the AICPA guide) requires the capitalization of property and
    • equipment owned by the CIRA that generate significant income. For tax
    • purposes, most CIRAs do not have any tax basis in the common area assets
    • that are associated with ancillary operations. This disparity between
    • the accounting and tax rules results in an automatic book-to-tax
    • depreciation difference for most CIRA ancillary activities.
  43. 303.42 For many associations, the
    primary motivation in establishing ancillary operations is not to
    generate profit but to provide services to the members. On the other
    hand, many associations develop ancillary operations with the thought of
    • added commercial value to the
    • association and/or the ability to differentiate its development from
    • “competing” developments. Regardless of whether a profit motive exists,
    • it is important that the revenues are adequate to fully subsidize the
    • costs of the activities so that ancillary operations do not result in a
    • significant drain on the association's general operating budget. It is
    • not uncommon for ancillary operations to create political factions
    • within associations—those who support certain activities and those who
    • oppose the activities.
  44. 303.43 Revenue Recognition Accounting treatment for ancillary operations depends in part on how the activities are conducted. For instance,
    • an association may not charge any
    • user fees for golf activities, but simply cover the golf course expenses
    • through the association's general operating assessment. Alternatively,
    • the association may charge user fees only to members (and possibly
    • guests and the public using a different rate schedule) that make use of
    • the facility. However the user fees and other revenue considerations are
    • managed, the mere existence of ancillary operations greatly increases
    • the complexity of the accounting process.
  45. 303.44 If user fees are charged in
    connection with ancillary activities, the association should develop
    adequate accounting systems to account for such revenues. This places a
    much greater burden on the association's accounting system, and often
    cannot be accommodated within an association's general accounting
    system. It is not uncommon to discover that
    • an association uses an industry specific accounting software system for its specific association needs and a separate country club accounting software system to account for golf or food and beverage operations (as an example). A country club
    • accounting system often entails the use of point-of-sale (POS)
    • software. The use of two distinct systems requires that information be
    • accurately transferred from one system to the other to adequately
    • account for revenues (and expenses).
  46. 303.45 If the association allows
    nonmember use of facilities in connection with ancillary activities, the
    accounting system must also provide separate accounting for revenues
    between members and nonmembers for each activity
    • In addition, it will be necessary
    • to track the incidence of activities between members and nonmembers. For
    • example, the association should not only be able to provide the total
    • number of rounds of golf played, but also the number of rounds played by
    • members and nonmembers. There also are additional internal control
    • considerations if the ancillary operations have material amounts of cash
    • collections. Information related to the financial and reporting
    • considerations of food and beverage operations is included in PPC's Guide to Restaurants and Bars, which is available by calling (800) 431-9025, or online at ppc.thomsonreuters.com.
  47. 303.46 Depending upon the
    ancillary activity conducted by the association, revenue recognition may
    become even more complicated. For example, in the case of rental
    operations where the association conducts a rental pool on behalf
    of its members, questions may arise as to what amount should be
    recorded as revenue by the association—the entire amount of rents
    • received or simply the commission
    • earned by the association for conducting the activity. (Rental pools are
    • discussed in more detail in paragraphs 509.10 and 703.56.)
    • GAAP requires that gross amounts be reported. However, in the case of
    • rental pool operations, the commission is the income amount to be
    • recorded by the association. (The actual rental income is the property
    • of the separate owners.) The association is merely acting as an agent on
    • behalf of the owners in conducting this type of activity. Another
    • example is a pro shop with golf pro activities handled on a contract
    • basis, where the golf pro is an independent contractor that receives all
    • or a portion of the revenues from those activities.
  48. 303.47 Expense Allocation
    When ancillary costs are significant or the association is otherwise
    concerned about the accurate tracking of the ancillary operation's
    costs, the association may establish
    • departmental accounting to capture
    • those costs. If the association has limited ancillary operations, the
    • benefit of establishing a separate accounting system outside of the main
    • association accounting system to track those costs may not be cost
    • effective. Accordingly, the association may absorb insignificant
    • ancillary operations costs in the general operating budget.
  49. 303.48 If the association decides
    to track ancillary operations costs, operating ancillary activities
    generally results in both direct and indirect costs. Costs that are
    incurred directly and solely as a result of operating the ancillary
    activity are direct costs and should be accounted for as costs related
    to the ancillary operation. The association should also consider if it
    should allocate indirect costs to the ancillary activities
    • It is virtually impossible for
    • such activities to exist based on their direct costs alone. Providing
    • ancillary activities will require some portion of on-site staff and/or
    • the management company's time (indirect costs) to enable these
    • activities to occur. Accordingly, the association should determine if
    • and how it should allocate such indirect costs. (PPC's Guide to Nonprofit Expenses
    • includes practical guidance on allocating indirect costs. See the
    • discussion titled, “Allocation of Expenses to More than One Function,”
    • in section 103 of that Guide.)
  50. 303.49 Capitalization and Depreciation Capitalization of common real property is unique in the CIRA industry as explained beginning in paragraph 304.4. Excluding cooperatives, CIRAs capitalize common real property only if—
    a. The CIRA has title or other evidence of ownership of the property, and

    b. either of the following conditions are met:

    • (1)The CIRA can dispose of the property, at the discretion of its board
    • of directors, for cash or claims to cash, with the CIRA retaining the
    • proceeds.

