AICPA Audit and Accounting Guide for Property Owners Associations

__ This was originally posted on 2005 August 27 on another blog. The links are being checked and updated.  Any links with "swagman" in the URL refer to the previous weblog and are obsolete, and most likely not available.  Some of the invalid links are shown with strike-through.

2005 August 27
Last edit: 2010 Jul 17. See History for changes and updates.
__ In 1991, the American Institute of Certified Public Accountants issued an "Auditing & Accounting Guide for Common Interest Realty Associations." All issues with the Federal Accounting Standards Board appear to have been resolved. It is Generally Accepted Accounting Principles (GAAP) for property owners associations (POAs).
__ The continuation of this post describes this Guide in successive levels of detail.
__ (edited 2010 Jul 17 and 2011 Dec 26)>>> In 2010, AICPA made the 2008 version of the Guide available for download at AICPA A&A Guide for CIRAs, but it has since apparently be removed.<<<
__ Several of the comments and replies may be of interest:

• Re: Planning and Accounting for Preservation (reserve) Fund — The name specified in the AICPA CIRA Guide for the audit report is Replacement Fund or Fund for Major Repairs and Replacements. However, the term Preservation Fund may be more descriptive of the intent. The paper, Accounting Truths about Reserves, based on the CIRA Guide by a Washington CPA may also be helpful.
• Re: Accounting for Deferred Revenue

__ Your improvements on the replies are specifically requested. Other comments and questions are invited.
__ The CIRA Guide might be referred to as GAAP for property owners associations, GAAP for homeowners associations, GAAP for community associations, GAAP for condominium associations, and GAAP for condos.

Don Nordeen
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Continue reading AICPA Audit and Accounting Guide for Property Owners Associations.

• Key Words:_ accounting; Accounting Principles; accounting standards; AICPA; AICPA Audit & Accounting Guide; AICPA Audit & Accounting Guide for Common Interest Realty Associations; CIRA; engagement; engagement letter; FASB; GAAP; GAAP for homeowners associations; GAAP for community associations; GAAP for condominium associations; GAAP for condos; nonprofit GAAP; preservation fund; reserve; reserve fund

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AICPA Audit and Accounting Guide for Property Owners Associations (Continued) ============================================================================ Please help answer some frequently asked questions:

• Recommended accounting for entry of deferred income. See comment3.

• Recommended planning and accounting for Preservation (reserve) Fund. See comment2.

Please add your thoughts on these FAQs with additional comments. Thanks. ============================================================================
__ Various names are used for communities governed by owners associations: homeowners associations (HOAs), property owners associations (POAs), condominium associations (sometimes refered to as association of co-owners), common interest developments (CIDs), and Common Interest Realty Associations (CIRAs). The Americian Institute of Certified Public Accountants (AICPA) uses the latter term, CIRAs. In the discussion below, the Auditing & Accounting Guide for Common Interest Realty Associations is referred to as "CIRA Guide".
__ This post discusses this CIRA Guide in several levels of detail. You can click your browser's back button/arrow at any time to return to your previous internet page
__ In the early 1990s, AICPA developed an audit and accounting guide for CIRAs. The description of that work is contained in a paper by Rutledge. Please note the last sentence in the abstract, "Financial statements starting after Sep 15, 1991 will be subjected to the guide." The paper describes the guide, its content and its application, and is GAAP for common interest realty associations (AICPA's name for property owners associations).
__ Access the paper at Ms. Rutledge "CIRA financial statements and required supplementary information" at [http://www.nysscpa.org/cpajournal/old/12106213.htm]. After referring to that paper, click your browser's back button/arrow to return to this post.
__ All issues with the Financial Accounting Standards Board (FASB) were resolved by 1993. See 1993 interview with AcSEC Chairman Norman Strauss. Search the interview for "The AICPA guides" and read the next several paragraphs. Access the interview at Mr. Strauss "The AICPA Accounting Standards Executive Committee" at [http://www.nysscpa.org/cpajournal/old/14152802.htm]. The interview states in part concerning the CIRA Guide, "... FASB supported the issuance of the guide." The issue had to do with whether the common areas should be shown as an asset on the association's balance sheet and it was resolved." This statement means that FASB supports the recommendations in the CIRA Guide on whether or not the common property should be recognized as assets. After referring to that paper, click your browser's back button/arrow to return to this post.
__ The 120+-page CIRA Guide states in the first paragraph on the first page of text in the Notice to Readers, "This AICPA Audit and Accounting Guide has been prepared by the Common Interest Realty Associations Task Force to assist preparers of financial statements in preparing financial statements in conformity with generally accepted accounting principles and to assist auditors in auditing and reporting on such financial statements in accordance with generally accepted auditing standards." AICPA also publishes a Supplemental Checklist for Review of Common Interest Realty Associations, PRP Section 22,060, at [http://www.aicpa.org/interestareas/peerreview/resources/peerreviewprogrammanual/2008/downloadabledocuments/prp-22060.pdf].].
__ (added 2011 Dec 26)>>> An application for the State of Virginia is available at "A Guide to Financial Reporting Responsibilities for Common-Interest Community Associations in Virginia".<<< 
__ (edited 2010 Jul 17)>>> AICPA keeps changing the links to the various documents on their website. My best luck is searches is to search with the string ["Audit and Accounting Guide" AND "Common Interest Realty Associations"] After extensive searching, It was previously available in booklet form from AICPA as Product# 012578PDF.
__ The AICPA has recently made the AICPA A&A Guide for CIRAs available for download at [www.aicpa.org/InterestAreas/AccountingAndAuditing/Resources/AudAttest/AudAttestGuidance/Pages/AAG_CIRA.aspx]. The linked page provides an explanation of the Guide and the recent change to make FASB documents the authoritative documents. The linked page states:

"FASB ASC 972, Real Estate — Common Interest Realty Associations, provides authoritative guidance for Common Interest Realty Associations."

If interested in the Guide, my recommendation is that you immediately download the Guide. AICPA may change its availability. (added 2011 Dec 26)>>> The guide appears to be no longer available from AICPA.<<<
__ With regard to status, the Guide states on its title page:

"This edition of the AICPA Audit and Accounting Guide for Common Interest Realty Associations, which was originally issued in 1991, has been modified by the AICPA staff to include certain changes necessary because of the issuance of authoritative pronouncements since the guide was originally issued and other changes necessary to keep the guide current on industry and regulatory matters. The changes made are identified in a schedule in appendix F of the guide. The changes do not include all those that might be considered necessary if the guide were subjected to a comprehensive review and revision."

__ (edited 2008 Dec 18)>>> The Guide is also available in CD form at Thomson PPC along with other reference materials.

__ Thomson PPC provides reference materials to aid in the application of this accounting standard. The Guide for CIRA is available in CD form , see Thomson PPC for CIRAs [Product ACIR] at [http://ppc.thomson.com/SiteComposer2/index.cfm?txtFuse=dspShellProductDetail&fuseAction=SHELL&numSiteID=2&numTaxonomyID=232&numTaxonomyTypeID=29&numProdClassID=112]. Practice materials are also available.
__ See Thomson PCC of Homeowners Association at [http://ria.thomsonreuters.com/EStore/detail.aspx?ID=HOAQ]. Click on the tabs for information on description, table of contents and self study. The 2005 description for detail states, "It covers the unique accounting, auditing, and reporting issues for common interest realty associations and shows you how to perform audit, compilation, and review engagements efficiently and profitably. It also provides comprehensive guidance on complex tax issues and assists you in preparing association returns."
__ Thomson PCC also provides a PPC's Practice Aids™ -- Homeowners' Associations, at [http://ria.thomsonreuters.com/EStore/detail.aspx?ID=PHAQ].   <<<

__ (added 2011 Dec 26)>>> Only discussion now appears to be available from AICPA, Common Interest Realty Associations - the AICPA.  This page includes a link to Common Interest Realty Association Wiki, which appears to provide discussions regarding the content of the prior A&A Guide for CIRAs.<<< 
__ (edited 2009 Dec 18) The following is taken from the 2005 Guide information. The Table of Contents from either the CIRA Guide or the Thomson reference materials shows how comprehensive the content is. This is why use of the CIRA Guide addresses almost all accounting issues for property owners associations. Note the last paragraph in the Chapter 1: Users of Financial Statements of CIRAs. Paragraphs 1.32-1.37 of the Guide state,

"Users of Financial Statements of CIRAs
1.32 The rapid growth of CIRAs has created a corresponding growth in the demand for financial information to satisfy the needs of users of the financial statements of such entities.
1.33 The primary users of the financial information of a CIRA are unit owners, whose periodic payments of assessments or carrying charges enable the CIRA to perform its functions. They are primarily interested in information that indicates whether assessments are used for their designated budgetary purposes, and whether adequate funds have been accumulated for future major repairs and replacements. Adequate financial reporting may assist owners in assessing the extent to which the CIRA is meeting its responsibilities to maintain the common property.
1.34 Members of a CIRA's board of directors need timely, comprehensive financial information to make financial decisions. Information on operating expenses and capital expenditures is a vital tool for identifying unusual trends and fluctuations in operating costs and, ultimately, in determining the assessments or carrying charges that a CIRA should collect from its members.
1.35 An understanding of a CIRA's financial condition is helpful to potential buyers in assessing their possible investments. A CIRA's financial statements revealing that the CIRA has a deficit in operating funds or that it has not obtained funds needed for property replacements or major repairs may alert a prospective buyer to seek other investment opportunities or to modify the offer. In contrast, financial information indicating that a CIRA is fiscally sound may help owners sell their units and enhance the value of individual units.
1.36 Other parties that may be interested in a CIRA's financial statements include the following:

Lenders that hold the financing on the property during the development period
Second mortgage lenders
Direct lenders to buyers of units
Government lending-related organizations
Trade vendors
Federal, state, and local taxing authorities
Insurers

1.37 Financial information about amounts due from unit owners and about a CIRA's policies for accumulating funds to meet future major repair and replacement costs on common property is a major concern of lenders, as well as of unit owners and prospective unit owners."

