As you may have heard, legislators have made changes made to RCW 64.90, which are effective at various dates over the next few years. Of particular interest to us, as accountants and auditors, are the requirements for accrual basis financial statements and annual independent audits of an association’s financial statements, presented in RCW 64.90.530.
The original Washington Uniform Common Interest Ownership Act, RCW 64.90, was initially effective for associations formed on or after July 1, 2018. Other RCWs continued in place for associations formed prior to July 2018, including the old (RCW 64.32) and new (RCW 64.34) Condominium Acts and the Homeowners Association Act (RCW 64.38).
RCW 64.90.530 goes into effect on July 27, 2025, for the associations that were formed on or after July 1, 2018, “WUCIOA associations”, and for associations which have adopted significant portions of WUCIOA, (address with your association’s attorney for any clarity needed). Under RCW 64.90.530, as it relates to financial statements and audits, sections (1) and (2):
- The association must prepare, or cause to be prepared, at least annually, a financial statement of the association in accordance with accrual-based accounting practices.
- The financial statements of the association with annual assessments of $50,000 or more must be audited at least annually by a certified public accountant (“CPA”). In the case of an association with annual assessments of less than $50,000, an annual audit is required but may be waived by unit owners other than the declarant of units to which a majority of the votes in the association are allocated, excluding the votes allocated to units owned by the declarant.
For other associations, the Act for these sections is effective January 1, 2028.
Accrual Based Financial Statements
In our experience, a significant number of associations do not prepare their monthly and/or annual financial statements using the accrual basis of accounting. Typically, CPAs performing annual financial statements audits, convert the association’s financials from the cash or modified cash bases to the accrual basis of accounting. United States Generally Accepted Accounting Principles (GAAP) are presented on the accrual basis.
Accrual basis financial statements include all revenue that has been earned, not just received. All expenses incurred should be recorded in accrual financials, not just vendor invoices that have been paid.
Audit Requirement
As a board or managing agent tasked with a fiduciary or agency duty of care, an audit is a way of obtaining an independent CPA opinion on the association’s financial reports. The auditor will perform a lot of required procedures from understanding the association’s financial processes and controls, to issuing an annual audit report, financial statements and related disclosures, also known as footnotes to the financial statements. A CPA audits significant account balances and transactions by obtaining documents known as audit evidence, that support balances and transactions. Are the bank and investment account balances accurate? A CPA tests the bank account reconciliations and bank statements. Has the association recorded income and expenses in the correct fund? Following budgets, and accounting for assessments in both the operating and reserves funds, identifying if the association has not transferred all budgeted reserves funding to the reserves bank account, accounting for expenses in the correct fund, are all very significant areas, that when activity is not properly accounted for, will significantly distort the association’s financial position (balance sheet) and income or loss for a period (statement of revenues and expenses).
Many associations have legal settlements, ongoing litigation, insurance claims, special assessments, loans and other non-routine financial activity. Many times, CPAs auditing such activity determine that the accounting has not been performed appropriately, thus rendering financial statements misleading or completely incorrect. Buyers of homes in an association often rely on audited financial statements as part of their due diligence. There are many instances where pre-audited financial statements, together with a lack of disclosures, can be misleading to buyers, and potentially lead to litigation.
Ask your CPA for a list of non-routine activity documentation they will need to accurately report the activity in your audited financials.
Another very important aspect of an audit is that year end accounting for income and expenses in the correct period/year. Examples include reserves assessments that have not been expended. Such assessments should be accounted for as deferred assessments. Expenses paid in a future year for the current year must be accrued in the current year to comply with accrual accounting rules, and to present expenses that can be completely and accurately compared to the association’s budget.
There are so many significant reasons why accrual-based financials are more useful than other forms of financial reporting. Publicly traded companies that you might buy stock in, or your 401k/IRA fund own, are required by law to prepare full accrual, GAAP-basis, financials. We strongly recommend that all associations comply with the new WUCIOA early and start to provide your members with accurate and independently audited financial reports.
Jeremy Newman CPA
Newman Certified Public Accountant PC
Bellevue, Washington
www.hoacpa.com
