Homeowners associations (HOAs), condominium associations and cooperatives fall under the heading of common interest realty associations (CIRAs). They are small, often run by volunteer boards and a management company, and their governing documents or state statutes frequently require an annual audit, review or compilation depending on size. Their financial statements look different from those of a business, and a few issues come up in nearly every engagement.
This guide is a starting point for staff and managers new to the area. State law varies a lot, so read the Codification, the AICPA's industry guide and the association's governing documents alongside it.
Which accounting guidance applies
The main US GAAP guidance for these entities is in ASC 972, Real Estate: Common Interest Realty Associations, along with the general topics for revenue, property, investments and contingencies. The AICPA publishes an Audit and Accounting Guide for common interest realty associations that many practitioners use for illustrations.
ASC 976 is the Codification topic for retail land. It covers developers who sell land lots, not the accounting of an association that owns and manages common property. It matters only where a developer entity, and not the association, is the client. In most association audits the relevant topic is 972, so check the scope paragraphs before citing 976 in a file.
Also decide whether the entity reports under US GAAP at all. Some small associations prepare statements on the income tax basis or another special purpose framework, in which case the report and the notes need to reflect that framework. Check what the governing documents, the state statute and the lender require.
How an association's financials differ
Fund accounting presentation
Many associations present an operating fund and one or more replacement or reserve funds, either in separate columns or as designations within net assets. The classification of net assets depends on the source and on whether the association is restricted by law, by a declaration or by its board. Board designations are not donor restrictions. In states where statutes require reserves to be held for stated purposes, the effect on classification should be considered and documented.
Member assessments
Revenue is mainly member assessments, regular and special. ASC 606 replaced the association-specific revenue guidance in ASC 972-605. Practitioner guidance generally treats operating assessments as revenue recognized over the period they cover, net of amounts not expected to be collected. Many practitioners recognize assessments for replacement projects as the related reserve spending occurs, with unspent amounts held as a contract liability, and recognize special assessments based on their purpose, which can be over time or at a point in time. These are judgments about performance obligations, so document the association's analysis instead of relying on how the management company's software reports revenue.
Assessments received in advance are a liability, and delinquent assessments need an allowance for amounts not expected to be collected. Late fees, interest, fines and legal fees charged to delinquent owners are separate revenue items and have their own collectibility concerns.
Replacement reserves
Associations accumulate cash for roofs, paving, elevators, pools and other components with finite lives. The reserve study estimates remaining useful lives and replacement costs and proposes funding levels.
ASC 972 treats information about future major repairs and replacements as supplementary information presented outside the basic financial statements. It includes the estimated remaining useful life and the current cost of replacement for each major component, the method of funding, and the balance of designated funds. When the information is presented, the auditor applies the limited procedures required by AU-C 730 for required supplementary information and includes an other-matter paragraph in the audit report. Where the association has not presented it, the report notes the omission.
The auditor does not audit the reserve study. The auditor makes inquiries about the methods, compares the information with the study, and considers whether it appears to be reasonable and consistent with the financial statements.
Common property
How common property is accounted for depends on the facts and on the property guidance in ASC 972. The answer turns mainly on who holds title and on the association's ability to dispose of the property. In many condominiums the owners hold title to the common elements as tenants in common, and the association does not capitalize them. Assess each association's facts and document the conclusion, as the same words in a declaration can lead to different outcomes.
Tax filings
Associations may file Form 1120-H under IRC section 528 or Form 1120. Some follow the principle in Rev. Rul. 70-604, where excess membership income is applied to the following year or refunded. Tax is outside the audit scope, but income tax expense, the filing status and unusual items should be understood for the financial statements.
Audit risks and approach
Fraud and misappropriation
Volunteer boards and a single bookkeeper with check authority create a classic misappropriation setup. The risk is highest around cash receipts, checks to vendors, reimbursements to board members and management fees. Include segregation of duties in the understanding of internal control and test it. Lockbox arrangements, bank statements sent to a board member and dual signatures are all evidence about the control environment. See fraud risk assessment under AU-C 240.
