Accounting for Common Interest Realty Associations
Tanju, Murat Neset, Sylvestre, A. J., The National Public Accountant
Accounting For Common Interest Realty Associations
In 1961, the U.S. Congress enacted the National Housing Act which extended the government issuance of mortgages to condominiums. This was viewed as a declaration of confidence by the U. S. Congress and the Federal Housing Authority which provided the impetus for condominium legislation on the state level such that by 1969 all 50 states had passed some form of condominium legislation.(1) Legislation for other similar forms of real estate ownership began to appear in the years that followed.
Today, condominiums, cooperatives, planned unit developments and time shares are household terms. Unique to these forms of real estate ownership is the existence of common property and the establishment of an association to manage such property. These associations are generally referred to as common interest realty associations (CIRAs). Indeed, so popular is this form of real estate ownership that the Community Associations Institute recently reported that one of every eight Americans lives in housing that is managed by CIRAs.(2)
CIRAs are required to provide financial information to their members on a regular basis. Financial statements of CIRAs are of utmost importance to members of the CIRA in order to determine whether assessments are used for budgetary purposes and whether common property is maintained and replaced according to a specified plan. Potential buyers are also keenly interested in these statements in order to properly assess the value of their purchases. Only through an understanding of these statements can new buyers and existing owners avoid costly surprises. Many other users, such as real estate agents, lenders, insurers and taxing authorities, are also interested in the information provided in a CIRA's financial statements.
Today, all user groups demand better accountability from the managers of CIRAs. This demand, in turn, encourages CIRA management teams to utilize the services of accountants. The increasing number of CIRAs and the emphasis placed upon improving the quality of information provided in financial statements have expanded the need for accounting services. Given the growing importance of this market, practitioners should be aware of those regulatory and accounting developments that affect CIRAs, especially in such bellwether states as Florida and California.
For example, Florida now requires condominium association boards to deliver to each unit-owner a complete report of actual cash receipts and disbursements for the last 12 months. The Florida administrative code requires condominium associations to provide:
1. Compiled statements when
annual cash receipts total from
$100,000 to $200,000, 2. Reviewed financial statements
when annual receipts are
within $200,000 to $400,000, 3. Audited financial statements
when annual receipts are
$400,000 or more.
The requirement to provide compiled/reviewed/audited statements may be waived annually by the majority vote of the unit owners.(3)
Under the Florida administrative code, reviews and audits must be performed by certified public accountants. At the same time, the code of ethics of certified public accountants allows an accountant to both compile and audit the financial statements of the same CIRA. In Florida, unit owners and/or CIRA managers are well-advised to retain public accountants instead of CPAs for their compilation work. This will assure the independence of the CPAs because they will not be auditing their own work.
Accounting for CIRAs is an ever-expanding market, and practitioners must keep pace with recent developments in order to provide the best possible service to clients. One such development is the expected issuance by the AICPA in 1990 of the first official guide for CIRA accounting.
The exposure draft of the proposed guide is composed of nine chapters and an appendix with illustrative financial statements. …