Serial Assessment Revenue Recognition
By: David T. Schwindt, CPA
Association: A separate legal entity created and governed by the CC&Rs, State Statutes and other governing bodies. One of the primary responsibilities of the Association is to maintain, repair and replace common area property.
Owner/members: Within a condominium, owner/members own common area pro rata. Owners have the right to elect Board members that have the responsibility of making decisions that fulfill the responsibility of the Association. Financially, Owner/members have the responsibility of paying dues and assessments when assessed. Owner/members are not responsible for maintaining, repairing and replacing common area property. The Association, as governed by the Board of Directors, has this responsibility.
Board of Directors: The Board is elected by the members and its responsibilities are dictated by the CC&Rs, State Statutes and other governing bodies. If granted by the CC&RS, the Board has the legal authority to assess the members for funds needed to fulfill the Association’s responsibilities. Some Associations require a vote of the membership for certain assessments.
Assessments/Payments: Assessments are legal transactions that obligate the Owner/members to pay assessments. On the accrual basis of accounting, which follows Generally Accepted Accounting Principles (GAAP), revenue is recognized when assessments are levied, not when owners make payments. A special assessment may have payment terms specified in the assessment resolution such as a 36-month payment period. However, revenue is generally recognized on the date of the assessment which creates a receivable from the members. Subsequent payments from the owner/members merely reduce the receivable. GAAP recognizes that such payment terms are a way of financing the special assessment to the members. Some assessments have an interest factor specified in the repayment and charge interest in addition to the specified assessment. Some assessments simply have a payment schedule with no interest amounts. In this case it may be necessary to impute interest and adjust the receivable amount to allow proper recording of interest when payments are made.
For purposes of this memo, we will assume serial assessments are for remediation. Homeowner Associations generally can have three types of assessments:
#1 Regular Assessments
Regular assessments include operating and reserve assessments. Regular assessments are sometimes referred to as periodic assessments. Legally, operating and similar assessments are defined as separate assessments levied in defined intervals. For many associations, the defined interval is a monthly assessment. The authority and practice of assessing regular assessments come from the legal documents
(CC&Rs) and GAAP, including industry accounting practice. Every year, as dictated by the CC&Rs, Associations prepare a budget of expected expenses for the coming year. This budget will generally include not only operating expenses but will also include the contribution to the reserve fund for major repairs and replacements. The contribution to the reserve fund is most often derived from a reserve study budget that details expected expenditures for repairs, major maintenance and replacements over a thirty-year period, which includes the recommended contribution to reserves for the budget year and each of the following 29 years.
Based upon the legal authority of the Board, the budget is either approved and adopted by the Board or by the membership. If the CC&Rs call for monthly assessments, the Association will assess 1/12th of the total budget pro rata to each member. On the accrual basis, 1/12th of the regular annual assessment is recognized as revenue by the Association every month. This practice gives rise to the recording of a receivable until the member pays that month’s assessment.
#2 Special Assessments
Special assessments are generally levied for expenditures not contemplated in the ordinary course of business or dictated by the reserve study. Special assessments are also governed by the CC&RS which give the Association guidance on the authority and other required procedures of special assessing. An example of a typical special assessment would be the discovery of dry rot in a portion of the siding which needs immediate attention, when the repair or replacement of siding is not included as a planned expenditure of the reserve study. A typical special assessment may include the option of paying the full special assessment on a particular date or paying over a specific time period. In this instance, if funds are needed immediately, and funds are available, the Board could borrow from the reserve fund to effect repairs and use the special assessment proceeds to pay back the borrowing from reserves. Since the assessment is a sum certain with a specific due date, the entire special assessment would be recognized when levied. It would make no difference that certain members were paying the assessments over the specified period. You can think of a special assessment just the same as assessing the monthly regular assessment; once the assessment is due, a receivable is recorded from the members and revenue is recognized or deferred and recognized during the period repairs are made.
#3 Serial Assessments
Associations considering a serial assessment will generally need a large amount of cash to pay for a major remediation project such as replacing windows, decks and/or siding. The Association often will work with a bank to finance the project. Repairs are then financed through the bank via a construction loan that will convert to a term loan once the borrowing amount is set. Terms can be anywhere from 5 to 20 years. It should be noted that the remediation project expenses and bank borrowing represent activity separate from the serial assessment. The Association will record the remediation expenditures and the amounts owed to the bank that financed the project. This entry utilizes the GAAP matching principle which matches the remediation expenditures with the funding sources, the owner/members that elect option 1 discussed later and the bank loan. The Association will use funds from the owner/members that choose to pay their serial assessments in a lump sum and bank loan proceeds to pay for the project. At the end of the project, the bank will determine the monthly loan payment required by the Association. The loan payments become an obligation of the Association along with all other obligations as detailed in the budgeting process for the regular assessment.
The authority of levying the serial assessment comes from the legal documents (CC&Rs) and from the serial assessment resolution. Serial assessment resolutions generally give the members two options:
Option 1 – Elect to pay the serial assessments in full on a specific date with no payment terms, referred to as a lump-sum payment. Lump-sum payments are generally discounted. The accounting treatment for option 1 is similar to the special assessment as described in #2 above. Members that elect this option owe and pay the assessment in full on a specific date. If the member chooses option 1, the Association will assess the member accordingly. The Association will record income and the receivable for amounts owed for option 1 and reduce the receivable when paid. Remember that the event that requires the Association to record income and a receivable is the levying of the assessment. Owner/Members that pay in accordance with option 1 will not have the future serial assessments levied to them. The revenue for the lump-sum payments may need to be deferred and matched with remediation expenses as they are incurred.
Option 2 – Elect to be assessed via a serial assessment. The accounting treatment for the serial assessment mirrors the accounting treatment for regular assessments except for the term of the budget. The serial assessment resolution ratifies the budget to repay the loan. Instead of a one-year budget, the serial assessment will detail a multi-year budget over the same time period as the loan repayment. This treatment follows the GAAP matching principle. The budget with a serial assessment includes one corresponding line item – loan payment. Every month, the Association levies that month’s serial assessment just like regular assessments and matches the monthly serial assessment with the payment of that month’s loan payment.
Option 2 may include an option to pay the remaining sum of serial assessments at a discount, and the lump sum is recognized as revenue in the period it is assessed and paid.
Remember, the event that requires the Association to record income and a receivable is the levying of assessments. The authority that requires Associations to recognize periodic (monthly) assessments as revenue in the month it is assessed is Accounting Standards Codification (ASC) 972-605-45-1 Other Presentation Matters General. It states: “Periodic assessments for funding future major repairs and replacements shall be reported in the replacement fund in the statements of revenues and expense in the periods in which they are assessed regardless of whether they have been collected or expended.” The key word here is “assessed”. This treatment is true for reserve assessments included in the regular assessment along with operating assessments, special assessments, and serial assessments. GAAP requires Associations to record revenue when amounts are assessed to the owner/members.
The opinion of Schwindt & Co is to follow GAAP and record revenue and the related receivable from periodic serial assessments monthly per the serial assessment resolution.
Questions regarding this article may be directed to David T. Schwindt, CPA at Schwindt & Co. (503) 227-1165.