    (2) The property is used by the CIRA to generate significant cash flows from members on the basis of usage or from nonmembers.
  51. 303.50 As a result of those unique
    accounting capitalization rules, the importance of how ancillary
    operations are conducted and how revenues are generated has a
    significant impact on the capitalization of assets. The following
    example provides a literal interpretation of current GAAP, based upon
    prevalent industry practice as outlined in FASB ASC 972 and explained beginning in paragraph 304.5.
    • • Association A is a planned development with a golf course valued
    • at $15,000,000. The Association has title to the golf course land and
    • charges green fees to its members and their guests. Those green fees
    • approximate $1,000,000 annually. Association A's golf course meets the
    • criteria for capitalization explained in paragraph 303.49, as the Association has title to the property and generates significant cash flows from the property. Accordingly, Association A capitalizes a $15,000,000 asset.

    • •Association B is also a planned development with a golf course valued
    • at $15,000,000. The Association has title to the golf course property,
    • but does not charge green fees to its members. While green fees are
    • charged to guests, the revenue received is not significant to the
    • association. The cost of maintaining the golf course is absorbed into
    • the assessment structure of the Association. This golf course does not
    • meet the criteria for capitalization explained in paragraph 303.49.
    • Although the association has title to the property, the golf course
    • does not produce significant revenues, nor is it severable and saleable
    • at the board's discretion because it is common area property of the
    • Association. Accordingly, Association B does not capitalize this $15,000,000 asset.

    • While the ancillary golf activity conducted by these two associations is
    • identical in every other way, the mere fact that revenue is recognized
    • differently causes a marked difference in capitalization of assets.
  52. 303.51 Depreciation should be
    recorded for all capitalized ancillary assets based upon estimated
    useful lives of the underlying assets. Tax methods
    • of depreciation are not acceptable
    • for financial statement purposes unless the tax method approximates GAAP
    • and the differences are immaterial
  53. 303.52 Reserve Considerations
    Reserves should be established for all association maintained assets
    (whether capitalized or not). It is the responsibility of the board of
    directors to assess an adequate amount to cover operating and reserve
    budgets. However,
    • the estimation and forecast of
    • revenues from ancillary operations plays a significant role in
    • determining the annual budget. The association bears the responsibility
    • to reserve for maintenance and replacement of income-producing assets,
    • irrespective of revenues generated by the underlying ancillary activity.
  54. 303.53 Normally, reserves for assets used in ancillary activities should be
    accounted for as part of that activity.
  55. 303.54 Auditing considerations related to ancillary operations is discussed beginning in paragraph 703.78. Tax considerations related to ancillary operations is included beginning in paragraph 509.22. Interfund transfers
    • and related receivables and payables from ancillary operations that may
    • arise when the CIRA's financial statements are presented on a fund
    • basis are discussed beginning in paragraph 306.5.
  56. Other Income

    303.55 Other income reported in
    the CIRA's financial statements varies depending on the nature of the
    CIRA's operations. Similar to income from ancillary operations (see
    paragraph 303.38), other income should be reported on an accrual basis. Examples of other income include—
    • Program income from special events and other programs sponsored by the CIRA;

    • Services for residents, such as valet parking and maid services;

    • Vending machine income;

    • Nonrefundable fees, such as key fees; and

    • Transfer fees and flip taxes (see discussion beginning at paragraph 203.12).

    • Lease income for cell towers, cable television, or billboards.
  57. 303.56 Utility Pass-throughs
    Utility companies often install master meters for water, gas, and
    electric service rather than individual meters for each unit. Cable and
    satellite television companies frequently enter into agreements under
    which the associations are billed for the total cost of the service at a
    reduced rate. The association then
    has to allocate those pass-through costs to the members since they are not billed separately by the utility companies
  58. 303.57 Associations may install
    submeters to determine the costs to be billed or, in the case of cable
    and satellite television, divide the monthly bill by the number of units
    to determine the cost to be billed each unit. There are three basic
    approaches to recovering those costs from the members.
    a. Basic monthly assessments may be increased to cover the allocated costs.

    • b.The allocated costs may be billed to the members separately from the
    • monthly assessments. Many associations choose that option so that
    • monthly assessments will not be increased.

    • c. Estimated
    • allocated costs may be billed to the members annually to avoid possible
    • unfavorable tax treatment for those associations that file Form 1120-H.
    • All members have to use the utility, such as cable service, under that
    • scenario.

    Those costs may be inflated by a handling or administrative fee or to cover anticipated losses on unpaid bills.
  59. 303.58 Accounting for pass-through utility costs using the approach in a. of paragraph 303.57 is the same as accounting for member assessments discussed beginning in paragraph 303.2. In practice, accounting for separately billed utility costs such as those in b. and c. of paragraph 303.57 may be handled in one of the following ways:
    • Some accountants report the gross revenue and gross expense separately in the statement of revenues and expenses.

    •Others offset the expense against the revenue (or vice versa), with any net difference reported in the statement of revenues and expenses.
  60. 303.59 There is no authoritative guidance on accounting for utility pass-throughs. If the amounts are material, the authors
    • recommend disclosing the approach
    • used in the notes to the financial statements. The tax effect of the
    • various approaches for accounting for utility pass-throughs is discussed
    • beginning at paragraph 502.32.
Card Set:
2011-06-22 21:34:09
Member Assessments other income Receivables

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