Yalnes, Inc. Blog

A Resource for Condo Owners

Methods of Accounting

There are three commonly known methods of accounting: 

  • in “Cash Basis”, income is recorded when it is received and expenses are recorded when they are paid;
  • in “modified accrual basis”, income is recorded when it is earned, and expenses are recorded when they are paid; 
  • in “accrual basis”, income is recorded when it is earned and expenses are recorded when they are incurred.  Accrual basis provides the most accurate financial reporting and is in compliance with GAAP (Generally Accepted Accounting Principles). 

There are several ways to determine the basis on which the financial statements are presented.  Accounts Receivable, Prepaid Assessments, Accounts Payable, and Prepaid Expenses will appear on the Balance Sheet if financial statements are prepared on an accrual basis.  Accounts Receivable and Prepaid assessments will appear on the Balance Sheet if financial statements are prepared on a modified accrual basis.  Since expenses are recorded when they are paid in a modified accrual financial statement, neither Accounts Payable nor Prepaid Expenses will appear on the Balance Sheet.  A Balance Sheet prepared on a cash basis will not contain any of these line items.

Accounts Receivable is an Asset and indicates the total amount of income earned (i.e. assessments levied against owners) but not yet received as of the date of the financial statement. 

Prepaid Assessments represents assessments, which owners paid in advance.  Prepaid Assessments are a Liability to the Association as this is income already received but not yet “earned” (or not charged against owner’s accounts).

Accounts Payable represents expenses incurred but not yet paid and is a Liability to the Association.  Accounts Payable may consist of actual expenses for which an invoice was received but not paid as of the date of the financial statement, and expenses accrued but for which an invoice was not yet been received (or paid).

Prepaid expenses are expenses, which were not yet incurred but already paid as of the date of financial statement.  Prepaid expenses are an Asset to the Association.  An example of a prepaid expense is an insurance premium, which is paid in full for the entire year when an invoice arrives.  When the insurance premium is paid, it appears on the Balance Sheet under Assets but it does not appear as an expense on the Profit and Loss Statement.  The premium would then be “expensed” on a monthly basis in equal monthly installments.

Profit and Loss Statement (P&L) can also help determine on which basis the financial statements are prepared when a budget comparison/variance is shown on the statement.  Because income and/or expenses are recorded when they are incurred, items such as “Homeowner Assessments” in the income section of the P&L, and all “Contract” line items in the Expenses Section of the P&L, should have zero variance from the budget in an accrual basis.  Member of the Association are charged based upon a budget prepared in advance, so 100% of income for a given period will be recorded at the time it is budgeted for and charged to owners’ accounts.  Expenses based upon contracts should also match the budget and have a zero variance because they are recorded when incurred whether or not an invoice is received from the vendor.

Advertisement

December 12, 2008 Posted by | Accounting | | Leave a comment

Taking Meeting Minutes

Meeting minutes are an official corporate record of a Condominium or a Homeowner Association and are considered to be legal documents by the IRS, courts, auditors, etc. The purpose of the minutes is to record decisions made and actions taken at a Board or general membership meeting. It is important that minutes preserve the full history of an Association and include all decisions made and all actions taken. A decision or action may be considered null and void if not recorded in the minutes.

Minutes should always reflect:

  • who was in attendance at the meeting;
  • whether or not a quorum was present as required by Association’s governing documents;
  • when (including time of calling the meeting to order and adjournment) and where the meeting was held;
  • type of the meeting (regular Board meeting, special Board meeting, annual general membership meeting, etc.);
  • approval of prior meeting minutes (as presented/written or with amendments/corrections);
  • provide a record of every matter brought before the Board and what decision was made (approval, denial, dismissal, postponing of action, etc) regarding each matter;
  • exact wording of each motion and name of the person who made and seconded the motion, whether or not the motion was approved or denied (in case of non-unanimous voting, names of persons voting in favor, opposing, and abstaining).

Meeting minutes should never include full details of all discussions (e.g. transcript), comments, etc. because they are an official corporate record of an Association. Instead, the minutes should reflect the name of the person and a topic discussed (for example: John Smith, on behalf of the Landscaping Committee, reported on landscape maintenance for the past month). For decisions and actions, minutes may include a brief statement describing how the Board reached a particular decision.

