Reserves Accounting Defined

This discussion is going to be slightly technical but hopefully accessible to a Las Mañanitas Owner who is somewhat familiar with Accounting.  This post is intended to illuminate how monies spent on the physical plant -- the buildings, equipment, common area amenities, etc. -- are budgeted, paid for and then reported on our monthly or yearly financial statements.

The first thing to know is that our HOA is not accounted for like a regular US or Canadian corporation.   If you owned an apartment building and held it in a separate entity (say a US or Canadian company or partnership), you'd expect your financial statements to be composed of a BALANCE SHEET (showing assets and liabilities) and a PROFIT AND LOSS Statement (a "P&L") that shows revenues coming in (say, from rents) and expenses going out (say, for insurance premiums, interest on the mortgage, real estate taxes, repairs, etc.), along with the resulting profit or loss.

One of your assets is the bank account you use for that building.  Rents are deposited.  Expenses are paid.  It goes up and down.  Sometimes, you buy something that is meant to last a long time -- like a new roof with a 20-year warranty.   Generally accepted accounting principles require you to show that as an ASSET on your Balance Sheet -- not as an EXPENSE that you report when you pay for the roof.  Yes, you can "write off" the Asset over the next 20 years, reducing the value of the asset each year (i.e., "depreciating" it) and deducting that depreciation amount as an expense.  That is the way you'd account for your building ... your for-profit, commercial real estate.

One last thing:  let's say you were told, "In five years, my friend, you are going to need a new roof, and it's going to cost $100,000."   You are a prudent owner; you set aside $20,000 per year from your bank account into a savings account you call "Funds for a New Roof."  That way, when you need the money, it's there.

In this for-profit example, this savings account is called a "Sinking Fund."   In our non-profit HOA, it's called a "Reserve Account".

Reserves Accounting 

OK, this will make more sense if you open up one of our standard financial reports.  I am going to use the numbers from January 2022 for this part of the discussion.

Our budget for that year is $1.15 million dollars.  We collect half of that from Owners in January and half in July.

OK, looking at January, let's start with the ASSETS -- page 1 (and a bit on p. 2).  The bank accounts (that are numbered 101xx) used for operating expenses total $1.3m (all amounts in this post are USD).  Nice -- we have over a million dollars in the bank.  Why? because people paid their first half HOA fees in January!

The next group of bank accounts (those numbered 102xx) hold the monies that we have in "Reserves" -- $1.11m.  Think of this as our "sinking fund" or our "savings for a rainy day."

The $50k receivable are HOA fees that got paid in February and the $1.27m in "other assets" are amounts we spent to buy assets from the developer.   Don't think that the buildings, equipment, amenities and other parts of the physical plant are only worth only $1.27m!    How much IS it worth?  Well, let's do a thought experiment:  a giant tsunami comes in from the Sea of Cortez and scrubs Las Mañanitas down to a sandy beach.  Everything's gone.  How much would it cost to rebuild?  The estimates vary but are all over $20 million!  The $1.27m is just what we paid to buy out the few parcels (like the Cactus Garden) not yet developed.

OK, back to the balance sheet:   The "Total Assets" on the Balance Sheet is $3.74m.

Now, looking at the Liabilities (p. 2), pay particular attention to the "Reserves" (accounts numbered 3xxxx).  There are eight separate ones, with balances as of January 31 as shown:

    1. 31500 - Contingency Reserve \ Reserva contingencia - 71,446
    2. 34000 - Phase I Reserve \ Reserva fase I - 490,529
    3. 34500 - Phase II Reserve \ Reserva fase II - 250,532
    4. 35000 - Phase III Reserve \ Reserva fase III - 243,688
    5. 35500 - Garage Reserve-Phase I - 25,280
    6. 35502 - Garage Reserve-Phase II - 14,431
    7. 35504 - Garage Reserve-Phase III - 19,575
    8. 39000 - Loss/Gain on Exc-Res \ Reserva Var. Cam - (450)

The total of all 8 accounts is $1,115,032.

Go back to p. 1 and look at the bank accounts numbered 10212 and 10215. "Total Capital Reserves" held in those bank accounts is $1,115,032 -- the exact amount of the 8 liability accounts!    That is, the cash for reserves is set aside in separate bank accounts and the "liability accounts" are like buckets showing which buildings can get which amounts of monies.

Why do this? Because EACH REGIME IS LEGALLY SEPARATE. Yes, the HOA is the "Administrator" for each regime. But we have to keep the accounting for reserves intended for separate buildings segregated to respect the legally separate nature of the regimes.


Where are the “Common Area Reserves” here?  E.g., let’s assume a pergola needs to be replaced or the Security Office needs a new roof.   Account 31500 is the correct accounting category for these items.

Additions To Reserves.  Note that the 2022 Budget has an amount earmarked for being added to reserves.  See account 98340 … $194k.  It will be allocated to the three Building Reserves in proportion to the dues paid by Owners of that Regime.

Charges To Reserves.  What items get charged to the Reserves on a Regime-by-Regime basis?

    • Any extraordinary OPERATING EXPENSE or any CAPITAL ASSET that is purchased for a single building is charged to that Building’s Reserves.   
    • Any extraordinary OPERATING EXPENSE or CAPITAL ASSET that is for common use (e.g., plumbing snake/camera) is booked to Contingency Reserves.  
    • Any third-party contract for goods or services to maintain or improve a particular building shall be charged to that Phase’s Reserves regardless of the amount or CAPITAL/OPERATING nature.

Assuming there’s a surplus or deficit in the operating budget, what balance sheet account does it affect?    Does it get added to the reserves?  If so, how is the surplus or deficit allocated among the different Reserve accounts?   Answer: any surplus or deficit is booked to Contingency Reserves.