California Civil Code requires boards of directors to perform all of the following on a monthly basis:
- Review a current reconciliation of the association’s operating
- Review a current reconciliation of the association’s reserve
- Review the current year’s actual operating revenues and expenses compared to the current year’s budget.
- Review the latest account statements prepared by the financial institutions where the association has its operating and reserve
- Review an income and expense statement for the association’s operating and reserve
To be in compliant with Civil Code requirements, associations should account for operating and reserves activity separately, known as fund accounting. Fund accounting performed accurately provides the basis for financial reports which present operating and reserves activities separately. Because some income and expenses are for operating purposes and some is for reserves purposes, accounting for activity and presenting the results of that activity clearly, by fund, on financial reports provides the board of directors and management information to help manage the association.
Most associations use two funds: Operating and Reserves. Activity related to monthly operations is recorded in the operating fund. A reserve fund is used to account for transactions related to setting aside funds for future use, typically based on a reserve study.
When management companies and boards of directors prepare annual budgets, they determine how much money is needed for operating activities, and how much should be saved for future reserves expenses. Monthly assessments are calculated based on projected operating expenditures and contributions to reserves. Fund separation is part of the process.
Fund accounting will provide data for reporting that enables boards to comply with Civil Code and review operating revenues and expenses versus budget, and to review operating and reserves statements. Associations should maintain separate bank accounts for operating and reserves to prevent commingling of designated funds.
It is important to maintain transparency of any transfers between funds by recording the activity in each fund and presenting the transfers on the face of financial statements. In our opinion, transfers are effectively a budget change and board authorization should be documented in board meeting minutes.
Due between funds balances occur when one fund has paid for an expense on behalf of another fund and reimbursement is expected.
Separate bank accounts and accounting funds should be used for special purpose activities including special assessments and litigation settlements.
California Civil Code has strict directives for monthly review of operating and reserve accounts and activity. Accurately accounting for activity and presenting the results of operations using fund accounting provides boards with the information they need to comply with Civil Code.