The minutes are also a “public record”, available upon request to members of the Association, Buyers, Real Estate Agents, etc. Minutes should be taken at every meeting of the Board of Directors and general membership with the exception of Executive Session meetings. Different states have different laws on whether or not Board meetings are open to the membership and which topics could be discussed in an Executive Session. In general, matters involving contract negotiations, employment issues, and legal matters are permitted and should be discussed in an Executive Session.

There are multiple laws which govern employment issues and any and all employment matters should be kept confidential between Management and the Board of Directors. Providing employment-related information to general membership carries significant liability and may give employees a legal cause of action against the Association.

Any and all legal matters, whether a potential lawsuit against one of the contractors of the Association, or enforcement of Rules and Regulations of the Association, should also be kept confidential. Hearings on alleged violations should be held in an Open Meeting; however, the Board should adjourn the regular meeting and convene an Executive Session to discuss information/evidence presented during the Hearing. Legal issues are complicated in their nature. They may involve attorney-client privileged discussions between the Board of Directors and the Association’s attorney, development of a strategy to prevail in a lawsuit, etc. Having such information made available to the general membership may jeopardize Association’s position in a legal matter and may potentially waive attorney-client confidentiality protection.

Roberts Rules of Order do not permit decisions to be made in an Executive Session; however, some states have specific laws, which govern Executive Sessions and may permit decision-making in a closed meeting. Full transparency of Board actions to the membership is very important for every Association. The best approach is to hold discussions in Executive Sessions and then make decisions in an open meeting immediately following the Executive Session. If minutes of Executive Session are taken, they should only state topics which were discussed (for example: The Board of Directors discussed employment of Mr. John Doe) and not include details or summary of the discussion. Minutes of the Open Meeting following the Executive Session should then reflect motion and action taken on the topic (for example: John Smith moved to terminate employment of Mr. John Doe effective immediately. Mary Stewart 2nd the motion. The motion was unanimously approved.)

Because Executive Sessions are closed meetings, minutes, if taken, should be privileged and not be made available to anyone other than Board members and Management. However, if no decisions are being made in Executive Sessions, there is no need to take the minutes. “Corporate history” would be properly recorded in meeting minutes where decisions are made.

Since minutes of Open Meetings are an official record of an Association, they should accurately describe actions taken to preserve the corporate history of the Association. Oftentimes, questions come up regarding actions taken several years ago. Minutes are a permanent record of an Association and any person and/or judge, should be able to understand exactly what action was taken on a specific matter. For example, if the Board (or Architectural Committee) is approving an alteration request, the minutes should identify the Unit/Home submitting the request, state what is being altered, and whether or not the request was approved as submitted (for example: The Board of Directors reviewed a request from Unit 500 to replace all windows. John Smith moved to approve the request as submitted. Mary Stewart 2nd the motion. After a brief discussion, the motion was unanimously approved).

December 12, 2008 Posted by | Meetings | , | Leave a comment

Being a Board Member

If you’re considering running for the Board, ask yourself the following three questions:

Do I have the time?: As a Board member, you will need to devote at least several hours of your time each month to Association business. In addition to regular Board meetings, you will need to be active in email discussions and occasional special meetings. During special projects, you may need to spend a little extra time on Association business. Some board members may also spend a little more time than others if they work with a committee

Can I make tough decisions when it’s required?: The primary role of the Board is to conduct the business of the Association. This doesn’t just mean approving the budget, but also developing and enforcing policies. Board members are required to step outside their immediate circle of family and neighbors and make decisions based on the greater good of the community.

Can I do all this and have fun, too?: It isn’t all about policies and tough decisions. An Association is only as good as its owners make it, and establishing and maintaining a sense of community is a part of a Board member’s responsibility. Planning and attending functions such as picnics and being a presence in the community are as important as any policy decisions you may make.

Being a board member can be frustrating at times, but it may also be one of the most rewarding ways you’ll find to volunteer your time.

December 12, 2008 Posted by | Board of Directors | , | Leave a comment