GAAP Financial Statements and the Radburn Association

By Gary Konecky, CPA

The Radburn Association has made numerous statements involving the Radburn Association’s finances. These statements are in the form of the “budget” distributed to the residents and correspondence from the Radburn Association. None of the information provided by the Radburn Association is in conformity with generally accepted accounting principles (GAAP). In fact, the trustees of the Radburn Association have gone to court to appeal a judge’s decision that requires the Radburn Association to make financial disclosures in accordance with GAAP, even though they say they are working on such a policy.

GAAP defines entities such as the Radburn Association as common interest realty associations (CIRA). GAAP for CIRA is explained in the American Institute of Certified Public Accountants’ Audit and Accounting Guide: Common Interest Realty Associations (AAG-CIR).

AAG-CIR paragraphs 1.32 – 1.37 make it clear that CIRA financial statements are expected to be distributed to all interested parties, not merely association members. AAG-CIR 1.35 makes it clear that the financial management of the CIRA, in our case the Radburn Association, does play a role in the price Radburn homeowners may receive when selling their homes.

AAG-CIR Appendix A contains illustrative financial statements. These statements are a clear example of what the Radburn Association’s financial statements should look like and the information they should contain. To date, the Radburn Association has not distributed such financial information (to the residents and homeowners of this community) despite a court order dated April 1, 2008.

The first statement illustrated are the Balance Sheets. This is a snapshot of the association’s finances at a given date. It tells us what the association owns and owes. Information is presented by fund. Each fund is treated for accounting purposes as a separate entity with different functions that serve the residents of the CIRA. See AAG-CIR page 91.

The second illustrated statement is the Statements of Revenues and Expenses and Changes in Fund Balances. Income and expense information for all the association activities are presented and are broken down by fund. This statement also shows the transfers between funds. These statements cover a period of time, typically a year. See AAG-CIR page 92.

The third illustrated statement is the Statement of Cash Flows. GAAP requires cash flow information by activity (operating, investing, and financing). Information is presented on a fund-by-fund basis for a specified period of time, typically a year. Cash flows can be reported using the “direct” or “indirect” method and both are illustrated in the AAG-CIR. As the indirect method is more commonly used, that is the illustration I am showing here. See AAG-CIR page 95.

The basic financial statements discussed so far do not include all the information that might be relevant for users of the financial statements. Some information is best presented as a narrative. Therefore, GAAP requires not only the aforementioned financial statements but also requires Notes to Financial Statements. Illustrative notes are presented in the AAG-CIR. See AAG-CIR pages 96-98.

In addition to the aforementioned items, GAAP also requires Schedules of Operating Fund Revenues and Expenses and Schedules of Changes in Replacement Fund Balances. The Schedules of Operating Fund Revenues and Expenses provide supporting detail for the items reported in the Statements of Revenues and Expenses and Changes in Fund Balances. See AAG-CIR pages 99-100. The Schedules of Changes in Replacement Fund Balances provides information about the replacement fund and the monies set aside for replacement of existing long-lived assets and other possible expenditures. See AAG-CIR page 101.

Lastly, Supplementary Information on Future Major Repairs and Replacements is illustrated in the AAG-CIR. Two sample presentations are illustrated. As both examples are very similar, I am showing one. This schedule shows funding information concerning long-lived assets and is designed to assist financial statement users in determining if adequate funds are being set aside for future capital expenditures. See AAG-CIR page 102.

GAAP requires extensive financial disclosures to a wide range of financial statement users. The purpose of GAAP is not to say whether something is a good investment, but to make sure the user of the financial statements has all the information needed to make an informed decision about the entities’ finances and the management of those finances. The Radburn Association trustees say they are going to comply with a recent court order to provide this information in full, but in the more than three months since the order, we have as yet seen nothing. Until they provide this financial information, they will be denying this community’s residents the opportunity to evaluate the trustees’ financial stewardship and the possible effects that stewardship could have on the values of their homes.

About the Author

Gary Konecky is a certified public accountant licensed by the States of New York and New Jersey. He has over 25 years experience in the field of public accounting. His experience includes providing litigation support services in a wide variety of cases including: a $1 billion lawsuit involving a large US city and a major public authority, estate disputes and accountings, chapters 7, 11 and 13 bankruptcies, and tax fraud.

He is the author of articles concerning professional issues and taxation that have been published in Computers In Accounting and the Lambda Philatelic Journal. He writes a financial planning column for the Challenge newsletter and letters of his concerning professional issues have been published in The CPA Journal, The New Jersey CPA, and Accounting Today.

He is a member of the American Institute of Certified Public Accountants, the New Jersey Society of Certified Public Accountants (NJSCPA) and the NJSCPA Professional Conduct (Ethics) Committee. He is also an adjunct professor of accounting at Bergen Community College.