QHSORM 9000-005

Capitalization vs Expense Policy

 

Responsible Committee
Finance

 

13 May 2024
Reference
CCRE Article II Section 2.1(c) 
Procedure
Capitalization guidelines issued by the American Institute of Certified Public Accounts (AICPA) for Common Interest Realty Associations (CIRAs) will be used to determine when community common property and equipment will be capitalized and when it will be expensed.
Capitalization
The following types of common property and equipment:

1.      Common “Real Property” for which the Association has title that is not directly associated with a Unit AND one of the following criteria is met:

  • The BOD CAN dispose of for cash or claims to cash    OR
  •  The property is used by the Association to generate significant cash flows from members based on usage or from non-members.

CCRE Article II Section 2.1(c) provides: “The right of the Association to sell, convey, or transfer the Common Property or any portion thereof to any third party other than those described in Subsection (b) for such purposes and subject to such conditions as may be approved by two-thirds vote of the Board of Directors subject to the requirements of the Permits.”  Subsection (b) refers to easements granted to utility companies.  Accordingly, the Association may dispose of common property assets by consent of two-thirds majority of the Board of Directors including:

  • Sports complex building
  • Pool and pool area
  • Tennis courts, fencing and related facilities
  • Maintenance building
  • POA office building
  • Fitness Facility
  • Playground
  • Marina
  • Underlying sports complex land

2. Community “Personal Property” used in operating, maintaining, and replacing common property and providing services. Examples include:

  •  Work Vehicles
    • Boats
    • Vehicles
  • Maintenance Equipment
  • Furnishings
  • Office and Recreational Equipment
    • Office Equipment
    • Fitness Equipment
    • Tennis Equipment
    • Pool Equipment
Expense
The following types of common property and equipment:

1.      For “Real Property” that is directly associated with the Unit [where the Unit is defined as lots owned by individual property owners within the Association]:

Expense Common Property without which the home could not be occupied.  Examples include:

  • Land
  • Land improvements including perimeter fences and walls.
  • Roads and paving
  • Streetlights
  • Lock and lagoon system including bulkheads and dredging.

Restrictive covenants severely limit the ability of the Association to dispose of or change the use of these common properties.  The property provides no future economic benefits to the Association.  Instead, the common property is considered to increase the value of the property owned by the homeowners and thus benefit the homeowners, not the Association.

2.      For “Real Property” that is NOT directly associated with the Unit (Association property that is not necessary for the use of the home, although individual lot owners may benefit from its use (e.g., swimming pool,  recreational facilities and controlled access facilities):

Expense Common Property that CANNOT be disposed of by the Board of  Directors (BOD) for cash or claims to cash and that does not generate significant cash from members on the basis of usage or from non-members:

The Controlled Access Building and associated security equipment is an example of such property.  Due to the location of the Controlled Access Building it is highly unlikely it could be disposed of by the BOD for cash or claims of cash.  This is exemplified by the fact that even though controlled access services have been out-sourced, the Association retained title to the property and building.

Capitalization threshold
The BOD has established $10,000 as the minimum threshold for capitalization.  Therefore, if common property or equipment meets the above criteria for capitalization but is under $10,000 it will be expensed.

MAY 2024