Reading and Understanding Strata Financial Statements

Strata financial reports are essential reports that offer information on the financial well-being and management of a strata corporation.

Both strata boards and owners must understand these reports in order to make well-informed decisions on budgeting, maintenance, and planning for the future.

This in-depth guide goes over the important strata financial reports, what to look out for, warning signs to check for, and best practices to review these documents effectively. And how to easily review these documents with automated strata document review software.

Understanding Important Strata Financial Statements

Operating Fund Statement

The Operating Fund Statement shows the day-to-day financial activities of the strata corporation on a continuous basis. It shows revenues-mostly payment of strata fees by owners-and costs related to routine maintenance, utilities, administration, insurance, and wages. This fund covers costs that occur annually or more frequently.

Key Items to Emphasize:

• Sources of revenues such as strata fees, interest income, user fees, and fines.
• Categories of expenses grouped under administration, utilities, insurance, maintenance, and wages.
• Surplus or deficit for the year-to-date.
• Comparison of actuals versus budget on expenses.

Red Flags to Watch For:

• Sustained operating losses that may translate to increased strata fees or special levies.
• Significant variations between actuals and budget on expenses with no satisfactory explanation.
• Unexplained or unusual source of revenues or expenses.
• The Operating Fund Statement shall be prepared annually and provided to owners at least until the tenth month of the year.

Contingency Reserve Fund (CRF) Statement

The CRF is a reserve fund utilized for financing large repairs or replacements that occur less frequently than annually, such as roof replacement, elevator installation, or paving.

The contributions to the fund must be at least 10% of the operating fund under the November 2023 regulations.

Key Factors to Highlight:

• Balance in the CRF currently.
• Contribution made to the fund yearly.
• Expenditure to major projects or emergency repairs.
• Compliance with minimum contribution rates.

Red Flags to Watch For:

• Low or insufficient CRF balance compared to the estimated expense in the depreciation report.
• Usage of CRF for ordinary or non-capital spending.
• Not meeting planned contribution or failing to observe minimum contribution requirements.

The statement of CRF enables owners to anticipate future capital expenditures and avoid surprise special levies.

Balance Sheet

The balance sheet provides a snapshot of the financial position of the strata corporation at a point in time. It consolidates all funds, such as the Operating Fund and CRF, and records assets, liabilities, and equity.

Important Items to Highlight:

• Cash and bank balances.
• Accounts receivable, such as strata fees outstanding.
• Amounts due between funds (e.g., amounts due from Operating Fund to CRF).
• Prepaid expenses.
• Liabilities like accounts payable or loans.

Red Flags to Watch For:

• High accounts receivable indicating outstanding strata fees.
• Significant inter-fund unreconciled balances.
• Notable liabilities likely to impact financial stability.

Individual fund balances and total columnar format is normally applied for an aggregate balance sheet for clear display.

Budget Comparison Statement

It compares actual expenditure and revenues against authorized budgetary provision for the financial year.

Key Items to Take Note of:

• Variation between budgeted and actual figures by category.
• Identification of over or under-spending.
• Trends in expenditure that may impact budgets in the future.

Red Flags to Watch For:

• Unexpected large overspending in major categories.
• Inadequate funding of major repairs or reserve contributions.
• Constant budget revisions with poor initial planning.

Breaking down this report helps strata councils prepare future budgets and manage finances in advance.

Accounts Receivable Report

This report indicates outstanding balances owing to the strata corporation, primarily outstanding strata fees.

Key Items to Track:

• Balances past due and receivables aging.
• Recognition of owners with balances due.
• Actions taken to collect delinquent fees.

Red Flags to Watch For:

• High or rising delinquent balances.
• No collection attempts or follow-up.
• Impact on cash flow and the ability to meet financial commitments.

Effective management of accounts receivable is vital in maintaining financial health.

Example Document Package

https://app.elireport.com/public/reports/654a80330bf89f001b88a269

How to Interpret Strata Financials in Minutes, Not Hours

Utilizing software like Eli Report can automate strata financial report review. Eli Report quickly condenses main financial ratios, by-law restrictions, and meeting minutes, providing budget benchmarks as well as alerting potential issues within 10 minutes.

Step-by-Step Implementation of Eli Report:

1. Load strata financial reports and accompanying reports.
2. Review condensed operating and contingency fund positions.
3. Review budget comparisons and variances highlighted by the software.
4. Review special levy estimates from depreciation reports included in the platform.
5. Review insurance coverage summaries and engineering report results.

Benefits Over Manual Review:

• Conserves time by condensing historical documents in an abbreviated form.
• Determines red flags and financial trends in automatic fashion.
• Provides comparative benchmarks against similar buildings.
• Facilitates sharing of reports with owners or prospective buyers for decision-making.

