Summer 2015 CPA Newsletter
Volume 31 Issue 3
By Valerie Thorpe, CPA
It’s time to update your engineering study.
The Big Question
What does the Association need to do in order to coordinate the engineering study update with the Association’s fiscal year-end and the annual operating budget preparation?
This article provides an example as well as a practical approach to answer this very question.
The Engineering Study Update
When the engineer is updating the reserve study, the following tasks are generally performed:
- Verify that all appropriate common property components are included in the replacement schedule;
- Determine the current replacement costs and estimate the remaining useful lives of those components;
- Determine the accumulated replacement fund balance as of the effective date of the new study (or fund status); and
- Calculate the annual contribution to the replacement fund for the Association’s future funding.
If an inaccurate fund balance is used as the beginning for the cash flow projection within the study, the annual contribution calculation may also be inaccurate.
The key concept is to have the engineer perform the study to be effective at the start of the next fiscal year in which the study will be implemented, as this will also be the start of the new annual operating budget. For example, it would be difficult to coordinate the two if the Association has a reserve study with a cash flow summary effective January 1, 2o16, yet the Association has a fiscal year beginning April 1, 2016 as this time lag would have an impact on the fund balances and annual contributions. As part of the update process, the engineer will utilize the anticipated year-end fund balance in the replacement fund as a starting point for the next study. The Association needs to provide the anticipated fund balance as of the effective date of the updated study to the engineer.
The Assumptions
Key assumptions for the purpose of this example are as follows:
- The fiscal year is January 1 – December 31
- This calculation is being performed in anticipation of the updated study to be performed in September 2015 and next year’s operating budget to be prepared in October 2015, both to be effective and implemented January 1, 2o16
- This ending replacement fund balance at December 31, 2014 was $200,000
- The 2015 funding per the operating budget is $55,000
- The Association anticipates that $5,000 of interest will be earned by the fund
- The Association anticipates that a total of $18,000 of replacement fund expenditures will be made in 2015
The Calculation:
As indicated above, the Association needs to tell the engineer to perform the study as if it were January 1, 2016. Additionally, the Association needs to calculate the anticipated year-end fund balance.
| 12/31/14 ending fund balance: | $200,000 |
| Add: 2015 funding: | $55,000 |
| Add: 2015 anticipated interest: | $5,000 |
| Less: 2015 anticipated expenditures Equals: | ($18,000) |
| 12/31/15 Anticipated fund balance: | $242,000 |
| to be used for the updated engineer study |
The fund balance considered above, not the actual amount of cash in the replacement fund bank account, is what should be used for this calculation.
Moving Forward
If the study is based on an accurate fund balance and covers the correct time period, the Association should have its study and financial records in line. This will also ensure that the annual replacement funding requirement is properly computed. When the Association begins to prepare next year’s operating budget, the annual replacement funding allocated within the budget should agree to the annual replacement funding requirement per the updated study. Once the study is updated by following the above assumptions and calculation, the engineering study update will now be in sync with the Association’s fiscal year-end and the operating budget.
Other Considerations
While this article touches on some basic steps to coordinating the engineering study update with the operating budget, it is also important to consider other factors while having an updated study performed. Two of those considerations are as follows:
Cash Flows Projection: The Association should communication upcoming projects and required replacements to the engineer when the updated study is being performed. The engineer can then incorporate these expenditures when the cash flows projection is being compiled, which will help to ensure that the study reflects these projects as part of the fund balance each year.
Funding: Once the replacement costs of common property and the cash flow projections are updated, the Association can determine the appropriateness of the annual funding requirements. If there is not adequate funding to cover major projects that are planned or required during the upcoming years and other funding will be required (i.e special assessment or borrowing), this should be communicated to the engineer. These projects should be excluded from the cash flow summary within the study as these items will be funded outside of the annual replacement funding. If borrowing or a special assessment is required, the operating budget should be updated to reflect this information.
If you have any questions regarding the above material, please contact your WilkinGuttenplan advisor.
