BEST PRACTICE incurred , so the resulting statements are more useful for comparing the results of the budget to the actual activity . GAAP requires the following set of year-end financial statements for community associations :
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Balance sheet – a summary of a community ’ s financial position at a specific point in time . The three major components of a balance sheet are : »» assets – items owed to , or owned by , an association
»» liabilities – the association ’ s debts to third parties
»» members ’ equity – the owners ’ interest in the association ’ s remaining assets after providing for the discharge of its liabilities .
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Statement of income and expense – the operating activities for a given period of time , usually one year , ending on the same date as the balance sheet .
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Statement of changes in members ’ equity ( or fund balances ) – reconciles the beginning and ending members ’ equity with results of operations for the period .
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Statement of cash flow – reconciles an association ’ s operating , investing , and financing activities from the basis of accounting used ( generally the accrual basis ) to a cash basis , to reflect what caused the changes in the cash balance during the year .
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Notes to financial statements – footnotes that provide additional information to help the reader understand the association ’ s financial situation .
Financial statements and reports
Financial statements are produced to :
•• provide their internal and external users with the economic information needed to make appropriate decisions on behalf of the community association
•• enable the community association board and manager to control the association ’ s financial operations . Year-end financial statements help determine and outline a community association ’ s fiscal health . Experts suggest that a chartered accountant ( CA ) specialising in community associations prepare these statements . From the more authoritative ( and most expensive ) to the least authoritative ( and least expensive ), these are audits , reviews and compilations .
Audits
An audit is an examination of an organisation ’ s accounting records and procedures by an independent chartered accountant for the purpose of verifying the fairness of the presentation of financial statements . An association ’ s governing documents and the national financial regulations require an annual audit of the association ’ s financial records , which is in any case sound business practice . The audit should include , but is not limited to :
•• confirmation of selected transactions and balances with outside parties ( such as banks and contractors )
•• a physical inspection of records
•• a trace of transactions to supporting documentation and authorisation by someone within the association
•• review of the association ’ s legal documents and minutes .
After the audit is complete , the chartered accountant will prepare an opinion report that states one of the following four outcomes :
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The auditor issues an unqualified or clean opinion that states that the financial statements are presented fairly in all material respects .
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The auditor issues a qualified opinion that says the statements , with certain reservations , are fairly presented .
•• The auditor disclaims his / her ability to issue an opinion .
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The auditor issues an adverse or negative opinion . Clearly , a community association should strive for a clean opinion or , if necessary , a qualified opinion . The third scenario – a disclaimer – usually occurs when the client organisation or the circumstances surrounding the audit restrict the CA ’ s ability to collect sufficient evidence to form an opinion . An adverse opinion is issued when evidence indicates that the financial statements do not fairly reflect the association ’ s financial position or operating results . Financial experts recommend that a CA familiar with community associations perform an audit annually .
Reviews
A review is less thorough than an audit , thus a less costly analysis of an association ’ s financial activities . It provides the board with some assurance that the financial statements are consistent with typical trends without the detailed examination obtained in an audit .
Compilations
A compilation is a presentation of financial statements prepared by an accountant , not necessarily a CA , but does not provide any level of assurance regarding the financial statements .
Levies and investments
Levy collection The association articles and law give associations the authority to collect levies . It is not unusual for a board to be responsible for millions of rand in levy fees . Given their fiduciary responsibility , association boards must collect levies in a timely , systematic manner . Each association should adopt , by resolution , the procedures for the collection of payments ( dues or levy fees ). The policy should be distributed to all members and uniformly enforced . Communication of the association ’ s budget is critical to levy collection because those members who understand the association ’ s financial position are more likely to pay their dues on time .
Investments Investments involve the purchase of assets with monetary value for the purpose of generating additional value over time . A community association should have a written investment policy , a set of procedures , and checks and balances for ensuring that investments :
•• are safe , i . e . protecting the principal from risk
•• are liquid , i . e . can easily be converted into cash or cash equivalent
•• give a good yield , or return on an investment .
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