Module 2: Understanding Financial Reporting

2. Module 2: Understanding Financial Reporting

3. Understanding Financial Reporting Purpose: • Financial reports provide financial information to: • Monitor actual use of financial resources • Make decisions related to the association’s financial position • Control the association’s financial operations

4. Understanding Financial Reporting Focus How to use working financial reports as a tool for decision-making and as a management control.

5. Understanding Financial Reporting Objectives • Explain the different types and methods of accounting for community associations. • Analyze and interpret the relationships between basic financial records and reports for an association. • Analyze and interpret a Statement of Revenues and Expenses. • Analyze and interpret a Schedule of Changes in Replacement Fund Balances for financial reporting.

6. Understanding Financial Reporting Objectives (cont.) • Analyze and interpret an Aged Receivable Report for the association. • Analyze and interpret a Balance Sheet. • Present and explain financial reports to a board of directors. • Use financial reports as a resource for board decision-making.

7. Lesson 1: Benefits of Accrual & Fund Accounting

8. Benefits of Accrual & Fund Accounting Lesson 1 Objective: • Explain the different types and methods of accounting for community associations.

9. Benefits of Accrual & Fund Accounting AICPA • Requires the use of accrual accounting to be in compliance with GAAP • Fund reporting is the most informative method for financial recordkeeping and reporting Cash accounting • Revenue: recorded when received • Expenses: recorded when paid Accrual accounting • Revenue: recorded when earned or billed • Expenses: recorded when incurred or acquired Modified accounting • Combines elements of cash and accrual methods

10. Benefits of Accrual & Fund Accounting Basic Methods of Accounting Summary • All the accounting and reporting methods we discussed are accurate. However, the accrual and fund methods provide more information.

11. Benefits of Accrual & Fund Accounting Basic Methods of Financial Reporting • Commercial Reporting • Fund Reporting • Operating Fund • Replacement Fund

12. Lesson 2: Basic Financial Records

13. Basic Financial Records Lesson 2 Objective: • Analyze and interpret the relationships between basic financial records and reports for an association.

14. Basic Financial Records Terms and Definitions • Check register: A log or book that sequentially lists the checks issued on a bank account. • General ledger: A record of all the association’s financial transactions grouped by account or category. • Bank reconciliation: Monthly statement of the activity in an association’s bank account.

15. Basic Financial Records Financial Records and Report Checklist are used to: • Monitor the association’s financial activity • Verify the accuracy of record keeping and reporting

16. Basic Financial Records As we review the basic financial reports used by associations, we will see where the information from basic records is used in reporting on the association’s financial activity and position.

17. Lesson 3: Statement of Revenues and Expenses

18. Statement of Revenues and Expenses Lesson 3 Objective: • Analyze and interpret a statement of revenues and expenses.

19. Statement of Revenues and Expenses • A review of financial reports usually begins with the balance sheet—a summary of the organization’s financial position at a given point in time. • The most common financial report used for analyzing and interpreting an association’s financial activity during a given period of time is the statement of revenues and expenses.

20. Statement of Revenues and Expenses • Revenue: Monies earned. Includes assessments, late fees, other fees, interest earned, etc. • Expenses: Costs of goods and services used to operate and maintain the community association. • Excess of revenues over expenses: Money left after deducting expenses from revenues, or “operating surplus” for an operating fund.

21. Statement of Revenues and Expenses • Excess of expenses over revenue: Occurs when expenses are greater than revenues. Indicated with (xx) or a minus sign in a report. Also called an “operating deficit” for an operating fund. • Variance: Difference between two numbers. In a statement of revenues and expenses, the variance is the difference between the budgeted revenue or expense and the actual revenue or expense

22. Statement of Revenues and Expenses How to Check a Statement of Revenues and Expenses • In accrual accounting, the actual assessments should equal the budgeted assessments. The variance for assessments for both month-to-date and year-to-date should be zero.

23. Statement of Revenues and Expenses How to Check a Statement of Revenues and Expenses, cont. • A budget is input in the month of service—instead of dividing by 12 months. Thus, assuming a balanced budget, the excess revenues or expenses under both the month-to-date budget and the year-to-date budget are zero only at year end. This is a way to verify the accuracy of individual entries on the statement.

24. Statement of Revenues and Expenses How to Check a Statement of Revenues and Expenses, cont. • Check the month-to-date and year-to-date variances under the revenue and expense categories for anything unusual. Investigate significant variances.

25. Statement of Revenues and Expenses A statement of revenues and expenses can be prepared to report on both the operating fund and the replacement fund in separate columns. This is recommended for end-of-year statements.

