Definition
Homeowners associations and condominium associations (common interest realty associations) collect assessments to fund operations and set aside reserves for future major repairs and replacements of common property, such as roofs, paving, and elevators. State law or governing documents may restrict use. Financial statements present reserve balances as designated or restricted fund balances or net assets, depending on whether the board or an outside party limits use. ASC 972 calls for disclosure of how future major repairs and replacements are funded and for presenting related information as required supplementary information.
Why it matters in an audit or review
Auditors test that reserve cash is separate and properly classified, that assessments are recognized per the governing documents, and that borrowings from reserves are disclosed. The supplementary reserve study information is outside the basic financial statements and the auditor addresses it under the supplementary information requirements (AU-C 730, because the future major repairs and replacements information is required supplementary information).
Example
(Illustrative) A reserve study shows a $90,000 annual contribution needed. The board budgets $60,000 for the year. The $30,000 shortfall is disclosed as underfunding relative to the study.
Common mistakes
- Treating reserve cash as operating cash.
- Omitting the reserve study update.
Sources
- FASB ASC 972, Real Estate-Common Interest Realty Associations (reserve funds, future major repairs and replacements disclosure and supplementary information)
- AICPA, AU-C Section 730, Required Supplementary Information
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error