Get Insights like, upcoming projected Special Levies in minutes, not hours:

Eli Report’s Sample Special Levies Insights Report

Other Best Practices for Financial Statement Review

To improve the financial management and transparency of a strata corporation, prospective purchasers, owners, and council members must implement a variety of best practices that go further than just studying the financial statements. Such practices ensure precision, accountability, and forward planning in the financial affairs of the strata.

Establish a financial review committee

Creating an exclusive financial review committee consisting of council members and owners who are interested can go a long way toward better financial management. Such a committee may:

• Meet regularly (e.g., monthly or quarterly) to review bank statements, financial reports, and budgets.
• Monitor payment of strata fees and special levies with timely collections.
• Provide a second level of oversight by cross-checking invoices against contracts and services rendered.
• Prepare questions and recommendations for council meetings, which fosters transparency and accountability.

This joint responsibility reduces errors and potential fraud and promotes owner participation in finance.

Questions to ask your treasurer or property manager

Owners and councilors must get actively involved with those who manage strata funds by posing pointed questions like:

• What were the reasons for any serious budget variations? Knowing reasons for over- or under-spending unexpectedly helps locate inefficiencies in operations or unplanned expenses.
• Any planned capital works or special levies in prospect? Being alerted in advance enables owners to financially plan and involve themselves in decisions.
• How is the Contingency Reserve Fund (CRF) being funded as compared to the depreciation report recommendations? Having the CRF fully funded prevents surprise special assessments.
• What is the status of accounts receivable and collections? Strata fees in arrears must be closely monitored to ensure cash flow.

In addition, inquire about the contractor hiring process to ascertain competitiveness and fairness of pricing, and the treasurer’s and property manager’s tenure and oversight to ascertain continuity and stability.

Monthly and Ongoing Financial Monitoring

Best practices recommended are that the strata council:

• Review bank and credit union statements monthly for all accounts, including operating, CRF, and special levy accounts.
• Monitor accounts receivable aging reports to identify and follow up outstanding strata fees in a timely manner.
• Ensure that all expenditure has prior approval and is supported by invoices or receipts.
• Maintain little petty cash with strict documentation.
• Review all revenue sources such as parking fees, fines, and interest income to ensure they are properly accounted for.

Keep Financial Information Simple and Transparent

Financial reports should be presented in a clear, understandable manner so that all owners, financially literate or not, can grasp them. Transparency facilitates trust and encourages owner participation in financial issues.

Eli Reports’ Financial Summary Information

Separate Funds and Maintain Adequate Banking

To avoid commingling and facilitate tracing, strata corporations should maintain separate bank accounts for:

• Operating funds;
• Contingency reserve funds;
• Special levies;

All of the accounts are to be in the legal name of the strata corporation. This segregation of funds ensures improper use is barred and audits or reviews become convenient.

Consider Independent Financial Reviews or Audits

Though not mandatory for every strata corporation, commissioning an independent financial review or audit can provide assurance of accuracy and compliance. This is strongly recommended if:

• The strata has intricate financial transactions or a high budget.
• There are discrepancies or concerns with financial management.
• Deficits or special levies have been passed.

An independent review can reveal errors, fraud, or inefficiencies and provide recommendations for improvement.

When to seek professional assistance

Professional advice must be sought when:

• The strata has persistent operating deficits or cash flow issues.
• Special levies or large capital projects are contemplated.
• Complex depreciation reports or insurance claims need to be interpreted.
• There is uncertainty about compliance with financial legislation or accounting standards.

Employing accountants, financial consultants, or strata management consultants allows for fully informed decision-making and protects each owner’s interests.

Understanding Special Financial Situations

Special financial situations like pending special assessments, large capital projects, or insurance claims need to be interpreted with care.

Special Assessments/Levies

They are additional charges to owners, often called when the CRF is not sufficient to support high expenses. A ¾ vote is required to enact them and they can have a serious cost impact on owners.

Major Capital Projects

Review the depreciation report and CRF reports to decide on timing and funding. Proper planning and financial projections can avoid sudden financial effects.

Insurance Claims

Familiarity with strata insurance coverage in the event of property damage claims is a requirement. The common property is typically covered by the strata corporation, and the owners cover personal belongings.

Final Thoughts

It is important to read and comprehend strata financial statements in order to ensure proper strata governance and ownership. It is made easy by using tools such as Eli Report, making it quicker and more insightful.

Through a combination of proper document reading and best practices along with professional counsel where necessary, strata boards and owners can maintain financial transparency and stability.

Try Eli Report today to simplify your strata financial document review and make decisions confidently.