financial statement

There are several components of a financial statement for a Condominium or a Cooperative.  Through a series of articles, we wish to offer a basic understanding and, where helpful, benchmarks for you to consider versus your specific property.  These articles are in no way intended to provide a comprehensive analysis, rather, more of a resource to provide a basic understanding of the component, and answer certain questions that you may have about specific line items in order to expand the value of the document that you receive from your Board.

These components include:

  • Report letter which details the extent of procedures that were applied, any limitations on those procedures and conclusions reached by the accounting professional.
  • Balance Sheet which presents a snapshot of the financial position of the property
  • Income State which presents the revenues and expenses for the period
  • Cash Flows which presents the sources and uses of cash for the period
  • Notes which presents required and requested disclosures

Each of the five common exhibits will be presented as separate articles which will also attempt to explain when and where another exhibit may interact or affect the component being showcased.  The articles will have a summary or explanations of the most basic components as well as a discussion of more details for each broad component.   The article on required disclosures that are included as notes to the financial statements, will attempt to offer insight into the most common disclosures for these properties and unfortunately may not include each financial statement note that is included in your property’s annual report.  As certain supplementary information is often included with these financial statements, the most common sections are all showcased together into one article.  We urge you to evaluate all of the articles to fully understand every important aspect of the finances of your property’s financial statements.  We also make ourselves available to attempt to assist with specific questions that you may have that are not covered by the articles by emailing us at info@czarbeer.com.

The balance sheet is a snapshot of assets and liabilities at the end of the fiscal year.  In the most basic terms, assets are what we have and liabilities are what we owe.  After presenting the broad component of asset and liability, there is a net difference section referred to as “stockholders’ equity” (for Cooperatives) and “fund” or “members’ equity” (for Condominiums).  Fund accounting is somewhat different from more general Corporation or business accounting, so we will discuss that in a separate article on the fund balance method used for Condominiums (but not allowed for Cooperatives).

Returning to the broad component of stockholders’ equity, it is the cash and assets contributed to the business plus the net accumulation of profits and losses since inception, less any dividends.  Being the net of what we have and have not (amounts we owe), stockholder’s equity acknowledges the net amount provided to start the business, plus the closing of the net income or loss each year since inception.  It further includes additions of capital that might be made, less any profit distributions made to shareholders. However, it is easiest considered as the total assets offset by liabilities.

Assets and liabilities are further classified into components which vary depending on their characteristics as well as the amount of time it is expected to take for each to be converted to cash or satisfied. Generally, assets and liabilities which are expected to or can be realized or paid within one year are considered “current”.  Thus, current assets and liabilities are items either available for use “currently” (less than one year) or items needed to be paid back “currently”. Examples of current assets include cash in the bank, accounts receivable, etc., while current liabilities typically include accounts payable (bills not paid), accrued expenses (items where the bill was not received until after the end of the year), and any part of longer term debt (typically mortgages) that is expected to be paid the next year.  Longer term balance sheet components within assets and liabilities are grouped into differing categories for assets versus liabilities.

First, let us take a look into the orphan component for assets and liabilities, “other”.  Other assets and liabilities tend to be items which may or may not provide benefit or need to be settled for more than a year to come but do have aspects which require that they not be classified as fixed assets and non-long term.  Other assets often include restricted cash, investments in mortgagee (lending institution), stock and funds that the mortgagee requires being set aside and used solely for specific purposes or as security for a loan to be the most common.  Other liabilities tend to be reflections of accounting standards that match revenue and expenses in the same period as well as items that are not expected to be resolved within the next year, but are not long-term financing.

This category includes assets such as accrued revenues and deferred charges. Accrued revenues being assessments and similar income which has not been billed or collected but is recorded as an asset to properly match it against a related expense or expenditure.  Deferred charges are expenses which are not booked when paid or incurred in order to record the expense in a later (proper) period.