26. Lesson 4: Schedule of Changes

27. Schedule of Changes Lesson 4 Objective: • Analyze and interpret a Schedule of Changes in Replacement Fund Balances for Financial Reporting

28. Schedule of Changes Terms and Definitions • Fund balances: A summary of replacement fund contributions and expenses over a given period of time. • Beginning fund balance: The amount of reserves in the replacement fund at the beginning of a given period of time. • Additions: Assessment fees contributed to the replacement fund during the given period of time.

29. Schedule of Changes • Monthly funding: Additions contributed to the replacement fund per month during the given period of time. • Expenditures: Major repairs and replacements made during the given period of time. • Ending fund balance: The amount of reserves in the replacement fund at the end of a given period of time. Terms and Definitions (cont.)

30. Schedule of Changes • Scan report for any apparent discrepancies. • Scan for adequacy of funding. • Scan for missing items. • Do expenditures appear to be properly stated as replacement fund expenses vs. operating? How to Check a Schedule of Changes in Replacement Fund Balances:

31. Lesson 5: Aged Receivable Report

32. Aged Receivable Report Lesson 5 Objective: • Analyze and interpret Aged Receivable Reports for the association.

33. Aged Receivable Report Terms and Definitions • Aged receivables report: A summary of funds owed to the community. It is usually an accounts receivable or assessments receivable report. Also known as the aged analysis or delinquency report. • Account numbers: Many associations use account numbers in place of an owner’s name or address on an aged receivables report. This is done to limit the association’s exposure to loss due to claims of advertising injury because of erroneous entries on a report.

34. Aged Receivable Report Terms and Definitions, cont. • Balance due: Total amount owed to the association by a party. • Current: Any amount overdue less than 30 days. • 30-60-120 days: The length of time funds owed are overdue. • Prepaid: A financial obligation is paid before its due date.

35. Aged Receivable Report Benefits • Provides the necessary detail at a glance. This makes it easy to track and update information. • Serves as a reminder. • Helps management to stay on top of collections. • Serves as an “early warning sign.”

36. Aged Receivable Report How to Check Aged Receivable Report • Review report for delinquencies and make notes to follow up on any balances due. • Review past due policy and procedures in a timely manner. • Scan report for any discrepancies. • From time to time, check the accounts receivable ledger for discrepancies.

37. Lesson 6: Balance Sheet for Financial Reporting

38. Balance Sheet for Financial Reporting Lesson 6 Objective: • Analyze and interpret a Balance Sheet—an association’s financial position at a given point in time.

39. Balance Sheet for Financial Reporting Terms and Definitions • Balance sheet: A summary of a community association’s financial position at a given point in time. A balance sheet summarizes: • Operating fund: The funds used for the daily operations of the association. • Replacement fund: The funds used for major repairs and replacements for the association.

40. Balance Sheet for Financial Reporting Terms and Definitions (cont.) • Assets: Anything owned that has monetary value. • Accounts receivable: Monies owed to the organization, but not collected yet. • Prepaid expense: A financial obligation is paid before its due date. • Liabilities: That which is owed to others. For community associations, liabilities typically include invoices not yet paid, assessment fees received before their due date, and long term debt.

41. Balance Sheet for Financial Reporting Terms and Definitions (cont.) • Accounts payable: Monies which the association owes in the normal course of operating, but has not paid yet. • Fund balance: The amount in a fund on a certain date. • Total fund balance/members’ equity: On a balance sheet, the difference between the assets and the liabilities. This figure translates into what is owned by the unit owners.

42. Balance Sheet for Financial Reporting Benefit • A snapshot of the association’s financial health at a given point in time.

43. Balance Sheet for Financial Reporting How to Check a Balance Sheet • Many of the financial checks for a balance sheet involve cross-checking figures in the other basic financial records and reports we have just examined.

44. Balance Sheet for Financial Reporting • Effective monitoring of an association’s financial activity requires checking a small number of items. The benefits far outweigh the costs of time and effort. • The list of financial checks can be used as the basis for reviewing the association’s financial records and reports with the board.

45. Lesson 7: Present and Explain Financial Reports

46. Present and Explain Financial Reports Lesson 7 Objective: • Present and explain financial reports to a board of directors.

47. Present and Explain Financial Reports Activity #1: Present and Explain Financial Reports to a Board of Directors Purpose: To practice presenting and explaining financial reports to a board of directors.

48. Lesson 8: Financial Reports as a Resource

49. Financial Reports as a Resource Lesson 8 Objective: • Use financial reports as a resource for board decision-making.

50. Financial Reports as a Resource Purpose: In this last section, we’ll pull together everything we’ve talked about in Module 2—just as you will have to do when it is time for one of your boards to make a financial decision.