Condo Reserve Fund Accounting Question

J.J. from Hartford County writes:

Dear Mister Condo,

Why does our balance sheet show all assets but only current liabilities? We have a Reserve Fund for replacing items of about $150,000. Current liabilities are shown at $4,000. However, the roofs are halfway through their useful lives, and will need to redone in 10-12 years. Shouldn’t the fact that half the life of the roofs has been “consumed” be shown as a long-term liability? I estimate this liability (i.e., half the cost of replacement roofs) at about $400,000.

Mister Condo replies:

J.J., I am glad that your association has a Reserve Fund with a significant balance. I can’t tell you how many letters I have received lately where the Reserves were not nearly as substantial as yours. However, you make a great point that even with $150,000 in the Reserve Fund, the Fund may be significantly deficient. That generally leads to Special Assessments or an association loan when the time comes to actually make those repairs. But your question was about accounting practice, and for that, I turn to my friend and HOA accounting expert Sam Tomasetti, CPA of Tomasetti, Kulas & Company, P.C.. Here’s what Sam had to say:

“The nature of the general accepted accounting principles used to prepare your financial statements at this time is to reflect items based upon closed transactions:  fees earned as accounts receivable, funds collected, expenditures committed, or paid.  In addition, assets owned in common by all the unit owners like roofs are not the property of the association but are reflected in the individual unit owners’ personal assets.  As I apply this context to your question, the roofs are not the property of the condominium association, and so they will not be listed among the assets on the balance sheet.  Since they are not listed as assets, you will not see them being “consumed”.  The logic is the same as to the liability concern you have raised.  The analysis you are making is a good one as to being mindful of keeping your property in good condition, and I think it is something you should definitely keep track of in the context of monitoring your replacement reserve and whether or not funds will be available when needed.”

Hope that helps, J.J.!

A few of our LinkedIn followers asked for a bit more information. Sam goes on to clarify:

“Perhaps a check in with an attorney in CT would be appropriate.  My understanding of the law is as I have stated above.  I believe when someone buys a unit they are paying for their “walls in” plus their undivided interest in the common elements.  The purchase price of the unit reflects this.  This would be why the common elements are not reflected on the books of an association and maintaining common elements are the responsibility of the association.”