1. 301 Cash and Cash Equivalents

    Overview of Accounting Standards

    301.1 Cash and cash equivalents include
    • demand deposits with banks and
    • other financial institutions, cash on hand (for example, change funds
    • and undeposited receipts), certificates of deposit, money market funds,
    • and certain short-term investments such as Treasury bills.
  2. Accounting for cash and cash
    equivalents of common interest realty associations is virtually the same
    as accounting for similar assets in commercial businesses. However,
    since many CIRAs accumulate funds for future major repairs and
    replacements, cash is often more material to CIRAs' financial statements
    than to the financial statements of commercial businesses. The amounts
    recorded in the financial statements represent the amounts available to
    the CIRA at the balance sheet date, including any accrued interest
    (i.e., interest income should be recognized in the period it is earned).
    Other important accounting considerations relate to disclosures
    regarding cash and cash equivalents such as the following:
    • • Restrictions.
    • Significant amounts of cash and cash equivalents that are not readily
    • available for normal disbursements because of withdrawal restrictions
    • should be disclosed. For example, if the withdrawal of long-term
    • certificates of deposit prior to maturity is subject to a substantial
    • penalty, the CDs should be segregated from the cash caption (see
    • paragraph 301.4)
    • and the restrictions, if material, should be disclosed in the notes to
    • the financial statements. On the other hand, certificates of deposit
    • often are not subject to withdrawal limitations although withdrawal
    • before maturity may result in a loss of a portion of the interest
    • earned. In those circumstances, the authors believe that the CDs may be
    • included with “Cash.” (See further discussion at the footnote to
    • paragraph 301.3.)
    • The CDs need not be separately disclosed in that case; however,
    • disclosure is not prohibited. Cash designated for special purposes
    • should be segregated from cash available for general operations and
    • normally, if it is legally restricted, should be excluded from current
    • assets if the CIRA presents a classified balance sheet. (See discussion
    • beginning at paragraph 301.8.)

    • • Overdrafts.
    • CIRAs frequently have cash accounts with more than one financial
    • institution. Generally, for each financial institution, all cash account
    • balances should be totaled to determine whether the CIRA has a net
    • positive or negative balance. If a net negative balance with a financial
    • institution is immaterial, the authors believe it may be offset against
    • positive balances in other financial institutions. However, if it is
    • material, the authors believe it (a) should be included with
    • liabilities, either presented separately or included with accounts
    • payable, and (b) if the CIRA presents a classified balance sheet, should
    • be included with current liabilities.

    • • Held Checks.
    • “Held checks” dated at or before the balance sheet date (and reflected
    • as outstanding checks on the bank reconciliation) that were not
    • released until after the balance sheet date should be reclassified as
    • accounts payable, if material.
  3. Distinguishing between Cash, Cash Equivalents, and Investments

    301.2 A statement of cash flows prepared in conformity with FASB ASC 230-10 (formerly SFAS No. 95) is one of the basic financial statements that CIRAs are required to present. CIRAs should distinguish
    • between cash, cash equivalents, and investments when preparing financial statements because FASB ASC 230-10 (formerly SFAS No. 95)
    • requires (a) the total amount of cash and cash equivalents shown in the
    • statement of cash flows to be the same as similarly titled line items
    • or subtotals in the balance sheet and (b) financial statement
    • disclosures about the policy for determining which items are treated as
    • cash equivalents
  4. Thus, if there are several cash accounts in the balance sheet (for
    example, cash on hand, demand deposits, and money market accounts) that
    should be combined to agree with the statement of cash flows, the
    balance sheet either should combine or subtotal those amounts or
    additional disclosure should be presented either on the face of the cash
    flow statement or in the notes to the financial statements. Similarly
    • short-term investments that are not cash equivalents should not be
    • combined in the balance sheet with cash and cash equivalents. Instead,
    • the balance sheet should present those investments as a separate item
    • and either show a single amount for cash and cash equivalents, with
    • additional disclosures provided in the notes, if considered necessary,
    • or subtotal cash and cash equivalents in the balance sheet. If a CIRA
    • presents its financial statements using fund accounting, the balance
    • sheet should (a) subtotal cash and cash equivalents and (b) segregate
    • cash equivalents and investments for each fund.
  5. 301.3 How Cash Is Defined FASB ASC 230-10-20 (formerly SFAS No. 95) defines cash and cash equivalents as follows:

