June 2023

Capital Expense or Recurring Maintenance By Michael Mezzo, CPA, WilkinGuttenplan

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W hile reviewing your audited financial state ments, you will likely notice that your associ ation’s accounting records are broken down into different “funds.” Depending on the complexity of operations, sites may utilize as many as ten funds or as few as two. The reason behind segregating an association’s finances into different funds is due to the fact that each fund has a very specific funding purpose. For purposes of this article, we will focus on two funds: Operating Fund: The purpose of the operating fund is to provide for the daily operations of the community and related amenities. It typically includes expenses such as professional fees (legal, engineering, management fees, accounting), site maintenance (landscaping, snow remov al, etc.), utilities, maintenance of amenities and common areas, as well as many others. Replacement Fund: The purpose of the replacement fund is to accumulate funds for future major repairs and replacements. Unlike the operating fund, which focuses on current expenses, the replacement fund can be viewed as a long-term savings account for future projects.

Fund accounting strives to maintain the integrity of each dollar included in an association’s annual budget. For example, if an association budgets to save a dollar for a roof replacement that is scheduled to be completed in ten years, it is imperative that dollar is set aside in a segregat ed account. This will help to ensure that the dollar is not used to pay an operating expense and is available for the board’s use in ten years when the project becomes due. Determining which fund an expense falls under can be difficult at times. Certain expense items, such as utilities, are easy to account for. Others, however, can fall into a gray area. This article will cover some of the more common questions regrding these issues, as well as guidance on how to account for each specific transaction. Before diving into some specific scenarios, it is import ant to have a general understanding of a few underlying concepts and definitions. The first relates to the engineering study. Most associations will engage an engineer to per form an on-site inspection of the association’s common ele ments. Based on their findings, the engineer will then pre pare a report detailing each individual component of the CONTINUES ON PAGE 16

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JUNE 2023