Last update: 2009 Mar 30. Click History for a list of changes and updates.
__The continuation of this post discusses three aspects of financial reports: importance of high-quality financial information, explanation of the Preservation (reserve of replacement) Fund, and explanation of the Preservation (reserve for replacement) Fund, and Estimated financial parameters for the end of 2008.
Don Nordeen
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- Key Words:_ Business Reviews, 2008; Financial Information, 2008 General; MOA Operations, General/Total; Reserves for Capital Repair; Working Capital
2008 MOA and PCC Financial Results (continued)
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Why are the Financial Reports Important? #FinReports
__It is human nature to prefer to report good news. That human nature is likely the driving force behind Generally Accepted Accounting Principles (GAAP) which include Audit & Accounting Guides/Standards for various types of accounting to prevent the good news preference from distorting the financial information disclosed.
__The accounting information should be as realistic as possible — not optimistic, not pessimistic, complete, no omissions. Because of human nature to present good news and avoid or disguise bad news, specific requirements are included in GAAP. Typically an audit is used to verify that the financial reports conform to GAAP and have accurately presented the financial results.
__Questions concerning the accounting should be quickly resolved. None should be ignored. If the accounting is done correctly, there are easy answers to any concerns.
__With full and accurate accounting information, all involved will be working with the same facts. All can therefore be focused on the problem areas, challenges and opportunities.
__Consider:
- Were there too few or too many questions concerning Madoff's accounting?
- Were there too few or too many questions concerning Enron's accounting?
- Were there too few or too many questions concerning WorldCom's accounting?
- Were there too few or too many questions concerning Adelphia's accounting?
- Were there too few or too many questions concerning accounting for the Gaylord DDA?
- Were there too few or too many questions concerning accounting for St. Mary's Cathedral?
- When management attempts to discourage questions about the accounting, should there be more or fewer questions?
- When management does not answer questions concerning the accounting, should there be more or fewer questions?
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Why is the Preservation Fund Important? #PreservationFund
__This fund sets aside cash and cash equivalents for future capital repairs, replacements and renovations (RRR) to ensure that the funds are available when needed for such capital expenditures. Accordingly, it is a restricted fund — to be used only for the stated purposes. This fund has many names. The accounting term is reserve because cash is "reserved" for the restricted purpose. An analysis to estimate the future capital expenditures is typically called a reserve study. MOA's CPA uses the term "Replacement". As I have studied this issue further, I have adopted to the term "Preservation Fund" (or possibly "Asset Preservation Fund") because it is the most descriptive to the general public.
__In a private business or even in a publicly-traded corporation, the same needs for asset preservation exist. The management can decide to set the cash aside for such future capital expenditures, or management might decide that the capital expenditures would be financed with new loans — or a combination. The obvious question is why doesn't a similar policy work for property owners associations (POAs)?
__The simple answer is that the owners/members decide whether or not to authorize the capital expenditures with approval of funding, not the management of the POA. If the members decide not to pay for the required capital expenditure, the assets will deteriorate as occurred at Michaywé during the 1980s and 1990s when the developer refused to make the necessary capital expenditures. Run-down and tired facilities have an adverse effect on the community, property values, and attractiveness of individual residences and the community as a whole. To have confidence that the asset preservation expenditures will be timely made, owners must commit to one another to set aside the required funds. It is all part of the interests of the owners/members being inescapably intertwined with one another.
__See the post, Reserve for Repair, Replacement and Renovation (See Welcome post for access.), for a further explanation including a table showing the numerical reserve study. A column showing the expenditures required in the 2006-2010 time period has been added as an indication of status.
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Estimates for Various Year-End Financial Parameters #EstFinPar
__Estimates for various financial parameters (first column) are shown in the table below. The estimates (third column) are based on the methodologies used by the CPA's for the years 2005-2007 as stated in the CPA's audit reports and financial statements. The second column provides the numbers from the 2008Q4 Business Review. The Notes expand on the Notes in my 2009 Mar 25 email to MOA members and include links to other posts that provide further explanation and references to the methodologies used.
__Estimates for various financial parameters (first column) are shown in the table below. The estimates (third column) are based on the methodologies used by the CPA's for the years 2005-2007 as stated in the CPA's audit reports and financial statements. The second column provides the numbers from the 2008Q4 Business Review. The Notes expand on the Notes in my 2009 Mar 25 email to MOA members and include links to other posts that provide further explanation and references to the methodologies used.
__The table below shows that a special assessment of $1900 per lot ($1050 per lot if the long-term loan is left in force) and an annual dues increase of $220 per lot (not $300 reported to MOA members in my 2008 Mar 25 email which was before the depreciation adjustment was made) are required to MOA and PCC to be in good financial condition and the assets to be preserved in good commercial condition for the current operational model. However, the estimates for the Replacement [Preservation] Fund are based on a 2005 Reserve Study. The current treasurer, who is an architect, has stated that the Reserve Study does not include all assets and that preservation costs are understated. Consequently, more than $220 per lot is required.
