Case 2
You, CPA, work as an audit senior for the firm Donan & Conan (D&C). Your firm has just acquired a new client, Le Marquis Condominium Inc. (LM). LM is a residential condominium (condo). This is LM’s second year of operations. The previous auditor decided to retire, therefore C&S was appointed as auditors for the year ended March 30, 2020.
LM was registered without share capital on August 20, 2018 under the laws of the Condominium Act. LM was formed to manage and maintain, on behalf of the owners, the common elements of the 140 residential units. For Canadian income tax purposes, the corporation qualifies as a not-for-profit organization. The Condominium Act requires the use of GAAP for their financial statements. LM has chosen not to adopt IFRS.
Today is May 5, 2020. You sit down with Julia Donan, the engagement partner, to go over the LM audit. She would like you to address any significant financial reporting issues this year.
The real estate company that constructed the building, Tardif Development Inc. (Tardif), set the condo fee based on square footage indicated on the architectural drawings. The contract between Tardif and the Board states that Tardif will cover any deficiencies in the condo fee revenues over the general operating expenses, but only for the first year of operations. As a result, the Board has also asked C&S to indicate whether the condo fee per square foot may have to be revised, and highlight the considerations the Board should be aware of as they make that decision.
Your notes from the meeting with Julia are included in Exhibit I. The financial statements and 2020 budget as prepared by the Board are provided in Exhibit II. Extracts from the minutes of the Board meetings are provided in Exhibit III.
The Board
LM is guided by the Board which consists of condo owners. The Board is elected by the condo owners and is made up of at least a president, vice-president, secretary and treasurer. The Board looks after the running of the condo. It makes sure that money is collected, bills are paid, and violations of the rules and by-laws are addressed. The Board is also responsible for reviewing the condo’s bank statements and preparing and distributing a budget. Even if the Board chooses to contract a professional management company to run the day-to-day affairs of the condo, the Board is still ultimately responsible for management of the condo.
Reserve Fund
Under the Condominium Act, Condominiums are required to conduct a reserve fund study at least every three years. Reserve fund studies are completed by engineering firms. The study outlines the funds that need to be contributed annually. The purpose of the reserve fund is to set aside funds on an annual basis in order to provide sufficient funds for the major repair and replacement of the common elements on a long-term basis. Without a fund, the condo would have to raise the required money to pay for needed repairs and replacements through increases in condo fees, by a special assessment on owners or seeking financing. The effective interest rate for the condominium is 5%.
Condo Fee
Tardif originally set the condo fee per square foot at $4.75. The condo fee is typically based on expected future cash flows. Tardif agreed that they would reimburse the condominium corporation for any operating deficiencies during the first year of operations. The Board has accrued a receivable from Tardif equal to the 2019 operating deficiency. Total square footage of the units in the building is 114,900 square feet.
Property Management
Condominiums often use a property management firm. A property manager typically runs the operations of the building, and is on-site at the building to manage repairs and maintenance issues, owner issues, collection of common element fees, etc. The property manager also has accounting staff at the property manager’s head office who handle the payment of bills and preparation of financial statements. However, LM has not contracted with a property manager.
Exhibit II
Le Marquis Condominium Inc.
Statement of Financial position
As at March 31,
2020
(unaudited)
2019
(audited)
Assets
Cash $ 124 $ 75
Accounts Receivable 6,875 1,500
Prepaid expenses 4,500 2,500
Receivable from developer 48,722
60,221 4,075
Reserve cash 137,600 150,040
197,821 154,115
Liabilities
Accounts payable and accrued liabilities 20,517 52,797
20,517 52,797
Fund balances
Reserve Fund 137,600 150,040
Operating Fund 39,704 (48,722)
177,304 101,318
$ 197,821 $ 154,115
Le Marquis Condominium Inc.
