The Communicator - Volume 1, Issue 1 - (Page 14)

on the first of each month, then they are earned on that day and would be shown as revenue and receivable. When the owners make their payments they decrease the receivable and increase the cash balance. On the expense side, all expenses are shown in their proper time period. If you contract for landscape services at $2,750 per month for 12 months, then you show $2,750 per month in the expense line item whether paid or not. If unpaid at the end of any month, the offset would be to show the $2,750 as accounts payable. Another problem with the cash basis income statement is prior year’s expenses and assessment collections can carry over to the current year to cause the actual income and expense to vary significantly from current year’s budget. If expenses incurred in the eleventh or twelfth month are paid in the first month of the New Year, they would be reflected on the first month’s financial under the cash basis. In September 2006, code section 1365.2 was amended retroactively to state: “The records described in this subparagraph shall be prepared in accordance with an accrual or modified accrual basis of accounting.” Don Haney, of Haney Accountants was adamant when he protested this sentence stating, “There is no ‘modified accrual’ under any basis of accounting other than a reference in Governmental accounting.” He is correct that GAAP does not refer to “modified accrual” as a method of presentation. This term has evolved more as an industry catch phrase than as any recognized accounting methodology. So what does modif ied accrual mean? The accepted definition for CID management seems to be that revenue is booked on an accrual basis and expenses on a cash basis. The problem is that this resolves the missing accounts receivable and check and balance for assessments, but does nothing to properly state the expenses and accounts payable. I know that many accountants have stated that this is a good compromise in that it at least bans cash accounting. We will have to wait and see how many management companies who are or were on cash basis have modified their internal reporting to incorporate modified accrual basis. The industry will not change unless and until the client, the board of directors of the CID, demands more sophisticated f inancial management and reporting. The boards themselves have often fought accrual accounting on the basis that the reports were too difficult to understand. This is just a matter of training. Boards are becoming more educated each year and are understanding the need for proper accounting of association financial activities. Accrual accounting takes more time, more highly trained staff and effort to help the board understand how to read the reports. Is the cost, time and effort worth the trouble? I certainly believe that it is, but that decision must be made by each client. They are the ones that will be willing to pay higher costs and take the time to learn how to interpret the financial reports. ■ 14 • The Communicator 353106_Community.indd 1 11/14/07 11:05:25 AM

Table of Contents Feed for the Digital Edition of The Communicator - Volume 1, Issue 1

The Communicator - Volume 1, Issue 1 Contents President’s Message Capitol Recap Complying with California’s Reserve Study and Disclosure Laws The Devil Is in the Details Ask the Experts – Deferred Maintenance HOA Banking, Then and Now 2008 Events & Education Calendar Welcome to CAI BayCen Index to Advertisers

The Communicator - Volume 1, Issue 1

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