2007 Issue 4

The Rest of the Statements
By Sam Tomasetti

Condominium cash flow statements were the subject of my last article, (see Common Interest magazine Volume II issue 3) and although they are one of the more intricate and therefore most misunderstood of the published financial statement group, they are not complete without spending time discussing the other parts of a basic set of published financial statements – the opinion, the balance sheet, the statement of revenue, expenses and changes in fund balances and the related footnotes.  Taken together they form the financial picture of an organization and like all good puzzles, if one of the pieces is left out of the discussion important information will be missed.

The accountant’s opinion is a statement that defines the level of attestation offered.  These levels are compilation, review and audit.  In the simplest of terms the compilation is the lowest level, the audit is the highest and the review is somewhere in the middle.  Understanding what these opinions mean is critical to understanding the accompanying financial statements.  In addition, the method of accounting is also disclosed in the opinion.  Some statements could be prepared on the cash basis, the accrual basis or some other basis, and it is important to know this information.  Each method of accounting has its strengths and weaknesses, but the accrual method is generally accepted accounting principles and this is what accountants believe gives the clearest picture of financial status.

The balance sheet is a financial statement designed to explain where an association is at a specific historical point in time.  For instance, at the end of the fiscal year a balance sheet is prepared to summarize all the assets, liabilities and fund balances.  Some of the items listed in this statement would be cash balances, investment balances, funds due from or paid in advance by condominium unit owners, amounts owed to vendors, amounts owed to taxing authorities and the accumulated amount of operating or reserve fund balances.

The income statement, in contrast, reflects income and expenses incurred by fund classification over an identified period of time.  In the example above, this would be the twelve months of activity that ends the last day of the fiscal year.  A brief list of the items in this statement would be condominium fee income, interest income, and expenses such as insurance, building maintenance, landscaping, management fees, and income taxes.  This statement also will track the change in the fund balances by adding the current year income and fund transfers to the previous year end balances to arrive at the current year end fund balances (which are shown on the balance sheet as well). Finally the footnotes that accompany a set of financial statements give information that you cannot see when you look at the numbers.  Some examples of this are:

• Mortgage information like security offered, length of the loan and annual payments.
• Information regarding special assessments such as how much, for how many years and for what purpose.
• Income tax calculation methods and amounts owed.
• Explanations regarding what funds exist, what their purpose is and how much is committed in the next budget year.
• Descriptions of unusual transactions or risks such as a lawsuit and its expected outcome.

In summary, all financial statements have one thing in common – the big picture can only be seen when all the individual components are understood, considered and interpreted.  Considering the importance of the information to the financial well-being of a condominium, it is worth the time and effort to get to know each part of the financial statements, what they mean and what they can tell about the past, the present and the future.