Statement of Operations
For the years ending March 30,
2020 Budget 2020 Actual 2019 Actual (audited)Revenue
Condominium fees $ 545,775 $ 545,775 $ 491,200
Interest 2,000 60 50
Reimbursement from developer – 48,722 –
Guest suite income 48,000 5,000 –
595,775 599,557 491,250
Less: allocation to reserve fund (150,000) (150,000) (150,000)
445,775 449,557 341,250
Expenses
Utilities 226,300 195,478 223,900
Maintenance and repairs 41,200 14,600 43,265
Insurance 17,050 20,000 9,500
Janitorial 49,700 50,675 49,897
Professional fees 5,000 5,000 4,000
Landscaping and Snow removal 8,500 – 8,000
Office 5,320 2,900 4,350
Building maintenance 6,055 100 3,000
Waste removal 6,000 7,200 8,500
Security 7,400 7,300 5,430
Reserve fund study – – 5,000
Interest expense – 3,578 1,480
Exercise equipment 38,000 54,000 23,400
Bookkeeper fee 250 300 250
Management fee 35,000 – –
445,775 361,131 389,972
Excess (deficiency) of revenues over expenses $ – $ 88,426 $ (48,722)
Le Marquis Condominium Inc.
Reserve Fund
For the years ending March 31,
2020 (unaudited) 2019 (audited)Balance beginning of the year $ 150,040 $ –
Add:
Allocation from owner’s assessments 150,000 150,000
Interest 60 40
300,100 150,040
Deduct:
Purchase of condominium unit 125,000 –
Landscaping 10,000 –
Carpet 4,000 –
Interior design 5,000 –
Plumbing 5,500 –
Elevator maintenance 13,000 –
162,500 –
Balance end of year $ 137,600 $ 150,040
Le Marquis Condominium Inc.
Operating Fund
For the years ending March 31,
2020 (unaudited) 2019 (audited)Balance beginning of the year $ ( 48,722) $ –
Add:
Excess of revenue over expenses 88,426 (48,722)
Balance end of year $ 39,704 $ (48,722)
EXHIBIT III
EXTRACTS FROM THE MINUTES
FROM THE BOARD OF DIRECTORS MEETINGS
Budget
The 2020 budget was completed on April 25, 2019 and approved by the Board. The reserve fund study was completed on April 25, 2019. The results of the reserve fund study indicated that LM should contribute $150,000 in its first year and $300,000 in its second and third year of operations in order to adequately fund the reserve for future expenditures.
Guest Suite
On April 20, 2019, LM was given an option to purchase a unit from Tardif that could be used as a guest suite. The Board exercised that option and purchased the unit at a cost of $125,000. Cash from the reserve fund was used to fund the transaction. The Board had expected $4,000 a month in extra revenues after expenses from renting out the suite over the next 10 years. Similar units generate $1,500 per month net of expenses with an expected occupancy of 85%.
Exercise Equipment
LM has continued to purchase exercise equipment to furnish the gym. Following the prior year policy, they have expensed all of the costs relating to furnishing the gym.
First Year Operating Deficiency
The Board has been attempting to contact Tardif for resolution on the payment of the first year’s operating deficiency. To date, Tardif has not responded to their calls. A copy of the first year’s audited financial statements was sent to Tardif in September 2019. According to the Condominium Act , Tardif has 30 days from receipt of the financial statements to pay the deficiency.
Other
LM received a quote of $5,000 from Max Field, Interior Designer, for the design of the lobby. The quote was approved and work will start as soon as possible. A cheque for the entire amount was prepared for Max. One quote was received for the replacement of damaged carpet in the upper corridor from Toro Carpet for $4,000. Toro Carpet will supply and install the carpet as soon as possible.
The Board received and reviewed one quote of $10,000 for refreshing the front gardens (till, soil, mulch, etc.), installing automatic watering system and landscaping of area opposite the garbage enclosure.
One member of the Board was quite concerned about the high interest expense relating to the late payments of supplier invoices.
Another member of the Board noted that the condo had not yet received any bills from the City for water since the new meter was installed. The cost of water has not increased significantly since the prior year.
The City will be adding a garbage levy to the LM’s water bill in the near future. City staff confirmed that the charges will be retroactive to January 2019 and are expected to be approximately $1,000 of fees per month.
A resident of the building does the bookkeeping for the condo throughout the year for a total fee of $300.
An annual preventive maintenance contract was signed with Lift All, an elevator maintenance company, for $13,000 a year.
A faulty valve in the mechanical room caused a leak. The cost to have a plumber come in and repair the valve was $5,500.