    • . . . cash includes not only currency on hand but demand deposits with
    • banks or other financial institutions. Cash also includes other kinds of
    • accounts that have the general characteristics of demand deposits in
    • that the customer may deposit additional funds at any time and also may
    • effectively withdraw funds at any time without prior notice or penalty .

    • Examples:
    • Certificates of deposit, money market accounts, and repurchase agreements that have the characteristics described above.


    • short-term, highly liquid investments that (a) are readily convertible
    • into known amounts of cash and (b) are so near to their maturity that
    • they present insignificant risk of changes in value because of changes
    • in interest rates

    • Examples:
    • Treasury bills, commercial paper, money market accounts that are not
    • classified as cash, and other short-term investments whose original
    • maturity is three months or less. 3 (Note that equity securities never meet the definition of cash equivalents.)
  6. 301.4 If penalties associated with
    certificates of deposit or money market accounts are material or if
    stated terms effectively restrict withdrawal of funds, the funds should
    • be classified as cash; rather,
    • they should be classified as cash equivalents or as investments,
    • depending on their maturity. Generally those accounts will be classified
    • as investments rather than cash equivalents, however, since their
    • original maturity will not be three months or less. 3
    • Thus, most CIRAs will not have accounts that are classified as cash
    • equivalents unless they have purchased Treasury bills or other
    • short-term investments with an original maturity date of three months or
    • less. Usually, a CIRA's cash-type accounts will meet the FASB ASC 230-10-20 (formerly SFAS No. 95)
    • definition of cash, or they will be classified as investments because
    • they will not meet the three-month original maturity criterion.
  7. 301.5 While the classification of
    cash-type accounts as either cash or investments has little effect on
    the CIRA's balance sheet, how those amounts are classified does affect
    the CIRA's statement of cash flows.
    • According to FASB ASC 230-10 (formerly SFAS No. 95),
    • cash receipts and payments from transactions affecting cash and from
    • purchasing and selling cash equivalents should be reported as operating
    • activities and may be presented net. However, cash receipts and payments
    • from purchasing and selling investments should be reported as investing
    • activities and are required to be reported at their gross amounts in
    • the statement of cash flows. Some accountants impose a higher
    • materiality threshold to evaluate whether certificates of deposit are
    • subject to material withdrawal restrictions or penalties and, thus,
    • should not be classified as cash.
  8. 301.6 Accounting Policy for Determining Cash Equivalents Not all short-term investments that qualify as cash equivalents are required to be treated as such
    • A CIRA may elect to treat some
    • qualifying investments as cash equivalents and other qualifying
    • investments as short-term investments. However, if an entity has cash
    • equivalents, FASB ASC 230-10-50-1 (formerly SFAS No. 95)
    • requires financial statements to disclose the policy for determining
    • which items are treated as cash equivalents. The authors recommend
    • disclosing that information in the accounting policies note to the
    • financial statements.
  9. 301.7 Financial Statement Presentation The authors recommend that all cash accounts be presented as
    • a single line item in the balance
    • sheet. (If the amounts include cash equivalents, the caption “Cash and
    • cash equivalents” should be used.) If additional detail is considered
    • necessary, (such as for combining the individual accounts that comprise
    • the amount that agrees to the statement of cash flows, as discussed in
    • paragraph 301.2), components may be disclosed in the notes to the financial statements or as additional information.
  10. Cash Designated for Specific Purposes

