Financial Statements. The Surrey Phase IV Owners Association, Inc.

Transcription

1 Financial Statements For the Year Ended

2 Contents (Summarized Totals for 2016) Page Independent Auditors Report 1-2 Financial Statements Balance Sheet 3 Statement of Revenue, Expenses, and Changes in Fund Balances 4 Statement of Cash Flows 5 Statement of Other Operating Income and Expenses 6 Notes to Financial Statements 7-14 Supplemental Information on Future Major Repairs and Replacements 15

3 FITZGERALD & ASSOCIATES, INC. Certified Public Accountants Member of the California Society of CPAs and The American Institute of Certified Public Accountants Independent Auditors Report Board of Directors Branson, Missouri We have audited the accompanying financial statements of Owners Association, Inc., which comprise the balance sheet as of, and the related statements of revenues, expenses, and changes in fund balances, and cash flows for the year then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of as of, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Redlands Office 300 E. State Street Suite 501 Redlands, CA (909) Irvine Office 100 Spectrum Center Drive Suite 900 Irvine, CA (949) Facsimile (909)

4 Page 2 Report on Supplementary Information Our audit was conducted for the purpose of forming an opinion on the financial statements as a whole. The Supplemental Information on Future Major Repairs and Replacements, which is the responsibility of the Association s management, is presented for purposes of additional analysis and is not a required part of the financial statements. Such information has not been subjected to the auditing procedures applied in the audit of the financial statements and, accordingly, we do not express an opinion or provide any assurance on it. Other Matters The prior year summarized comparative information has been derived from the Association s December 31, 2016 financial statements and, in our report dated March 5, 2017, we expressed an unqualified opinion on those financial statements. Redlands, California March 3, 2018

5 Owners' Association, Inc. Balance Sheet (Summarized Totals for 2016) Page 3 Operating Replacement Capital Fund Fund Fund Total Total Assets Cash, including interestbearing deposits $ 1,174,328 $ 24,048 $ - $ 1,198,376 $ 1,276,525 Accounts receivable, net 29, ,705 15,267 Prepaid expenses 82, ,880 67,717 Notes receivable, timeshare sales 5, ,100 - Property and equipment, net ,196 57,196 65,648 Other assets 16, ,200 16,200 Total assets $ 1,308,213 $ 24,048 $ 57,196 $ 1,389,457 $ 1,441,357 Liabilities and Fund Balances Accounts payable $ 56,092 $ - $ - $ 56,092 $ 120,563 Accrued expenses 14, ,176 14,797 Due to other associations 12, ,911 17,045 Deferred revenue 4, ,599 3,740 Prepaid assessments 884, , ,661 Total liabilities 972, ,656 1,126,806 Fund balances 335,557 24,048 57, , ,551 Total liabilities and fund balances $ 1,308,213 $ 24,048 $ 57,196 $ 1,389,457 $ 1,441,357 The accompanying notes are an integral part of these financial statements.

6 Owners' Association, Inc. Statement of Revenue, Expenses, and Changes in Fund Balances For the Year Ended (Summarized Totals for 2016) Page 4 Operating Replacement Capital Fund Fund Fund Total Total Revenue Member assessments $ 2,558,809 $ 86,932 $ - $ 2,645,741 $ 2,734,387 Developer assessments 354, , ,197 ILG membership dues 267, , ,243 Rental income, net 154, , ,290 Timeshare interval sales 64, ,364 6,849 Insurance proceeds 671, ,281 - Interest income 5, ,132 5,242 Other income (Schedule) 117, , ,908 Total revenue 4,192,906 86,971-4,279,877 3,628,116 Expenses Activities 28, ,294 31,335 Bad debt expense 303, , ,771 Bad debt expense, developer 411, , ,570 Depreciation expense - - 8,452 8,452 9,655 Engineering expense 292, , ,973 Front desk 85, ,562 86,721 General and administrative Services (Schedule) 176, , ,619 General maintenance 101, , ,694 Grounds and landscaping 23, ,321 21,999 Housekeeping 473, , ,880 Income tax expense 13, ,380 19,202 Insurance expense 79, ,720 74,355 Management fees 400, , ,067 ILG membership dues 267, , ,243 Property taxes 119, , ,821 Repairs and replacements - 308, , ,354 Resort operations 109, ,741 76,398 Timeshare interval sales costs 31, ,196 3,255 Security 46, ,701 37,448 Storm damage costs 510, ,507 - Supplies 19, ,937 18,307 Utilities 365, , ,649 Total expenses 3,860, ,836 8,452 4,177,627 3,648,316 Excess revenue (expenses) 332,567 (221,865) (8,452) 102,250 (20,200) Fund balances, beginning of year 2, ,952 65, , ,751 Fund transfers 39 (39) Fund balances, end of year $ 335,557 $ 24,048 $ 57,196 $ 416,801 $ 314,551 The accompanying notes are an integral part of these financial statements.