Financial Results for Selected Parameters (2008 YTD)
__________________________________________________Using CPA's_______
Parameter______________________________2008Q4 BR______Methods____Notes_
MOA&PCC Operating Profit (Loss)_______($250,000)___($300,000)______1
PCC Operating Profit (Loss)___________($244,757)___($444,757)______2
Annual Cash Flow for Generic Accounts and Items____________________3
___MOA&PCC Operating Profit (Loss)____($250,000)___($300,000)____Line 1
___Adjustment for Depreciation__________$252,000_____$252,000______4
___Line of Credit, Net_________________($50,000)____($50,000)______5
___Loan Payments_______________________($70,000)____($70,000)______5
___Capital Improvements________________($43,000)___($100,000)______6
___Replacement Fund____________________($48,000)___($113,000)______7
______Total variance__________________($209,000)___($429,000)__Approx.
______________________________________________________________$220/lot
Working Capital_____________________Not Reported___($693,917)______8
Replacement Fund Assets_________________$228,304_____$228,304______9
Replacement Fund Net Assets ________Not Reported_____$330,272_____10
Required Replacement Net Assets_____Not Reported___$1,289,350_____11
Current Cash Shortfall
___Working Capital_______________________________($1,000,000)_____12
___Replacement Fund______________________________($1,060,000)_____13
______Total Cash Shortfall_______________________($2,060,000)_____14
Long-Term and Other Debt_________________________($1,642,838)_____15
_______________________________________________________________Approx.
_____________________________________________________________$1060/lot
Booked and unbooked debt_________________________($3,702,838)_ __16
_______________________________________________________________Approx.
_____________________________________________________________$1900/lot
Notes
- Incorrect dues revenue by MOA. Dues Income used for the Replacement Fund cannot also be used as Dues Income for the Operating Fund. This separation in the CPA's audit financial statements. See Accounting for the Reserve [Preservation] Fund.
- PCC Expenses charged to MOA. Not all costs for operating the golf course and bar & restaurant are booked to those facilities. Rent of only $1 is charged. The CPA in 2005 estimated the total rent to cover property expenses to be $195,000. It has increased since. See Audit Considerations for 2006, third paragraph down. Unfortunately the board refused to consider full cost accounting though allocation of costs.
- The generic accounts and items are those that will appear in every cash flow statement. Other accounts may also appear in the annual statements but could be positive or negative. Consequently, the generic trend is indicated by the changes in these generic accounts and items.
- The trend for depreciation expense is decreasing indicating that more of the assets are becoming fully depreciated. Since fully depreciated is based on the useful life of the assets, it also means that some/many oof the assets are wearing out and will have to be repaire, replaced, or renovated.
- Long-Term + Miscellaneous loans, not including the Lines of Credit. Numbers from 2008Q4 Business Review.
- Ongoing improvements. Any organization must make ongoing improvements to be viable. These should be part of the operating plan and reported to members. This was the original purpose of the Debt Reduction Capital Improvement Dues, but the board in 2002, Ron Hees president, used the DR/CI Dues for operations. Members were not informed by the board.
- Required to meet 2005 reserve study which showed $161,000 required annually for capital repairs, replacements and renovations (Preservation Fund). At the 2007 Spring Town Hall Meeting, treasurer Latuszek, who is an architect, stated that the $161,000 does not include many items and the the costs in the study were too low. See Reserve for Repair, Replacement and Renovation. This post shows that the amount required in the reserve study to maintain the facilities is $385,500 for the time period 2006-2010. Since very little has been spent, the condition of the facilities and equipment is deteriorating (looking worn and tired).
- Recommended parameter by AICPA with precise accounting definition. See Audit Considerations for 2006, fourth paragraph down. It is basically current assets minus current liabilities. The numbers shown include the Lines of Credit. The 2008 end-of-year number means that current assets are less than current liabilities by $$693,917. Need about $300,000 to be viable.
- MOA's reporting is incomplete. The $228,304 is the amount shown as Cash Restricted Accounts in the 2008Q4 BR. MOA does not provide line items Replacement Fund Assets and Replacement Net Assets which the CPA audit reports do. Not does MOA provide a statement of revenues and expenses for the Replacement Fund, which is provided in the CPA's audit reports. This error/omission would be prevented if MOA would follow the statements in the CPA's audit reports.
- The amount $330,272 is based on the 2007 CPA's audit report plus the $48,000 allocated in 2008. Shortfall: $228,304 - $330,272 = ($101,968).
- The amount $1,289,350 is based on the 2005 CPA's audit report which stated a shortfall of $600,000 plus accumulated shortfalls of annual allocations and unexpected expenses since 2005. Shortfall: $228,304 - $1,289,350 = (1,061,046).
- This is the amount required to bring the amount to a viable $300,000.
- See Required (Replacement Fund) Net Assets above. The amount is shown in Note 9.
- Not shown in 2008Q4 BR.
- This is the amount from MOA's statement of financial position (balance sheet) in the 2008Q4 BR, which is about $850 per lot.
- The amount per lot excluding the long-term debt is about $1060.
- History:_
- 2009 Mar 30 — Table of financial parameters revised to include depreciation and provide estimated capital improvements for 2008.
- 2009 Mar 24 — Initial Post
- Links:_ 2008 MOA&PCC Financial Results at [http://swagmanmwpoa.blogspot.com/2009/03/2008-moa-financial-results.html]
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