By Clint Riddin

Clint RiddinHow much money is in the bank, what can we spend on fixing the roof problem, what is there to spend on the painting and water-proofing problem?

Let us ask the accountant? And the answer usually is something along the lines of… “if you look at the accounts receivable position, allow for a collections efficiency of 90%, and an improvement of your ageing of 100% of your 120 days debtors to 60 days, and then stall your accounts payable from current to 60 days, this will free up cash reserves of…, then when the repair is effected we could capitalise the project to the statement of financial position and depreciate this over five years, this will then prevent the reserves from being completely depleted and allow a period of recovery, allowing the financial position to remain relatively stable whilst the reserves recovery period takes place…”
And so everyone knows exactly how much was available, what was spent and how much was left? As with any industry and profession we can be as clever or as simple as we want or need to be, but an overriding factor always has to be the needs of the users. In the community schemes industry this is particularly important; for most people, the home is the single biggest investment and also becomes one of the biggest cost centres of the monthly budget, not so much from the monthly levy aspect, but from the often forgotten maintenance expense part of the investment, which in sectional title and until now, mostly took the form of unexpected special levies.
As buildings have aged and this industry has aged – remember that sectional title has only been around since circa 1973 – these special levies have really started to make themselves felt, running into millions of Rands and for smaller schemes can equate to tens of thousands of Rands, and in one case that I am aware of, a few hundred thousand Rands per flat.

The new Sectional Title Schemes Management Act looks to set minimum maintenance reserves and so will mean that levies for most schemes will have to be adjusted upwards over time to start meeting these requirements, but which will hopefully start to address the dreaded unexpected special levy, but may also mean higher levies, which also says that the monthly levy as part of the household budget is also a bigger item to consider.

And so this is why it is so important that community schemes accounting is simple and easy to understand and that the reporting allows for all owners to get to see what makes up the numbers, which in turn are used for budgets and management reports and any other financial reports that could be used to better manage the affairs of a scheme.

The budget therefore should make no allowance for capital expenditure; if a roof needs to be fixed, a lift needs to be replaced or a tennis court re-surfaced, the amount is just reflected as an expense under the maintenance part of the budget. The income to cover this is to be found, whether from reserves from previous years or from current levies, or where this is insufficient, a special levy.

When the expense is incurred, it is not capitalised to the balance sheet (now known as the statement of financial position) and depreciated over the life span of the roof, lift or whatever the “capital project” was, just expense it to the income statement. The money is spent, the reserve is depleted; show this, so everyone knows that it is time to build reserves again.

The only current assets in a scheme should be cash and debtors. If you put up a security fence it is not an asset; an asset is best described as cash, or something that can be converted to cash. Once the fence is erected, you will not convert this to the same cash value as what was spent on it and so it cannot be an asset and therefore has no place on a balance sheet, especially in community scheme accounting.

Does this fence have value? Definitely, it has utility value; it even has an asset value, but this asset value attaches itself to the value of the homes it protects, not the scheme.

Accounting for a community scheme can never be as simple as cash in and cash out, the debtors and creditors must always be taken into account to arrive at what the true reserve position is, but this must not be inflated by showing an asset that is not really an asset. What is meant here is that the transaction might meet the accounting disclosure requirements for assets, but this in no way serves the needs of the users and so expense the transaction, to show what effect it has on the finances so that these users know where they stand.

There are many reports that trustees could look at to manage the affairs of the scheme, but one of these must be a monthly report which plots the income and expenses against the budget and also a monthly review of the debtors’ position and what action is being taken to collect the levies. This review assists with cashflow, which is the lifeblood of the scheme; and make sure that excess cash reserves are invested. But as with all of these reports, have the accountant try to keep them simple, so that you did not miss the obvious variances in too much detail. Numbers, numbers, numbers… often tell a very interesting story when you take a little time to read them.

Article reference: Paddocks Press: Volume 9, Issue 5, Page 2
Clint Riddin of Clint Riddin & Associates is a sectional title accountant specialised in accounting, income tax and secretarial services to bodies corporate.

This article is published under the Creative Commons Attribution license

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