__ To meet the needs of the various users — particularly the owners (members of POAs) — the audits/reviews have to be in common language with good explanations.
__ A important use of this table of contents is to use a word search for the topic of interest. For example, "repair" is covered in §2.20, §3.01-3.08, §4.27-4.32, §5.07,and §7.54-7.56. Similarly, having the complete CIRA Guide in electronic form provides even more search capabilities. For example, a search on "capital improvement" identifies §4.13 which states, "All CIRA activities, except for replacement fund activities, should be presented in the operating fund in the statement of revenues and expenses unless the CIRA has other funds such as deferred maintenance fund or capital improvement fund, etc." The CIRA Guide recommends fund accounting.
__ <Click you browser's back button/arrow to return to your previous web page.>

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• History:
  • 2010 Jul 17 — Updated that bound copy is no longer available from AICPA, but PDF of 2008 version can now be downloaded.
  • 2010 Mar 06 — finally located a link to the AICPA Guide at the AICPA website.
  • 2009 Dec 18 — checked and revised internet links since some were no longer available.
  • 2009 Aug 06 — Internet link to paper on Fund for Major Replacements and Repairs added
  • 2008 Sep 07 — Comment and reply on planning and accounting for Preservation (reserve) fund may be of interest
  • 2008 Aug 15 — Comment and reply on accounting for deferred revenue and expenses may be of interest
  • 2006 May 20 — Internet links checked and updated
  • 2006 May 30 — Internet links checked and updated
  • 2006 Feb 01 — Compiled:
  • 2005 Aug 27 — Initial post
• Links: AICPA Audit and Accounting Guide for Property Owners Associations at [http://govpoa.blogspot.com/2011/12/aicpa-audit-and-accounting-guide-for.html]

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Copyright © 2011 Donald L. Nordeen. All Rights Reserved.  See Copying Posts on This Weblog.
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Comments from the prior weblog
Comment #1
2007 Sep 05
__ I will like to know if FASB 117 should be considered when preparing the Financial Statements of a not-for-profit owners association. Should the section be called "Net Assets" or Owners Equity. Thanks.
Sonia Torres
=====Reply=====
2007 Sep 16
Dear Ms. Torres:
__ I am not an accountant so this is not professional advice. My research is posted in the category, Accounting Principles, at http://swagman.typepad.com/poa_governance/accounting_principles/index.html. The posts in that category include internet links to other references and Wikipedia explanations which should provide you perspective on your question.
__ I believe the applicable GAAP for owners associations is the AICPA Audit and Accounting Guide for Common Interest Realty Associations ("CIRA Guide"). It was first issued in 1991 and appears to be updated each year. I believe it predates FASB 116 and 117 which were issued in 1993. Internet links to all of these documents are provided in the above internet link to my weblog. My reading is that the principles in FASB 116 and 117 are incorporated in the CIRA Guide but with terminology that is appropriate to owners associations. The terminology is consistent with a charity type of nonprofit. The terms of donors and donation are used rather than members, dues and assessments. Fund accounting is required in both FASB and CIRA Guide. Both also use the term "Net Assets" rather than "equity". "Net Assets" appears to be the correct term for all nonprofits. My recommendation is to use the CIRA Guide for both internal accounting and audits. I believe complying with the CIRA Guide and its referenced documents would meet the requirements for GAAP accounting.
Don Nordeen