Liabilities include deferred revenue which represents assessment or other income received but not yet recognized as income in order to match it against specific expenses or expenditures which have not yet been incurred. It may also include upfront commercial lease payments or signing bonuses which, under accounting standards, are recognized as revenue in equal amounts over the term of the lease or agreement. Accordingly, amounts received but not yet recognized as income are reflected in the balance sheet as “other liabilities”.

Returning to the most common alternative to the current designation (expected to be converted to/from cash within the next year), are longer term assets and liabilities.  These include fixed assets, which are the property itself as well as investments which are expected to last or provide benefit to the property for more than a year.  On the liability side, long-term debt which is financing needed to be repaid over periods longer than a year.  Long-term debt may be offset by an accounting reflection of upfront costs incurred to obtain the financing, referred to as financing costs.  These are expensed over the term of the debt rather than in the period paid and thus are reflected as a reduction of the debt, although they do not reduce the payments, and thus need to be added back to truly understand the full amount of future payments.

While specific benchmarks for a property are limited, we did want to touch upon aspects of the balance sheet you should look for.

  1. Total assets should exceed total liabilities. It is always best to have more than you owe! However, this may not be true for Cooperatives due to the fact that fixed assets are recorded at costs, generally incurred years and years ago, and then depreciated, or written off over the “accounting life” of the property, while  real estate typically increases in value over time, and available financing is based upon the increased value of that real estate and the cooperative’s ability to fund debt.  Therefore, for Cooperatives, this metric is most applicable for current assets and current liabilities.
  2. Current assets should exceed current liabilities. Cash will need to be utilized if assets don’t get realized into cash as current liabilities need to be repaid.
  3. Other assets and liabilities are not stale. Evaluate each of these and verify whether there is a chance that they will come due and produce cash or be required to be repaid.
  4. Accumulated depreciation shouldn’t exceed accumulate deficit for Cooperatives since, with intended breakeven operating budgets each year, the net amount of accumulated deficit should equal the accumulated depreciation. If it’s more, that means there have been funded net operating deficits. The question is: “Will that behavior be repeated and will you need to fund your share of operating deficits?”.
  5. There should not be net accumulated deficiency of operations by Condominiums since, with intended breakeven operating budgets each year, any deficit should net out over time. If there is a net negative amount of equity, that means there have been funded net operating deficits. The question here is: “Will that behavior be repeated and will you need to fund your share of operating deficits?”.
  6. Stockholders’ equity for Cooperatives should have a net positive accumulation of initial contributions, profits and losses since inception if the operating and capital budgeted items have been fully net breakeven. If there is a net negative amount of equity, that means there have been funded net operating deficits. Finally, the question is: “Will that behavior be repeated and will you need to fund your share of operating deficits?”.

We wanted to loop back to another pronounced difference between Cooperatives, which have been showcased so far for fixed assets, mortgages as opposed to loans payable, and stockholders’ equity, and Condominiums, which use fund balance accounting.  This section replaces the references to stockholders’ equity above for any owner of a condominium utilizing this resource.   Condominiums utilize an equity section which reflects fund accounting in order to detail the apportionment of funds for specific uses such as operations and capital repairs.  Generally, the former is general revenue and expenses and the latter represents those funds collected for major repairs and replacements less amounts paid toward such major items.  The designation is comparable to the condominium holding funds on behalf of each unit owner to make major repairs, as needed.  However, these funds are not recorded applicable to each unit owner, but the unit owners in total, and no amount is refundable to a unit owner should they wish their funds back.  Thus, the designated fund for major repairs and replacements of a condominium is the net accumulation of initial reserve funds and capital assessments less capital projects since inception for capital budgeted items.  That really reflects what is left or available for capital projects in the future, while the undesignated Fund Equity for Condominiums offers less important financial information of the net accumulation of initial contributions, and profits and losses since inception for operating budgeted items.

Whether you are a business, individual, or non-profit – we will outline specific steps you can take to minimize taxes, maximize loan eligibility, or enhance the value of your property. With one call or email we will provide you with a professional, complimentary financial Statement evaluation – no obligation. Just visit Czarbeer.com/tax-offer or contact us at info@czarbeer.com, or call (212) 397-2970 and we will be happy to help you and answer your questions.