Your condominium is an investment. The condominium’s financial statements allow you to assess the health of the condominium corporation and the stewardship of the board. When you read the statements, you will find there is a story or two that lies within them. Your financial statements may not be a spine-tingling read, in fact we hope they are not, but they are important.
For many, financial statements are full of numbers arranged in an unfamiliar format. This can result in the inability to understand what is being presented. The intent of this article is to clarify this information so you can understand the story behind those numbers. Did your corporation have a major repair? Look at the Reserve fund statement to find out how much it cost. Did your corporation do an LED retrofit? If this resulted in savings in utility costs, you could find this on the General fund statement.
Why are the financial statements audited? To protect the condominium owner, the Condominium Act of Ontario requires statements be audited. The audit is completed by an independent auditor and the statements are presented in accordance with Canadian Accounting Standards for Not-For-Profit Organizations to ensure the information provided to you is an accurate and consistent representation no matter which auditor you appoint.
As an example, an unaudited set of statements may show the bank has a balance of $10,000 but neglect to report that the corporation owes vendors $9,000. However, an audited statement will follow standards by showing the $10,000 bank balance as well as the $9,000 payable. This is a significant difference in the health of your corporation.
Standardization allows you to rely on the statements. Potential purchasers review the financial statements to help make their purchasing decision.
How to read your audited financial statements. We will proceed step by step through the information. Financial statement formatting varies auditor to auditor, so the sections described below may not be in the same order, but the basic information will be there.
Independent Auditor’s Report
This provides the opinion of the auditor after reviewing the financial information provided by your Board of Directors. For a detailed description of the auditor’s opinion, see the CCI-GRC Blog: https://www.cci-grc.ca/blogs/view/your-financial-statements-the-first-thing-you-should-read.
Is there a section on this page labelled Condominium Act of Ontario (The Act)? Violations of a financial aspect of The Act, if found, will be reported here.
The Statement of Financial Position
This is a snapshot, showing the condominium’s financial standing at year end. Assets are items owned by the corporation while Liabilities are what it owes. Net Assets is the difference – that is to say, subtract what is owed from what is owned. Think of Net Assets as the Net Worth of the corporation.
Condominiums have at least two funds. The allocation of the Net Assets into the separate funds is found at the bottom of this statement. The General fund is for the day to day operations and maintenance of the common elements – it collects the monthly fees and pays for audit, legal, property management, insurance, utilities, landscaping, and snowplowing to name a few. The Reserve fund is for the major repairs and replacements of the common elements. The list of eligible Reserve expenses is listed within the Reserve Fund Study.
The remaining statements are flow statements: they report the year’s activities showing money coming in and going out throughout the year.
The Statement of General Operations and Fund Balance
The change in the General Fund Balance from the previous year to the current year can be found in this statement. The activity of the current year (usually the middle column of numbers) is added to the previous year’s closing balance, resulting in the General Fund Balance at the end of this year. The condominium’s annual budget is typically presented on this statement as well. The Budget column shows the board’s plan for what they expected to happen during the current year. Comparing budget to the actual results, you may want to follow up with management or the board to understand why there are significant differences, if any.
Brackets around the year end General Fund Balance means the fund is in a deficit. This indicates a shortage of money, making it difficult to meet financial obligations (paying the corporation’s bills). A healthy corporation will have a surplus closing balance of between a half month to three months of common element fees. This surplus allows the corporation to meet unexpected expenses.
The Statement of Reserve Operation and Fund Balance
This statement focuses on the activity of the Reserve fund. Revenue includes the portion of your monthly condo fees that are allocated to the Reserve plus other income that is attributed to the Reserve, such as interest. The Expenditure section shows all the projects for the last two years. This statement shows how the Reserve Fund Balance changed from the previous year to the current year. The result of the current year activity is added to the previous year’s closing balance.
The Notes to the Financial Statements include a note that shows the expected contribution, expenditure and closing balance as per the Reserve Fund Study. You can follow up with management or the board to understand why there are differences between the study and actual, if any.
The Statement of Cash Flows
This statement summarizes, from the bank’s perspective, all the activity throughout the year. It shows how the bank accounts, as seen on the Statement of Financial Position, changed from the previous year to the current year because of the revenues and expenditures in both the General and Reserve funds.
Notes to the Financial Statements
Notes provide further information such as: your corporation’s accounting policies, the current reserve fund study details, commitments, subsequent events, and a list of investments showing their interest rates and maturity dates, if applicable.
Audited financial statements are general purpose and are summaries. Each line item may represent numerous actions. For example, the “Utilities” line on the Statement of General Operations and Fund Balance may represent twelve monthly bills for each of gas, hydro and water costs. The statements are presented at a high level to give the reader an overview. For most readers, that is enough information. Owners who want more detail have the right to make a request to the board or property manager.
Read your condominium’s financial statements to get a sense of the health of the corporation and an understanding of how your money is being spent. Ask questions. Be an informed condominium owner. Protect your investment.
Gwen Story, B.Com(Hons), CPA, CGA
Senior Manager at RLB LLP, Chartered Professional Accountants