Comment #2
2008 Jul 07
Re: Planning and Accounting for Preservation (Reserve) Fund
__ I read a comment in the Journal of Accountancy saying future replacement should not be recorded as a liability. Our acct is recording a large receivable due from the operating fund to make the replacement fund equal the replacement study. He says that complies with CIRA Guide. I think it inflates the fund balance of the replacement fund showing an asset that is not possible to collect in the near term. Your thoughts?
Tony Reski
====Reply====
2008 Sep 05
__ There are no easy or simple answers to your question, except to say that a management problem can't be fixed with accounting entries. Unless required by law, accounting rules, and/or governing documents, future replacement costs are usually not recorded as a liability. The accumulated depreciation produces a decrease in asset value which is reflected as a decrease in net assets (equity). However, depreciation is not a good predictor of future funding requirements.
__ A much better estimate is obtained from a competent reserve study. What really matters is the reserve (I prefer the term preservation as more descriptive.) and financial planning. The preservation planning should be based on the requirements in the governing documents and/or policy adopted by the board. The accounting can only implement what is so stated, and then only provides a "snapshot" at the date of the financial report.
__ On the other hand, the planning document provides a forecast over the planning period which may be 20 years or more for the preservation fund. With new accounting and legal requirements, unfunded liabilities are now entering the accounting. The use of fund accounting, which is required by the AICPA A&A Guide for CIRAs, requires an annual credit allocation to the fund (based on the reserve study) with an offsetting debit entry to net assets (equity account).
__ When capital repairs, replacements and/or renovations are made, the preservation account is debited by the amount. The credit entry is to unrestricted cash or some investment account which provided the cash. If a separate cash or investment set-aside account is used, then that account should be debited with the set aside and operating cash or some investment account should be credited. When the set-aside cash is used for capital RRR, the cash is moved to the unrestricted cash and then paid as described above. Perhaps others have experience with both the planning and the accounting, and could add their ideas and recommendations.
Don Nordeen

Comment #3
2008 Aug 12
Re: Accounting for Deferred Revenue
__ The guidance on accounting for special assessments is limited and vague. I was taught that the matching principle requires that revenues be reported as a liability (Deferred Revenue) until the expenditures relating to that special assessment revenue are incurred. Conversely, if expenditures occur before the assessment is levied, the expense is capitalized as an asset (Deferred Expense). The deferred accounts are to be released to revenue and expense equally as they can be matched (both the expense and the special assessment that funds it have occurred). The effect is to avoid wild swings in revenue and expense (affecting net income) on a project that occurs over more than one period. The user could also determine that additional assessments will be required if deferred Expense exceeds Deferred Revenue. I find few CPA's that seem aware of this. Is my interpretation correct?
Lil Freedman
====Reply====
Dear Ms. Freedman,
__ I basically agree with your understanding. I am not an accountant, but have studied the accounting issues involved in POA accounting. I rely on accounting standards and papers by experts, but with a perspective of application to POA accounting issues. My reviews indicate that the special assessment accounting is covered in the AICPA Audit & Accounting Guide for Common Interest Realty Associations (CIRA Guide). Every POA would be well advised to obtain a copy of the Guide and use it, in my opinion. A special assessment is normally for a capital project, and would be restricted to a specific purpose (requires fund accounting) as described in GAAP for nonprofits and in the CIRA Guide. The amounts collected would be booked into the restricted fund and then disbursed for the authorized capital expenditures.
__ My understanding of IRS rules is that special assessments for capital projects are not booked as revenue, but rather are booked to the appropriate asset and liability accounts. This is not any different from what is done for assessments collected for the Preservation (reserve) Funds for repair, replacement and renovation of assets.
__ The Matching Principle and its companion Revenue Recognition are described in Wikipedia. The matching principle indicates that the revenues for operation or an expensed project should be matched to the expenses for operation or the expensed project, as you describe.
__ Item #4 in Revenue Recognition Criteria requires that revenues be booked only where "Collectibility is reasonably assured". The "reasonably assured" implies accrual accounting which means that the cash to be collected must be reasonably estimated for the accrual and then adjusted to actual at the end of the accounting period. At the beginning of the fiscal year (or beginning of an expense project), the total dues or assessment would be debited as an Account Receivable and credited to Uncollected Dues (or Other Name).
__ As you state, the cash collected would be booked to a current liability account, Prepaid Dues (or Other Name), and then appropriately allocated as revenue to be used against the authorized expenses. Inherent with this would be a residual of uncollected amounts, Uncollected Dues (or Other Name), at the end of the accounting period. The adjustment to actual at the end of the accounting period (or end of an expense project) would zero the Prepaid account and adjust the revenue accordingly.
__ The remaining Accounts Receivable would be offset by the Uncollected Dues (or Other Name), thus have no effect on the Net Assets at the end of the period. This is a direct result of the matching principle. At the beginning of the next accounting period, the remaining Accounts Receivable and the Uncollected Dues (or Other Name) should be moved to Non-Current Assets and Liabilities. The ongoing Statements of Financial Position will then show the ongoing status of collection of the dues (or assessment for an expense project).
__ With the above, important accounts and categories for management are automatically generated in the accounting. Side-by-side comparisons to prior period provides additional understanding. I encourage others to add their thoughts on this important issue. I may create a separate post on the accounting for annual dues (or expense project). Or perhaps, someone could provide a link to a guide or paper on this subject.
Don Nordeen

Comment #4
2011 Mar 22
__ I am a homeowner and cannot see why our auditor wrote off all the roads and land in our park on this years tax return. The roads have been on the books and depr. on the SL method. Land has been on since the incorp, of the assoc.
----Reply ----
2011 Apr 14
__ I suggest that you ask the Board to request an explanation from the auditor.
DLN