7 Owners' Association, Inc. Statement of Cash Flows For the Year Ended (Summarized Totals for 2016) Page 5 Operating Replacement Capital Fund Fund Fund Total Total Cash Flows From Operating Activities Excess revenue (expenses) $ 332,567 $ (221,865) $ (8,452) $ 102,250 $ (20,200) Adjustments to reconcile excess of revenues over expenses to net cash provided by operating activities: Depreciation - - 8,452 8,452 9,655 Changes in: Accounts receivable (14,438) - - (14,438) 5,853 Prepaid expenses (15,163) - - (15,163) 9,787 Accounts payable (64,471) - - (64,471) 78,161 Accrued expenses (621) - - (621) (55,823) Due to other associations (4,134) - - (4,134) 17,045 Deferred revenue Prepaid assessments (85,783) - - (85,783) (145,886) Net cash provided (used) by operating activities 148,816 (221,865) - (73,049) (100,509) Cash Flows From Investing Activities Issuance of notes receivable (5,100) - - (5,100) - Net cash provided (used) by financing activities (5,100) - - (5,100) - Cash Flows From Financing Activities Due from other associations ,833 Due from related associations ,128 Fund transfers 39 (39) Net cash provided (used) by financing activities 39 (39) ,961 Net increase (decrease) in cash 143,755 (221,904) - (78,149) (46,548) Cash, beginning of year 1,030, ,952-1,276,525 1,323,073 Cash, end of year $ 1,174,328 $ 24,048 $ - $ 1,198,376 $ 1,276,525 The accompanying notes are an integral part of these financial statements.

8 Owners' Association, Inc. Statements of Other Operating Income and Expenses For the Year Ended September 30, 2017 (Summarized Totals for 2016) Page Total Total Other Income Late fees $ 51,009 $ 97,943 Activities 8,890 9,623 Bonus time 29,822 23,902 Cleaning fees 7, Owners' week revenue 7,432 6,628 Other income 13,175 20,314 Total other income $ 117,497 $ 158,908 General and Administrative Services Audit and tax fees $ 6,000 $ 6,000 Credit card fees 20,419 22,362 Guest activities expense 13,169 14,823 IT service expense 15,075 25,192 Legal fees 52,457 63,596 Office supplies 28,588 32,240 Owner's week activities expense 12,509 12,796 Pest control 7,219 6,597 Other general and administrative 20,835 24,013 Total general and administrative services $ 176,271 $ 207,619 The accompanying notes are an integral part of these financial statements.

