Sun City Board Member Answers Surplus Funds Questions

Surplus Funds and Cash Flow

Answers to Surplus Funds and Cash Flow Questions

By Jim Mayfield,  Board Member

In 1973, I completed my Masters of Accountancy Degree and passed the CPA exam.  The governing rules of the accounting profession (Generally Accepted Accounting Principals—“GAAP”) were much simpler and set by CPA practitioners through their professional governing and standards body, the American Institute of CPAs.

In the over four decades since 1973, the US Congress and state legislatures, Federal and state regulatory bodies, and the legal system have stripped away the self-governance of accounting professionals.  Government has substituted a complex set of Federal and state laws and regulatory agencies that now set generally accepted accounting principals.  

Three adverse consequences of the change of control over accounting principals are that

1. CPAs, CFOs and regulators now speak in a language that is difficult to understand,
2.  GAAP frequently contain conflicts and inconsistencies, and
3. Users of financial information are often confused by accounting reports and the explanation of these reports by accountants, who can’t even agree on or define accounting terms.

These problems are even evident in what should be simple accounting and financial reporting environments, such as common interest communities—HOAs.

My purpose in writing this article is to attempt to strip away the complex accounting language in order to answer three simple questions:

   1)    Does SCA currently have surplus funds (defined in NRS 116) that should be returned to the SCA homeowners or credited to their owner accounts?

  2)    Do the annual homeowner assessments for 2016 need to be increased to cover the cost of transition to self-management?

  3)    Is SCA at risk of running out of cash in 2016? 

For those of you who just want the answers to these questions and don’t care about the details, the answers to all three questions is “no”.  For those of you who want to better understand the answers, I hope you find the explanations straightforward.

Does SCA currently have surplus funds that should be returned to SCA homeowners or credited to their owner accounts?

Commercial corporate financial and accounting rules allow a corporation to retain “profits” (revenues in excess of expenses) in a fiscal year as retained earnings.  No requirement is placed upon a commercial corporation to return retained earnings to stockholders.  However, NRS 116 prevents HOAs from accumulating revenues in excess of expenses (“carry forward funds”), except to the extent that it shows that carry forward funds are necessary to provide for future specific common expenses (term used in NRS 116.3114). (In my view, common expenses don’t include future undefined contingencies or provisions for working capital.)

Calculation of whether or not a HOA has surplus funds begins with a determination of the amount of cumulative carry forward funds from all prior fiscal years as of the end of each fiscal year.  Carry forward funds represent possible surplus funds that must be returned to or credited to the homeowners, unless the HOA can show estimates of future specific common expenses that will use the carry forward funds and reduce future assessments.  Calculations on the attached spreadsheet present the amount of carry forward funds as of December 31, 2014 and estimates for carry forward and surplus funds as of December 31, 2015 and 2016.

Carry forward funds as of the end of 2014 were $827,701, based upon financial information in the 2014 SCA audited financial statements.  Future common expenses for correcting deferred maintenance and transition to self-management are estimated to be approximately $1.15 million, which is greater than the $827,701 of the 2014 carry forward funds.  Therefore, surplus funds did not exist as of the end of of 2014. 

The estimate for surplus funds as of the end of 2015 is approximately $91,000.  (The calculation of this amount is based upon unaudited financial reports and other current estimates.)  Since this amount is less than 10% of the estimate for future common expenses for correcting deferred maintenance and transition to self-management, surplus funds aren’t estimated to exist as of the end of 2015.  An exact determination of surplus funds can only be prepared after receipt of the SCA 2015 audited financial statements in 2016.

Do the annual homeowners assessments for 2016 need to be increased to provide for the cost of transition to self-management?

The estimated cost of transition to self-management of $727,200 can be funded from carry forward funds accumulated through 2015.  Therefore, an increase in the annual homeowners assessment for 2016 is not necessary.

Is SCA at risk of running out of cash in 2016?

The estimate for surplus funds as December 31, 2016 is approximately $491,000.  A precise determination of the amount of surplus funds as of the end of 2016 is not possible at this time due to uncertainties related to actual cost of operations in 2016, cost that will be incurred in 2016 for transition to self-management, and currently unknown future common expenses. The only reason an estimate was calculated was to analyze whether or not SCA could have a cash flow problem in 2016.  Using the attached estimate, a basis does not exists to support a conclusion that SCA will run out of cash in 2016.  However, if transition costs increase by more than $491,000 over the current estimates of $727,000, cash flow deficits could exist in the fourth quarter of 2016 and will have to be managed by using cash conservation techniques.

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Author’s Notes.

Note 1.  The accounting interpretations and estimates used in this article are strictly the views and estimates of the author.  They do not represent an opinion or assessment of the Board of Directors.

Note 2.  The budgeting process at SCA should include accounting for both carry forward funds from prior years as well as revenues earned in the year being budgeted.  This practice has not been followed in prior years and must be incorporated into the budget process in future years.


For the detail oriented, the following is a numerical comparison to the 2 methods of evaluation.

                                          

1. 
   Marty WOctober 12, 2015 at 6:21 PM

   Sure, wait till the end of the year and get all of everything in order. Isn't it odd the way it works though: Figures never lie, and liars never figure?