The HOA financial statements play a key role in the long-term success of a homeowners association. They give board members a detailed look at the association’s current financial health and allow them to make informed decisions. These statements show homeowners where their money is going and how the HOA is doing financially.
What are the HOA Financial Statements?
Like any organization, homeowners associations have finances to manage. These associations collect dues from homeowners, pay expenses, and earn revenue from other sources. Financial statements are necessary to keep track of all these transactions and gauge the HOA’s financial condition.
The basic HOA financial statements are the balance sheet, income statement, cash flow statement, general ledger, accounts payable report, account delinquency report, and cash disbursements ledger. Let’s break them down below.
1. HOA Balance Sheet
The Balance Sheet clearly shows an HOA’s overall financial standing by showing what it owns (assets), what it owes (liabilities), and the difference between the two (equity). It’s a quick way to understand the association’s net worth.
The standard formula it follows is:
Assets = Liabilities + Equity
For the Balance Sheet to be accurate, both sides of the equation must be equal. If they don’t balance, it usually means there’s an error that the board must look into.
Assets fall into two types: current and noncurrent. Current assets refer to anything the association can turn into cash within a year. Meanwhile, noncurrent assets take longer than a year to convert to cash. They usually include fixed items like furniture or equipment that the HOA uses regularly but wouldn’t sell quickly.
Liabilities, on the other hand, represent the association’s debts. These can fall into current liabilities, which the association must pay within a year, and long-term liabilities, which the HOA can pay over a longer period. They reflect how much the HOA needs to spend or repay.
Equity, sometimes called owners’ or shareholders’ equity, remains after subtracting liabilities from assets. It reflects the amount that the association would return to members if the HOA sold its assets and paid all its debts. Positive equity usually indicates that the HOA is in good financial standing.
2. HOA Income Statement
The Income Statement, also called the Profit and Loss Statement or the Statement of Income and Expense, is a crucial aspect of the HOA financial report. It shows how much the association has earned or lost over a specific period. It includes cash and non-cash gains or losses, giving the board a comprehensive look at the association’s profitability.
This report typically has two parts: the operating and non-operating sections. It lists all sources of income, such as regular dues, rental fees from amenities, and ticket sales for community events. On the other hand, the expenses can include operating costs like utilities, employee salaries, service fees, and bank charges.
Additionally, the board must record any losses here. These include accruals.
3. Cash Flow Statement
The Cash Flow Statement tracks actual cash movement in and out of the HOA. It identifies where money is coming from and where it’s being spent. As its name suggests, this statement only focuses on cash-based transactions.
Cash flows fall under three main activities: operations, investments, and financing. Unlike the Income Statement, this report doesn’t include non-cash items. The HOA mainly uses it to assess liquidity and determine whether the association can cover upcoming expenses like employee wages or vendor payments.
4. General Ledger
Though not officially a financial statement, the General Ledger is one of an HOA’s most essential accounting tools. It organizes every financial transaction by account number and date, making it easy to track expenses and income without sorting through piles of receipts.
The General Ledger serves as the master record on which other financial statements base their numbers. Because of this, accuracy is of absolute importance when maintaining a General Ledger. Otherwise, everything else will be thrown off and show inaccurate amounts.
5. Accounts Payable Report
The Accounts Payable Report is an HOA financial report that lists all the association’s outstanding payments. It provides a complete view of what the HOA owes and to whom, as well as relevant details for each debt.
This report is crucial because HOAs often work with several vendors and service providers. If the association misses or is late on a payment, its relationship with a vendor may suffer.
6. Account Delinquency Report
Not all homeowners pay their dues on time. This is where an Account Delinquency Report comes in. This report helps the HOA monitor which residents have overdue balances and offers a clear view of total accounts receivable.
This report typically lists each homeowner’s name along with the amount they owe. Each debt is broken down into aging categories: Current, Over 30 Days, Over 60 Days, and Over 90 Days. This structure makes it easy to identify which delinquencies have been ongoing for a long time and helps simplify the collection process.
7. Cash Disbursements Ledger
The Cash Disbursements Ledger keeps track of all the money the HOA spends, including payments made via both cash and check. It provides a detailed look at the association’s outgoing funds. Another name for this is the Check Register.
Each entry should include important details such as the date, payee, amount, and expense description. It should also include the check date, check number, and invoice number if applicable.
Presenting HOA Financial Statements to Homeowners
The HOA board typically presents the financial statements at annual and board meetings, allowing homeowners to understand the association’s financial condition.
Remember that not all homeowners association financial statements are shared with homeowners. For instance, the Account Delinquency Report is a financial report for the board’s eyes only.
According to Section 209.005 of the Texas Property Code, a homeowner’s financial information, including nonpayment of dues, falls under confidential records. This means the HOA can deny homeowners access to this information unless given a court order or the consent of the affected owner.
Are HOAs Required to Provide Financial Statements in Texas?
Can homeowners examine HOA financial statements? Yes, homeowners have a right to inspect an association’s financial statements. Typically, HOAs must provide buyers a copy of the financial statements. In Texas, this requirement can be found under Section 207.003 of the Texas Property Code.
Existing homeowners have several other ways to request a copy of the financial statements, including but not limited to:
HOA Website
Many HOAs maintain websites where owners can access the association’s financial reports. A website is even required for HOAs with 60 or more lots or those run by a management company (Section 207.006).
Upon Written Request
According to Section 209.005, HOAs must provide homeowners with access to the association’s books and records, including financial reports. A homeowner can request to examine the records in person or ask for copies of the documents. An HOA may charge a fee for copies, provided it already has a copying policy with fees communicated to homeowners in advance.
Homeowners must write their request and send it through certified mail. The HOA must respond to this request within 10 business days, with an extension of up to 15 additional days if the HOA gives proper written notice.
What to Do About Denied Access
What can homeowners do if their HOA denies them access to the financial records? Provided that the records are not confidential, a homeowner may seek relief in a justice court, according to Section 209.005 of the Texas Property Code.
Before pursuing this action, the homeowner must inform the HOA of their intention to sue and list the records they are asking to see. If the justice court rules that the homeowner has a right to access the records, the judge can order the HOA to comply. In this case, the court may order the HOA to cover the homeowner’s court costs and attorney’s fees.
How Long Should an HOA Retain Financial Statements?
Retention policies for HOA financial records can vary depending on state laws and the governing documents. The law requires HOAs with more than 14 lots to have a records retention policy in Texas.
Section 209.005 of the Texas Property Code states that financial records, tax returns, and audits should be kept for at least 7 years. An HOA must retain account records of current owners for 5 years.
Professional Help
Clearly, the HOA financial statements are an essential tool in managing any community. Board members use them to gauge financial stability and make smarter decisions for the association. On the other hand, homeowners use them to ensure the board runs the HOA wisely.
Preparing and interpreting the financial statements of an HOA can come as a challenge. Let Graham Management do it for you. We provide exceptional and reliable HOA financial management services to Houston communities. Call us today at (713) 334-8000, request a proposal, or contact us online to learn more!
RELATED ARTICLES:
- Finding An HOA Lawyer And Why Your Association Needs One
- HOA Reserve Funds: How Does It Protect Your Community?
- HOA Management Companies: Myths, Facts, And Industry Secrets