Aline Désormeaux

Aline Desormeaux (CPA, CA, Adm.) holds a Bachelor of Business Administration from UQAM and is a member of the Order of Chartered Professional Accountants of Quebec and of the Order of Chartered Administrators of Quebec.

Chartered Professional Accountant since 1992, she specializes in audit, review engagement and notice to the reader, and more particularly as an auditor for several condominium syndicates in Montreal, Nun’s Island, Laval and Mont-Tremblant. She also offers tax planning for corporation, individuals and estate, and financial forecasts services.

The fund basis of accounting and internal reserves

November 1st 2016 - A condominium syndicate has the obligation to report its operations using the fund basis of accounting. The article 1071 of the Civil Code of Quebec imposes indeed the creation of a contingency fund. Every condominium has to set up accounts distinguishing the general fund for common operations, sometimes called the administration funds, and the contingency funds.

 

 

THE IMPLANTATION

The establishment of funds complicates the accounting of the condominium. The administrators can not only have a bank account called contingency funds and imagine that the requirements of the Civil Code are met. Each fund is independent of the others and must have its own financial statements: a statement of earnings, of changes in net assets and of financial position (balance sheet).

Each fund being independent, it is possible that at year-end there is non-cleared inter-fund transactions. For example, the operating funds could have a receivable from the contingency funds if it has paid expenses for the latter during the year. However, inversely, it is possible that the operating fund has a payable to the contingency fund if, for example, there was a lack of liquidity to make the contributions as budgeted. This type of inter-funds balance is contrary to the will of the Civil Code which states that at all times the fund's assets must be liquid. As a fact, an account receivable from the general fund is not a liquid asset.

THE PROLIFERATION OF FUNDS

Several condominiums want to compartmentalize the operations of the syndicate and then create several funds. In addition to the contingency fund, there is sometimes the maintenance fund, the insurance fund, the unforseen events fund, the legal fund, the renovation fund, the improvement fund, the painting fund, and so on. Remember that when you multiply the funds, each fund is independent and if one fund does not have enough money to operate, there will inevitably be amounts receivable or payable between the funds. It then becomes difficult to understand and explain the financial statements. It is best to keep it simple.

RESERVE

A good compromise for the multiplication of funds is to create reserves in the statement of net assets. The reserve does not create an obligation to have a separate bank account. The reserve is created when restrict an amount from your accumulated surplus of the general fund to an upcoming event or project. The owners then know that part of their surplus is already reserved. The reserve gives a purpose to the surplus that might otherwise be regarded as excessive.

Reserves are often used to accumulate the amount of the deductible in the event of a disaster, especially since insurance deductibles can represent a significant amount. Instead of budgeting each year an amount for unforeseen event to cover one or two probable disaster, a portion is reserved in the surplus to cover these contingencies. When the loss occurs, the reserve is reduced by the expenses incurred by the syndicate and another portion is taken from the surplus to replenish the reserve. This approach avoids creating an insurance fund in which there will be almost no operation.

So, have a careful thought before multiplying the funds and bank accounts of the condominium. Think of the novice readers of the financial statements...

 

Aline Desormeaux, CPA auditrice, CA

Désormeaux Patenaude inc
1312 Sherbrooke est
Montréal, Québec H2L 1M2
Téléphone : 514 522-2232 EXT. 207
adesormeaux@dpcpa.ca

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