    301.8 As explained in paragraph 201.21,
    a CIRA's bylaws frequently stipulate that a portion of the annual
    assessments to unit owners will be set aside for future major repairs
    and replacements of the common property or other specific purposes
    rather than be used for current operations. In the authors' opinion,
    • funds designated in a CIRA's governing documents or by the unit owners
    • for specific purposes are not legally restricted because a majority of
    • the unit owners (as specified in the CIRA's governing documents) may
    • subsequently decide to use the funds for other purposes. However, the
    • authors believe that the funds are similar to legally restricted funds
    • since the CIRA's board of directors does not have the authority to
    • decide how those funds are to be used nor does the board have the
    • authority to reverse the decisions of the unit owners. Thus, they
    • believe such funds should be segregated from cash available for current
    • operations in the CIRA's financial statements.
  11. Generally, CIRAs comply with that requirement by reporting the funds for
    future major repairs and replacements in a separate replacement fund.
    (See discussion beginning in paragraph 400.3.)
    If the CIRA prepares its financial statements using a nonfund approach,
    however, the authors recommend disclosing funds designated by the unit
    owners for specific purposes, for example, by using a descriptive
    caption such as “Cash for future repairs and replacements.” In addition,
    the authors believe such amounts should be reported as a separate
    classification of members' equity on the balance sheet (or disclosed in
    the notes) such as follows:
    Members' equity

    Designated by unit owners for future majo rrepairs and replacements $ 83,000

    Undesignated 6,500

    • Designated funds are similar to restricted funds, but since they are not
    • legally restricted, the authors believe that the term “restricted”
    • should not be used in conjunction with them.

  12. 301.9 Additional disclosures about the nature of funds designated by unit owners should be made in the
    • notes to the financial statements
    • regardless of whether the CIRA presents its financial statements using a
    • fund or nonfund approach. (See paragraph 306.13.) As explained in paragraph 306.11,
    • GAAP also requires a CIRA's financial statements to disclose
    • assessments that were used for purposes other than those for which they
    • were designated.
  13. 301.10 Interest Allocated between Operating and Replacement Funds
    When cash is invested in interest bearing savings accounts,
    certificates of deposit, or other short-term investments, any interest
    earned takes on
    • the same character as the related
    • investment (that is, either designated or undesignated) unless the CIRA
    • has a specific policy to treat it otherwise. For example, a CIRA's
    • governing documents or its board of directors may stipulate that
    • interest earned on cash for operations or a portion of that interest
    • should be allocated to replacement funds. Since such an allocation is
    • part of the current operating revenues, it should be reported as revenue
    • in the statement of revenues and expenses rather than as an interfund
    • transfer. When a CIRA's governing documents do not stipulate how
    • interest earned is to be allocated between funds, the practitioner may
    • look to the CIRA's operating budget and/or reserve study for an
    • indication of how such funds are to be allocated. (Other transactions
    • between operating and replacement funds are discussed beginning in
    • paragraph 306.5.)
  14. 301.11 Legally Restricted Cash If CIRAs present classified balance sheets, cash that is legally restricted (for example, in certain HUD assisted CIRAs) should
    • be excluded from current assets
    • and presented with other assets unless it is considered to offset debt
    • that is classified as a current liability. For example, classifying
    • restricted cash as a current asset would be appropriate when the cash is
    • restricted to repay specific debt. The amount classified as a current
    • asset should not exceed the amount of the related liability that is
    • classified as current.
  15. Required Disclosures

    301.12 In addition to the required
    financial statement disclosures related to cash equivalents and
    restricted cash as discussed in the preceding paragraphs, FASB ASC 825-10-50 (formerly SFAS No. 107, Disclosures about Fair Value of Financial Instruments), as amended, requires all types of entities to disclose certain information about financial instruments that have
    • concentrations of credit risk. As explained beginning in paragraph 303.31,
    • material amounts of cash invested in certificates of deposit or money
    • market and other accounts that are not covered by insurance or are in
    • excess of amounts insured represent concentrations of credit risk and
    • should be disclosed.
  16. Other Cash Funds

    301.13 Some CIRAs collect and hold
    funds as an accommodation to their members and, accordingly, they
    should not be recorded in the CIRA's financial statements.
    Distinguishing those cash funds from funds that CIRAs should record in
    their financial statements, however, often requires judgment. For
    example, CIRAs may collect funds from the following sources:
    • • Members may be required to
    • pay a deposit when they purchase units and receive their keys. The
    • deposits are refunded to unit owners on the return of their keys when
    • they sell their units.

