The Federal Accounting Standards Board (“FASB”) issued a new standard (“ASC 606”) that will have a significant impact on the financial statements for homeowner associations, condominium associations and housing cooperatives (collectively known as community interest realty associations (“CIRA’s”)). The standard is effective for the December 31, 2019 reporting period and defines how and when revenue from “contracts with customers” is to be recognized. The relationship between a CIRA and its unit owners fits the definition of a “contract with a customer” and therefore a CIRA is impacted by the new standard. According to ASC 606, revenue should be recognized when a performance obligation is satisfied. A performance obligation is a promise to deliver a good or service and for assessments, the delivery could be at different times, depending on the purpose of the assessment. In order to determine when the revenue is recognized a CIRA must first identify each performance obligation:
- Operating Assessments – The performance obligation for operating assessments is the annual maintenance and management of common area property. This performance obligation is generally met on an ongoing basis throughout the fiscal year which results in very little change to how a CIRA currently recognizes revenue for operating assessments.
- Special Assessments – The performance obligation is the expenditure of the assessed funds for their intended purpose(s). For example, a special assessment to replace the roof is recognized in the period in which the roof work is completed which may be different than the year the unit owners were assessed. This too is essentially no change as to how CIRAs currently account for special assessments.
- Replacement Fund Contributions – ASC 606 has the largest impact on how to account for contributions to the replacement fund because similar to special assessments, the performance obligation is the expenditure of the assessed funds for their intended purpose(s). Accordingly, revenue should be recognized when the related expenditures occur. Unspent reserves must now be presented in the liability section of the balance sheet and will be designated as “Deferred Revenue – Reserves”. This is the most significant change in the standard as it applies to CIRAs. This means that assessments collected for reserves are recorded and accumulated as deferred revenue and will no longer be included in fund balance for the reserve fund.
Accounting for “Bad Debt” – In addition, ASC 606 impacts how CIRAs account for unit owners that are in arrears. In the past, CIRAs would evaluate their receivables retrospectively and record an allowance for doubtful accounts as well as bad debt expense for the amounts deemed uncollectible. The new standard requires the board to determine the assessments billed which should be adjusted for amounts that the CIRA has deemed unlikely to collect. This requires CIRA boards and management to evaluate the collectability of assessments on a prospective basis to determine the amount of revenue to be recognized. CIRAs often accomplish this in practice by budgeting for bad debt expense, however, based on ASC 606 this amount will be recorded as a reduction of assessment revenue rather than an expense in the CIRAs’ annual financial statements.
The application of ASC 606 – Revenue From Contracts With Customers is a major change but WilkinGuttenplan is here to help you through implementation. Please feel free to contact your WG advisor for more information on how ASC 606 will impact your CIRA