9 Notes to Financial Statements (Summarized Totals for 2016) Page 7 1. Organization and Other Matters was incorporated in April 1997 and is governed by a member-elected Board of Directors. The Association is responsible for the operation and maintenance of 157 condominium units representing 8,164 timeshare intervals per year. The property is located in Branson, Missouri. 2. Significant Accounting Policies Comparative Information The financial statements include certain 2016 comparative information. With respect to the balance sheet, the statement of revenue, expenses, and changes in fund balances, and the statement of cash flows, such prior year information is not presented by fund. Accordingly, such information should be read in conjunction with the Association s financial statement for the year ended December 31, 2016 from which the summarized information was derived. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the reporting date and revenues, and expenses during the reporting period. Actual results could differ from those estimates. Fund Accounting The Association s governing documents provide guidelines for managing its financial activities. To ensure compliance with limitations and restrictions on the use of financial resources, the Association maintains its records using fund accounting. They classify transactions for accounting and reporting purposes in funds established according to their nature and purpose. Operating Fund - This fund is used to account for the financial resources available for the general operations of the Association. Replacement Fund - This fund is used to account for financial resources designated for future major repairs and replacements. Capital Fund - This fund is used to account for capital assets purchased by the Association and the related depreciation expense over the life of the asset.

10 Notes to Financial Statements (Summarized Totals for 2016) Page 8 2. Significant Accounting Policies (continued) Major Repairs and Replacements A portion of Association dues are paid for reserve expenses, generally major repairs and replacements. They deposit these funds in separate interest-bearing bank accounts. For a further discussion of reserves, see Note 11. Cash and Cash Equivalents The Association considers all temporary cash investments with maturity of three months or less to be cash equivalents. Member Assessments Members are subject to annual assessments to provide funds for operating expenses, future major repairs and replacements and capital asset acquisitions. The annual budget and assessments of owners are determined by the board of directors. Assessments receivable at the reporting date represent amounts due from members. The Association s policy is to accrue interest on all amounts due, including delinquent assessments, reasonable collection costs and late charges commencing 30 days after assessments become due. Interest and related charges are recorded as income when billed to the owner. See Note 4 for details on accounts receivable. The Association's policies permit various collection remedies for delinquent assessments, principally the cancellation of the membership. Timeshare Interval Sales In December 2016, the Association began selling its timeshare intervals. In Accordance with AICPA Statement of Position (SOP) 04-2, Accounting for Real Estate Time-Sharing Transactions and Statement of Financial Accounting Standards (SFAS) No. 66, Accounting for Sales of Real Estate, the revenue on these timeshare intervals is recognized using the Relative Sales Value Method, Full Accrual Profit Recognition method. The Association occasionally finances the sales to the buyer and evaluates the continuing collectability of the outstanding notes on a quarterly basis. The sales costs associated with the timeshare interval sale program are expensed in the period they are incurred. See Note 6 for additional information on Timeshare Interval Sales.

11 Notes to Financial Statements (Summarized Totals for 2016) Page 9 2. Significant Accounting Policies (concluded) Property and Equipment The Association conforms to industry practice in recognizing real property and common areas as assets. Based on this practice, the Association only capitalizes property to which it has title and to which the board of directors has discretion to dispose of the property and retain the proceeds for the Association s use. Other real property and common areas are owned by the members in common and not by the Association and therefore are not capitalized. Depreciation is calculated using the straight-line method over a 5 to 15 year estimated useful life of the asset. Repairs, replacements and improvements of common property are expensed as incurred. See Note 7 for additional information on property and equipment. Prepaid Assessments Prepaid assessments consist of members annual assessments received in advance. The Association recognizes these amounts as income when they are earned in the subsequent year. 3. Income Taxes Timeshare associations may elect to be taxed either as a timeshare association or as a regular corporation. The Association elected to be taxed as a timeshare association in accordance with Internal Revenue Code Section 528 for the years ending and Under that Section, the Association is not taxed on assessments to members and other income received from association members solely as a function of their membership in the Association. The Association is taxed for federal purposes at the rate of 32% and taxed for state purposes at a rate of 6.25% on its nonexempt function income such as interest. The Association s state and federal income tax filings are subject to audit by various taxing authorities. While the Association currently has no income tax returns under audit, the open tax audit periods, for which the statute of limitations has not expired, are 2014 through Accounts Receivable Accounts receivable at the reporting dates consist of the following amounts: Regular assessments $3,667,237 $3,451,854 Developer assessments 864, ,377 Other receivables 29,705 15,267 Allowance for doubtful accounts (4,531,997) (3,895,231) Assessments receivable, net $29,705 $15,267

