1. 1

2. At the close of this session, you will be able to:  Understand the concept behind the due to/due from funds  Understand the importance of managing the contributions and expenses for the replacement reserve fund  Tax implications of due to/due from replacement reserves  Better educate the Board on the significance of the due to/due from funds 2

3. 3  This occurs when the replacement reserve equity does not balance with the corresponding assets and liabilities on the balance sheet  When there is not enough cash to pay operating expenses some associations will “borrow” from reserves to pay normal operating expenses  If funds are borrowed from the reserves, plans should be made to repay the reserves as soon as practicable

4. 4  If the association does not have the ability to repay borrowed funds by the end of the fiscal year, then a budget line needs to be set up to “payback those funds in subsequent years  Annually evaluate assessment in regards to budgeted contributions  Annually evaluate reserve contributions per reserve study

5. Balance Sheet - Assets  Reserve cash  Savings account  Money markets  Reserve investments  Certificates of Deposit  Treasury bills and other securities  Prepaid expenses  Accrued interest – reserves  Other reserve receivables 5

6. 6

7. Balance Sheet – Liabilities & Equity  Liabilities  Reserve – accounts payable  Reserve – notes payable  Equity  General replacement reserves  Restricted reserve funds 7

8. 8

9. Statement of Revenues, Expenses and Changes in Fund Balances  Reserve contributions  Reserve interest income  Other contributions to reserves  Roadway reimbursements  Energy savings reimbursement  Special assessments  Reserve expenditures 9

10. 10

11. 11

12.  Have a current reserve study done by an independent engineering firm (recommended every five years)  Have enough cash in the replacement reserve for future major repairs and replacements  Set assessments to an adequate level to fund according to the reserve study  Cash and investments accounts need to be designated as operating OR reserves 12

13.  Transfer reserve contributions on a monthly basis  Reimburse operating cash account monthly for reserve expenditures  Recognize interest earned on reserve cash and investments in the replacement reserves 13

14.  Form 1120  Federally taxed at a rate of 15% on non- membership revenues  IRS strict on what is classified as a reserve expenditure  Form 1120-H  Federally taxed at a rate of 30% on non-exempt revenues  IRS more lenient on what can be classified as a reserve expenditure 14

15. 15  This occurs when the replacement reserve equity does not balance with the corresponding assets and liabilities on the balance sheet  When there is not enough cash to pay operating expenses some associations will “borrow” from reserves to pay normal operating expenses  If funds are borrowed from the reserves, plans should be made to repay the reserves as soon as practicable

16. 16  If the association does not have the ability to repay borrowed funds by the end of the fiscal year, then a budget line needs to be set up to “payback those funds in subsequent years  Annually evaluate assessment in regards to budgeted contributions  Annually evaluate reserve contributions per reserve study

17.  The concept of the due to/from is comparing the replacement reserve fund with the corresponding assets and liabilities  Because of the timing of transfers, it is often necessary to track the due to/due from on the financial statements  Significant due to/from can result in tax implications and SAS115 comments  It is vital to know the advantages and disadvantages of filing Form 1120 versus Form 1120-H  Due to/from allows the Board to assess whether the funding of their replacement reserves is adequate 17

18. 18