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Cash vs Accrual Accounting

October 2013

Cash vs Accrual Accounting

The scale and complexity of strata entities continues to grow. In this article we will consider the concept of cash ‘jam jar’ accounting compared to accrual accounting in the preparation of financial statements for strata entities – a common area of discussion for committee members and users of financial statements.

A major purpose of financial statements for a strata entity is to understand the financial performance of the previous year and the financial position at year end.  This assists with determining levies for the coming year.

Cash accounting recognises revenue when the funds are received and expenses when they are paid.

Accrual accounting recognises revenues when the income is due and expenses when the service is  provided.  Accrual accounting will also create debtors and creditors if the revenues or expenses have not yet been received or paid.

An analysis of selected areas relevant to strata entities on the basis of accounting is outlined in the following information:

Basics of Accounting

In Queensland,The Body Corporate and Community Management Regulation (Accommodation Module) 2008 “Qld regs” R152(2)states that a strata entity’s accounts must be prepared:
·on a cash, or
·accrual basis(R152(2))

Some strata entities incorrectly prepare their accounts using a hybrid of cash and accrual methodology.

Are there additional requirements if cash accounting is used?

Qld regsstates that if the accounts are prepared on a cash basis, the accounts must disclose all contributions in advance and in arrears.

1) Even if the cash-basis accounting method is adopted, it may be difficult to record and monitor levies or other monies due without a debtors ledger maintained in an accounting system

2) Strata entities need to record their GST liability on levies billed but not due, in accordance with the ATO requirements (s.29-5 GST Act).

Qld regsstates that if the accounts are prepared on a cash basis, the accounts must disclose all ’outstanding payments’.
See(Reg 152(3)(d)).

The definition of outstanding payments is unclear. In addition to invoices received prior to the balance date and unpaid, KPMG’s view is that an accrual should also include an estimate for contractual obligations existing at balance date for items such as electricity or legal costs, even if the invoice had not been received at balance date.

Budget and income matching requirements

All strata entities, no matter which state they reside, are required to raise levies to cover annual administration and capital (sinking fund) expenses.

As the receipt of levies and payment of expenses may not align to the budget, there may be significant variances between recording of revenues and expenses under a cash basis as opposed to an accrual basis.

Budgets for administration and sinking funds are based on when levies are planned to be raised and expenses planned in the coming financial year.

Insurance costs are an example where even though paid once a year, the costs should be expensed on a monthly basis (accrual accounting) to appropriately record the expense in the financial statements.

Cash accounting may result in significant variances to the budget of a strata entity if revenues are not received in a timely basis and costs are not expensed in the period to which they relate.

Should a strata entity adopt cash or accrual accounting?

An analogy of cash accounting being likened to a ‘jam jar’ has been used in the past.  The concept describes using a ’jam jar’ to collect money you receive, and pay out money for your expenses.  The amount you have left in the ‘jam jar’ is what you can spend in the future.  This obviously is not an appropriate basis for a strata entity managing a multi-million dollar property asset.

Cash accounting may be easier throughout the year, but at year end there still needs to be an analysis of the financial position in ascertaining debtors and liabilities of the strata entity. 

The basis of preparing financial statements on an accrual basis readily provides a true understanding of the financial performance and the financial position at year end.  Thus, there is more to accounting than using a jam jar....

Written by Garry Skene.

Garry is a Manager with KPMG, a Member of Strata Community Australia and specialises in providing audit and advisory services to the strata title industry.

* Disclaimer: The information provided above is general in nature and not specific to any particular individual circumstance. Accordingly, you should obtain specific advice on accounting matters and in particular any changes to the legislation and/or guidelines since the date of this document.   KPMG accepts no responsibility for the accuracy or completeness of the information above.

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Thursday, October 31, 2013