Assessment revenue and receivables
Revenue is usually predictable: units multiplied by the assessment rate for the year, plus special assessments. Use an expectation approach: recompute from the unit count and the rate approved by the board, then compare to recorded revenue. Test the unit roster for completeness, the rates against board minutes, and special assessments against the board's resolutions.
For receivables, obtain the delinquency report, test it against the ledger, and consider confirming the largest balances. Evaluate the allowance by looking at collections after year-end, the status of liens and collection actions, and past loss experience. The receivables aging and allowance guide applies, adapted to assessments.
Reserves and cash
Confirm bank and investment balances directly. Check that reserve funds are in the accounts the association says they are, and compare the designated balance with the amount of cash and investments set aside. Review investments for compliance with the board's investment policy and the governing documents, and test their fair value. Test transfers between operating and reserve accounts against board approvals.
Expenses and management company
Management companies often process payments, collect assessments and prepare records. Understand the management agreement, the fees and the controls at the manager, and decide if a service organization report is available and relevant under AU-C 402. Test expenditures for approval, contract support and proper period, and look at repairs paid from the operating fund that should have been paid from reserves or the reverse.
Related parties and developer matters
Directors may own units or have interests in vendors. For newly turned-over associations, the developer may owe assessments or have promised deficiency funding. Obtain the turnover documents and consider developer-related receivables and commitments. See related party transactions.
Contingencies
Construction defect claims, litigation with owners and insurance deductibles are common. See loss contingencies under ASC 450 and obtain legal letters under AU-C 501.
State requirements
Many states regulate associations by statute. Some require audited, reviewed or compiled statements depending on annual revenue, some impose reserve funding requirements, and some require periodic structural or reserve studies for certain buildings. Florida, California and a number of other states have detailed statutes, and they change. Read the current statute and the governing documents, and include the requirement in the engagement letter and the planning file. The audit engagement letter guide covers the terms to confirm.
Common problems
- Treating the association as a business, with no awareness of the supplementary information on future repairs.
- Reserve cash that cannot be traced to a bank or investment account.
- No allowance on delinquent assessments despite an aging with old balances.
- Special assessments recognized in the wrong period or without matching board approval.
- A management company's accounting system treated as reliable without testing.
- Citing the wrong topic in the Codification.
- An engagement letter that ignores the state statute that requires the audit.
Frequently asked questions
Which ASC topic covers HOA accounting?
ASC 972 covers common interest realty associations. ASC 976 covers retail land and is generally relevant only for developers selling lots.
Are reserve funds restricted net assets?
Not automatically. Board designations are not donor restrictions. Whether a reserve is restricted depends on the governing documents and on state law. Document the facts and the basis for the classification.
Does the auditor audit the reserve study?
No. The reserve study information is supplementary information. The auditor applies limited procedures under AU-C 730 and reports on it with an other-matter paragraph.
Does an HOA need an audit?
It depends on the state statute, the governing documents and lender or owner requirements. Some require an audit above a revenue level, others allow a review or compilation. Establish the requirement before accepting the engagement.
How are delinquent assessments handled in the financial statements?
The association records assessments receivable, and recognizes an allowance for amounts not expected to be collected. Late fees, interest and legal costs charged to delinquent owners are accounted for separately and carry their own collectibility concerns.
CORAA prepares ready-to-review audit files for US CPA firms; see /us.
Sources
- FASB ASC 972, Real Estate: Common Interest Realty Associations (including the future major repairs and replacements disclosures)
- FASB ASC 976, Real Estate: Retail Land (scope only)
- FASB ASC 606, Revenue from Contracts with Customers (supersedes ASC 972-605)
- AICPA, AU-C Section 730, Required Supplementary Information; AU-C Section 402; AU-C Section 501
- AICPA, Audit and Accounting Guide, Common Interest Realty Associations
- IRC section 528 and Form 1120-H instructions, irs.gov; Rev. Rul. 70-604
- Withum, "New Revenue Recognition Standards for CIRAs: Are You Ready?" (practitioner guidance on ASC 606 for associations). withum.com
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AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error