Tips for Recording Reserve Transactions

Written by David T. Schwindt, CPA RS PRA Published: 15 August 2013

Once the budget process is over and boards and management companies settle in to the new year, the question of how to record expenses on an ongoing basis becomes a relevant issue.

Generally accepted accounting principles require a separation of operating and replacement reserve transactions. Not all accounting systems have the capability of presenting activity that mirrors the presentation in audited financial statements. However, most accounting systems allow the separation of activities via separate account codes. This article provides certain tips to aid in the correct coding of transactions and the correct presentation of financial information.

As mentioned above, reserve transactions should be reported as separately as possible given the limitation of the accounting software. At the very least, the portion of the total assessments relating to reserves should be deposited in the reserve bank account on a timely basis. Accounting treatment to accomplish this varies, but the key is to make sure reserve cash is kept separate from operating cash.

Reserve expenditures should be reported separate from operating expenses. Most accounting software packages allow for separate recording via account codes. The correct coding of expenditures in the accounting system is the critical event that allows for proper presentation of each fund. Therefore, the individual responsible for coding each transaction in the proper expense line item needs to be very familiar with the operating and replacement reserve budgets. The replacement reserve budget is detailed in the reserve study. Reserve studies generally provide a list of components that will require replacement and repair, as well as a list of expected expenditures relating to each year. It may be helpful to set up an expense account code in the financial statements to match each expected reserve expenditure, much the same as account codes are set up for budgeted operating expenses. Many associations have one line item for reserve expenditures labeled “major maintenance and repairs”. Although this may aid in the ease of recording, it does not give the reader of the financial statements adequate information on specific expenditures. We suggest that associations consider expanding their reserve expense account codes to accommodate major classes of reserve expenditures.

Tips for recording reserve transactions:

  • At times, a service provider will send the Association an invoice for work pertaining to both operating and reserve work. The portion pertaining to each fund should be clearly marked on the invoice, and each amount should be posted to the appropriate accounts.
  • The Association may have funds in addition to operating and replacement reserve funds, such as a working capital fund. Activity for additional funds should also have unique accounts pertaining to each fund, and the activity for other funds should not be posted to replacement reserve accounts.
    Account names should be based on components included in the reserve study. The Association can more easily track the frequency of expenditures for individual common elements and actual expenditures for major repairs and replacements. Cost and timing information will be useful when the Association updates its reserve study.
  • Associations often accumulate reserve funds to replace personal property that is subsequently capitalized. When reserves are expended to purchase capitalized assets, a transfer from the reserve fund rather than an expense should be recorded. Since fixed assets are not carried in the reserve fund, the transaction should be presented as a transfer to the operating or other fund.
  • At times the Association, with the Board’s approval, may need to borrow cash from the reserve fund to pay operating expenses. The borrowing of reserve funds should not be recorded as an expense. It should be recorded as an amount due to reserves from operating.
  • Reserve expenditures vary from year to year depending on the schedule for repairs and replacements, so reserve expenditures may be more or less than reserve assessments in any given year. Because of this variance, reserve expenses are not always included in the budget as a line item. Therefore, when the Board is approving expenditures, it is important for the Board to use the reserve study as guidance for approved expenditures.

In conclusion, the key for correctly recording transactions is referencing the budgets, correctly coding the revenue or expense items in the correct accounts, and timely reviewing the transactions/reports to make sure all transactions were recorded appropriately.