At a recent board and owner meeting, I was asked about cash basis of accounting being a better reflection of activity than GAAP. This owner was an observer at a prior board meeting where I discussed this issue with the board so I think she wanted me to go on record in front of others.
GAAP, for all its flaws, is superior to the cash basis of accounting when it comes to reporting outside of management. While I agree that GAAP can include requirements that are complex and perhaps outside the competency of management, that doesn’t mean that GAAP is inappropriate: It means that management is likely over its head.
Since this was a condominium association, I asked the board if management told them how much money owners had not paid for the reporting period. The answer – Yes. But it wasn’t included in the financial statements. Management prepared a report showing how much money was collected and spent during the month, and then provided a separate statement with
- How much owners hadn’t paid
- How much in vendor invoices came in but were not paid yet
Also known as accounts payable and accounts receivable. The concern I have is not that they were doing this on a monthly basis but rather that management decided that this was an appropriate year-end reporting model as well. This was the mistake.
Management could have made essentially three journal entries to ensure that the books and records accrued non-cash activity:
- Record the due but unpaid assessments
- Record the due but unpaid vendor invoices
- Adjust the insurance for the amount that is considered prepaid
There is absolutely nothing wrong with keeping a set of management books and a set of financial reporting books. It is, in fact, encouraged since decision-makers have different information needs. Keeping separate books should not entail a great deal of work either. Most software today is sophisticated enough to easily track cash in and cash out while at the same time tracking the amounts which have not been converted to cash. The excuse that it is too much work is just that; an excuse.
But I would go further. The board should receive a GAAP based balance sheet and statement of operations for each meeting. But, management should also create special reports, or dashboards, for the various members of the board. The treasurer is mostly worried about current cash receipts and disbursements. The president, on the other hand, may be worried about reserve project expenditures in relationship to the reserve study. It is most appropriate, indeed it should be considered essential, to give the information to decision-makers which is most appropriate for their particular needs.
GAAP fills a need for external reporting. It is as complicated as the entity makes itself out to be. Internal management reporting can be as simple and targeted as the user wants it to be and indeed should be. The point of keeping the books on GAAP basis is to ensure that transactions are not overlooked at year-end; Otherwise both management and the auditor have to put more effort into the accounting than is likely warranted. But if no one minds paying extra to address the conversion from one accounting basis to another, it is likely fine with the auditor. I know it is fine with us.