Understanding Financial Statements and the Independent Auditor's Report for Condominium Associations
Glenn Tyndall, CPA
The primary purpose of an audit is to assure users of the financial statements that these statements are reliable.
When is a condominium association required to have an audit?
Florida law requires condominium, cooperative, and homeowners' associations to have audits. Condominium and homeowners’ Association financial reporting requirements are similar under the following Florida Statutes:
- Florida Chapter 718.111 – Condominium Act
- Florida Chapter 719.104 – Cooperatives Act
- Florida Chapter 720.303 – Homeowners’ Association Act
The level of required financial report depends upon condominium association’s annual revenues.
- Associations with revenues of more than $400,000 must produce an audit.
- Associations with revenues of $200,000 to $400,000 must produce a review.
- Associations with revenues of $100,000 to $200,000 must produce a compilation.
- Associations with revenues of less than $100,000 must produce a report of cash receipts and expenditures.
- Community associations with less than 50 units or 50 parcels may produce a report of cash receipts and expenditures, regardless of annual revenues.
Board Members and Community Association Managers (CAMs) are required by Florida Law to issue financial reports timely. The association's required to provide the year-end financial report to owners or let them know it’s available to them free of charge as outlined below:
- Condominium Association have 120 days after the fiscal year ends.
- Cooperative Association have 90 days after the fiscal year ends.
- Homeowners’ Association have 120 days after the fiscal year ends.
What does a CPA do during an audit?
The auditors' investigation of financial statement items looking at the client's accounting records, but is not limited to these records. The auditors' examination includes observation of tangible assets, inspection of such documents as purchase orders and contracts, and the gathering of evidence from outsiders including banks, customers, and suppliers, as well as analysis of the client's accounting records. The condominium association's reserve study will also be reviewed during the audit.
The Condominium Association’s Financial Statements and the CPA’s Audit Report: 7 Parts Explained
Part 1 – Independent Auditor’s Report
If you’ve received an audit and the auditor has issued the report, you'll see the Independent Auditor's report in the first page or two. This report is just the CPA's opinion on whether the financial reports are presented in accordance with generally accepted accounting principles.
A “clean” audit will result in an unqualified opinion. If only one part of the financial statements don’t conform to the accounting guidelines, a qualified opinion will be given. However, if the financial statements are materially misstated an adverse opinion will result. In some cases, an auditor will disclaim an opinion. This disclaimer means the auditor is unable to give an opinion, perhaps because a fire destroyed the accounting records so there is nothing to audit.
Part 2 – Balance Sheet
The Balance Sheet lists all the association’s assets and liabilities at a specific time – at year-end for the annual financial report. Some people have complicated explanations of what the information in a balance means to financial statement users. However, to put it simply:
“The balance sheet simply shows the “net worth” of an Association.”
The difference between assets and liabilities is the Association’s fund balance. If assets exceed liabilities, the Association will have a positive fund balance or “net worth.” Associations may have a negative net worth if their liabilities exceed their assets. An Association with a negative fund balance is usually not in a strong financial position. In this case, the Board of Directors should seriously consider authorizing a special assessment or increasing maintenance fees to strengthen the Association’s financial position.
Part 3 – Statement of Revenues, Expenses, and Changes in Fund Balances
As the Statement of Revenues, Expenses, and Changes in Fund Balances is similar to an income statement of a business. This statement tells us the financial reports over a specific time period, showing how much revenue was earned from January 1 to December 31. This statement is not the same as a Statement of Cash Flows. There are differences between these two statements, with some items included in one statement but excluded from the other.
Here are a few examples:
Depreciation. The general wear and tear of furniture and equipment that requires their eventual replacement is what’s referred to as depreciation. Depreciation gets expensed over the expected life of that piece of furniture or equipment. While depreciation is expensed on the Statement of Revenues, Expenses, and Changes in Fund Balances, no vendor received any cash for that expense. That's why depreciation is called a “non-cash” item.
Loans. An Association that successfully receives financing from a bank will have received cash. However, cash received for a loan is not revenue and won't appear on the Statement of Revenues, Expenses, and Changes in Fund Balances. Instead, it’ll be shown in the financing section of the Statement of Cash Flows as a cash inflow.
Receivables. As the condo association bills owners for maintenance fees, it records that amount as revenue regardless of whether or not the owner paid the bill. At the end of the year, receivables are the record of how much money is owed to the association. Receivables are a line item on the Balance Sheet. However, the Statement of Cash Flows will show only the amount of cash received from unit owners. In an extreme case, if an Association billed owners $200,000 in assessments, but none of the owners paid a dime. The Statement of Revenues, Expenses, and Changes in Fund would show $200,000 of revenue, while the Statement of Cash Flows would show $0 cash received from owners.
Part 4 – Statement of Cash Flows
The Association’s Statement of Cash Flows shows where cash is coming from and where cash is going to. There are 3 sections to this statement:
Cash flows from operating activities show us how the cash from members’ assessments or maintenance fees was spent on the association's routine operations. The Statement of Cash Flows will show you how much cash it’s actually being received by members (as described above). It’ll also show how much employees and vendors/ suppliers got paid.
Cash flows from investing activities shows us how much cash the association spends on investments, furniture or equipment, or loans that it’s making to other businesses.
Cash flows from financing activities shows us how much cash came in from issuing debt (or how much cash the association spent to pay down any loans).
Part 5 – Notes to the Financial Statements
I recommend reading the Notes to the Financial Statements before looking at the financial statements, especially if you’re new to reading an Association’s financials. The Notes to the Financial Statements give the other statements context and provide the reader with descriptions of accounting terms and principles. The notes will also disclose significant business transactions, lawsuits, and any related-party transactions.
Part 6 – Additional Information: Comparison of Operating Fund Revenues and Expenses to Budget Amounts
The Board of Director’s will adopt a condominium association’s budget for the fiscal year. At the end of the year, the budget gets compared to the association's actual financial results. The Comparison of Operating Fund Revenues and Expenses to Budget Amounts is just that comparison. The revenues and expenses are usually broken down into greater detail here compared to anywhere else in the financial statements. That’s what makes this statement important. Significant variances will show how good the condo association was managed.
Part 7 – Supplementary Information: Supplementary Information of Future Major Repairs and Replacements
The condo association will usually hire an independent reserve analyst to estimate how long the components of common property will last and how much it will cost to replace this property. You’ll usually see a breakdown of the components of the common property, such as roof, paving and sidewalks, and so on. You’ll then see how much it is expected to cost to replace these items and how much the condo association has put aside to cover these costs.