An independent Chartered Professional Accountant (CPA) prepares, audits and issues the financial statements of a condominium corporation. In doing so, he is reporting to the owners of the condominium units the state of the financial position of the corporation. However, before issuing the final report, he needs the approval of the board of directors, who represent the owners.
It’s important for board members to review the draft financial statements and know what questions to ask before giving their approval. The board is familiar with the financial dealings of the corporation and therefore well-positioned to detect any unusual items. This step ensures that proper financial controls have been followed. After all, the owners rely on the board members to fulfill this responsibility.
The financial statements consist of three main parts: the balance sheet, the statement of general fund operations and the statement of reserve fund operations. Supplementary statements include the statement of cash flow.
The balance sheet
The balance sheet reflects the financial position of the corporation at a point in time, the year end of the corporation. It breaks down the financial position to the following components: assets, liabilities and fund balances (operating and reserve). When the financial statements are presented to the board for its approval, board members should ask some of the following common questions when they review the balance sheet:
Is there enough operating cash to meet the immediate obligations of the corporation? In other words, the directors should ensure the operating bank account, together with any receivables, is sufficient to meet accounts payable and accrued liabilities.
Are the cash reserve and investment in line with the reserve fund balance? Remember that the reserve fund study ensures sufficient cash is available to meet anticipated capital replacement costs.
What are the common element assessments receivable (better known as unpaid condominium fees)? Is any of this amount outstanding more than 30 days? And, if so, what action has been taken to collect it? If the receivable is current, was it collected after the year end?
What is the breakdown of the accounts payable and the accrued liabilities? Is there any amount outstanding more than 60 days? And if so, what is the reason for not paying it? It’s important for the board to be aware of any amount that is unpaid for a long period. This will help avoid, among other things, potential lawsuits or a lien against the corporation.
Does the reserve fund balance meet the reserve fund study requirement? If not, what are the reasons? What can be done about it? It’s common to see capital replacement expenses incurred earlier — or later — than expected. This should be noted and brought to the attention of the engineer who conducted the reserve fund study.
The statement of general fund operations
On the one hand, the balance sheet reflects the financial position of the corporation at year end. The statement of general fund operations, on the other hand, reflects the results of the 12 months before year end. It also includes, for comparison purposes, the prior year’s results and the current year’s budget.
Common questions about the statement of general fund operations include:
Is there any large variance compared to the prior year’s results or the current year’s budget? The answer should help the board identify any unusual fluctuations in expenses and seek out explanations.
What is the reason for variances? Was it a controllable or uncontrollable expense? Controllable expenses can include hydro, repairs and maintenance. Some of the uncontrollable variances are utilities, insurance and new contracts, such as landscaping, snow removal and elevators.
Has the corporation broken even, generated excess revenue or ended up in deficit? The result will influence the future condominium fee. Any deficit will have to be incorporated into the next year’s budget. A surplus may help keep the condominium fees in line or be transferred to the reserve fund if the board finds it necessary. Note: Once the funds are transferred to the reserve account, they cannot be then transferred back to the operating account, should a need arise.
The statement of reserve fund operations
The statement of reserve fund operations refers only to expenses that are qualified to come from the reserve account. The common questions are as follows:
Was the allocation to the reserve account from the owners’ condominium fees done in accordance with the budget, which reflects the contribution required by the reserve fund study? A review of the reserve fund study will show the required yearly contribution, which should match the amount shown on the statement of reserve fund operation.
Do all the expenses qualify as reserve fund expenses as defined in the Condominium Act? Section 93 (2) of the act restricts these expenses to major repairs and replacement of the common element and assets of the corporation.
Are there any reserve fund expenses that happened earlier than expected in the reserve fund study? Knowing the answer for this question will explain any variance between the reserve fund balance and the financial statement balance.
Knowing and understanding the financial position of the condominium corporation is one of the most important aspects of the board’s role in governing for the corporation’s current and future strength.
Shlomo Sharon is the CEO of Taft Management.