    • • Members may purchase annual
    • passes allowing them access to recreational facilities, such as a
    • swimming pool or tennis court. Only members who purchase the passes may
    • use the recreational facilities, but purchasing passes is voluntary.

    • •Unit owners may decide to organize picnics, Christmas parties, or
    • other social events that members may voluntarily attend upon payment of a
    • fee that is estimated to cover their proportionate share of the cost.
    • As an accommodation to the unit owners, the CIRA collects the fee from
    • unit owners who decide to participate.
  17. 301.14 The authors believe that
    decisions about whether miscellaneous collections should be recorded in
    the CIRA's financial statements should be based on whether they result
    activities associated with the CIRA's responsibilities of managing and maintaining the development's common property
  18. Amounts that are budgeted as part
    of the CIRA's annual revenues or are included as part of members' annual
    assessments usually are considered to relate to the CIRA's primary
    responsibilities and, thus, should be recorded in the CIRA's financial
    statements. Following that criterion, CIRAs should record amounts
    collected under the first two scenarios in the preceding paragraph in
    their financial statements, but not the last scenario.
    • Amounts that CIRAs do not budget or
    • collections from activities that CIRAs are not required to undertake
    • should not be recorded in their financial statements, even if the CIRA
    • authorizes the events, or they include all of its members, or the CIRA
    • bills and collects fees that are charged for the event.
  19. 301.15 While it may be preferable
    for the association not to get involved in accommodations to the unit
    owners, many associations do offer that service to their members when
    requested. When the CIRA collects fees from unit owners for these
    non-budgeted activities as an accommodation to the unit owners, the
    collected funds may be deposited into the CIRA's bank accounts rather
    than separate bank accounts
    • (often because these social events
    • operate on such an informal basis). If material, the authors believe
    • that those collections should be segregated into a separate trust fund
    • if the CIRA uses fund accounting and if fund accounting is not used,
    • disclosed on the face of the balance sheet or in the notes to the
    • financial statements. Additionally, the amount of the cash balances at
    • the balance sheet date, as well as the estimated extent of the total
    • collections and the nature of the CIRA's responsibility under the
    • arrangement should be disclosed in the financial statements. While the
    • association may deposit money and write checks for these non-budgeted
    • social events, the funds do not belong to the association, and the
    • association and its board of directors exercise no control over
    • disposition of the funds. Accordingly, a liability should be recorded on
    • the financial statements of the association rather than income or
    • expense.
  20. 301.16 CIRAs sometimes receive
    contributions of personal property that has been purchased with social
    funds or other cash funds established by the CIRA's members. If the
    funds are not recorded in the CIRA's financial statements because they
    do not meet the criteria in paragraph 301.14 for inclusion, the property should
    • be capitalized in the operating fund (or separate property and equipment
    • fund, if applicable) with an offsetting credit to contributed capital
    • for the fair value of the donated property.
  21. Segregation of Cash for Tax Purposes

    301.17 In addition to accounting
    for and financial statement presentation of cash accounts, IRS
    requirements for segregation of cash for tax purposes must be
    considered. The IRS
    • has strict requirements regarding
    • segregation of cash when Form 1120 is filed. While those requirements
    • are not as stringent for filers of Form 1120-H, the authors recommend
    • that cash be segregated in the accounting records according to IRS
    • guidelines to allow the CIRA the flexibility to elect either tax form in
    • any given year. Paragraph 501.32 begins a more thorough discussion of the IRS requirements for segregation of cash accounts for tax purposes.
  22. 3
    Only those investments that mature three months or less from the date
    they were purchased qualify as cash equivalents. For example,
    • a three-month Treasury bill and a three-year Treasury note purchased
    • three months from maturity both would qualify as cash equivalents. A
    • Treasury note purchased three years ago does not become a cash
    • equivalent when its remaining maturity is three months, however.
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