Reserves, Assessments, and Funds in Custody Explained

Reserves

Reserves generally refer to money designated for major repair, replacement, or other future obligations, but the operative meaning can come from state law, governing documents, budgets, and accounting practices. A reserve-study recommendation is not necessarily the same figure as cash held in reserve accounts.

For a formula, determine whether the authority refers to actual account balances, budgeted reserves, all reserve funds, or another defined amount. Note outstanding transfers and restrictions rather than assuming the general ledger and bank balance are identical.

Assessments

Regular assessments commonly fund annual operations and reserve contributions. Special assessments are separately imposed for a particular need, and whether they enter a formula depends on the governing language.

A phrase such as three months of assessments may require analysis of gross annual billings, the current budget, or another base. Collections received during three months are not automatically equivalent to three months of the annual assessment amount.

Funds in custody or control

Custody and control focus on who holds money or can direct it, rather than why the money was collected. Depending on the governing source, the relevant total may include operating funds, reserves, investments, manager-held funds, and temporary balances from large collections.

A peak-custody approach is forward-looking when balances fluctuate. The association can build a month-by-month cash forecast that includes assessment receipts, special-assessment installments, reserve transfers, and expected project payments.

Reconcile the inputs

Prepare an account inventory showing owner, institution, last four digits, purpose, balance date, authorized users, and whether a management company can transact. Reconcile it to the general ledger and bank or custodial statements.

Explain exclusions in writing and have an independent reviewer check the worksheet. Apply the governing authority and compare the result with the complete policy or bond wording.

• Include accounts with zero or temporary balances so the map is complete.
• Identify restricted and unrestricted money without assuming either is outside the rule.
• Capture funds held in transit or by a manager.
• Update the inventory after new accounts or collection arrangements.