Monta Kane and Diana Rivera, Principal MBAF in Miami (Photo: Courtesy Photo)In 2016, the Financial Accounting Standards Board (FASB) released a new standard, ASC 606 – Revenue from Contracts with Customers. The new standard is effective for Dec. 31, 2019, financial statements, and the changes in revenue recognition it has created, have a significant impact for condominium and homeowner associations (community associations).
This new standard should be of particular concern to Floridians because of our large and growing number of such community associations. According to the Community Associations Institute (CAI), Florida currently leads the nation in community associations with a whopping 48,250. Even a state like New York, (including New York City) only has around 14,000. Furthermore, it is estimated that approximately 50% of Florida’s population live in community associations.
This standard is applicable to community associations because the relationship between an association and its members meets the FASB’s definition of a “contract with a customer.” The primary revenues for most associations are operating assessments and assessments for future major repairs and replacements, commonly referred to as “reserve assessments.” Under ASC 606, revenue is recognized when Associations satisfy their performance obligations.
Here is how the new standard applies to these two major forms of revenue:
- Operating Assessments: The performance obligation for operating assessments is the maintenance, management and operation of common area property. This performance obligation is generally met on an ongoing basis throughout the fiscal year. Therefore, revenue is recognized on a periodic basis, as it is in current practice.
- Reserve Assessments: The performance obligation for reserve assessments is the expenditure of the assessed funds for their intended purpose(s). Accordingly, revenue will be recognized when the related expenditures occur. Unspent reserves will be presented as a liability on the balance sheet. This is a very significant change from current practice. Previously, assessments for reserves were reflected as revenues of the reserve fund at the time they were assessed to the members, and unspent reserve funds were a part of the reserves fund balance, which is equivalent to retained earnings for commercial for-profit entities.
While these are the two primary sources of income for most community associations, the recognition of other sources of income may be impacted by ASC 606.
Prior Year’s Reserve Fund Balance Restated
Under ASC 606, in the year of adoption of the standard, the financial statements should reflect a restatement of the opening fund balance.
Overall Impact of ASC 606 Compliance
Of course, community associations are not the only types of entities that are affected by the implementation of ASC 606. Almost all businesses will be impacted by this new approach to revenue recognition. While compliance for privately held companies is just starting, publicly-owned companies have already been at it for a year, and indications are that compliance has proved to be very complicated.
According to ASC 606, organizations must recognize revenue on financial statements to “depict the transfer of goods and services to customers in an amount that reflects what the company expects to be entitled to in exchange for those goods or services.” Which, in other words, means at the completion of the work, services, or deliverables that were “contracted for,” or at “the close of the deal.”
Gathering the right data for ASC 606 compliance is proving to be an added burden for many companies. While, the gathering of the data for community associations may not be as burdensome, there are nevertheless many CPAs who have been raising objections to the applicability of ASC 606 to community associations.
Stay tuned for potentially more to come, as the implementation is just beginning!
Monte Kane and Diana Rivera are both principals at accounting firm, MBAF in Miami.
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