12 Notes to Financial Statements (Summarized Totals for 2016) Page Prepaid Expenses Prepaid expenses at the reporting dates consist of the following amounts: Income taxes $5,898 $1,039 Insurance 75,787 66,568 Other prepaid expenses 1, Total prepaid expenses $82,880 $67, Notes Receivable, Timeshare Sales In late 2016, the Association began a program to sell Association-owned timeshare intervals to the public. The Association occasionally finances the sale of these intervals. Notes receivable on these timeshare intervals is as follows: Notes receivable, timeshare sales $5,100 $-0- Allowance for doubtful notes receivable Notes receivable timeshare sale, net $5,100 $-0- Future maturities on these notes receivable are as follows: For the year ending December 31: 2018 $5, Thereafter -0- Total $5,100 The notes are non-interest bearing and the weighted-average interest rate on all such notes is 0%. There was no change in the allowance for doubtful notes receivable during the year ended December 31, 2017.

13 Notes to Financial Statements (Summarized Totals for 2016) Page Property and Equipment Property and equipment at the reporting dates consist of the following amounts: Equipment and property improvements $113,367 $113,367 Accumulated depreciation (56,171) (47,719) Property and equipment, net $57,196 $65, Due To and From Other Associations The Association is due amounts from other associations in the area as follows: Due from Crown View Estates $24,732 $24,732 Due from The Lodges at Crown View Interval 9,627 9,627 Due from Crowne View Heights Property 4,474 4,474 Allowance for doubtful accounts (38,833) (38,833) Total due from other associations $-0- $-0-9. Accrued Expenses Accrued expenses at the reporting dates consist of the following amounts: Accrued wages $3,640 $6,457 Accrued rent to developer 7,245 7,245 Accrued excise and tourism tax 3,203 1,095 Accrued other Total accrued expenses $14,175 $14,797

14 Notes to Financial Statements (Summarized Totals for 2016) Page Related Party Transactions The Association shares certain costs with two related associations in the area. These costs are incurred by one association and reimbursed back from the other related associations. The amounts were due to the related associations at the reporting date and were paid subsequent to and The Association paid the related associations for shared costs during the year ended December 31 as follows: Paid to The Surrey Grand Crowne Owners Association $760,446 $620,882 Payment from The Surrey Condominium Association, Inc. $73,830 $103,205 The Association has balances due to and from related associations for shared costs as follows: Due to The Surrey Grand Crowne Resort $(63,832) $(67,997) Due from The Surrey Condominium 2,153 2,184 Prior to the change in management in August 2011: Due to The Surrey Grand Crowne Resort (1,251) (7,251) Due from The Surrey Condominium 50,019 56,019 Total due (to) from related associations (current and prior) $(12,911) $(17,045) Interval Leisure Group (ILG), the parent company of the Association s management company, Trading Places International, charges a membership fee that is collected through the Association and remitted to the parent company. The amount collected in fees during the years ended December 31, 2017 and 2016 is $267,138 and $298,243 respectively. There was no outstanding balance due to or from the parent company at.

15 Notes to Financial Statements (Summarized Totals for 2016) Page Future Major Repairs and Replacements The Association s governing documents require that funds be accumulated for future major repairs and replacements. Accumulated funds are held in separate savings accounts and are generally not available for expenditures for normal operations. Complex Solutions, Ltd. conducted a study in February 2014 to estimate the remaining useful lives and the replacement costs of the components of common property. The estimates were based on future estimated replacement costs. Funding requirements consider an annual inflation rate of 3 percent and interest of 0.25 percent, net of taxes, on amounts funded for future major repairs and replacements. The table included in the unaudited supplementary information on Future Major Repairs and Replacements is based on the study. In 2017, the board of directors decided to fund 12 percent of the amount recommended by the study. Accordingly, $86,932 was included in the 2017 budget. For that reason, and because actual expenditures may vary from estimated future expenditures and the variations may be material, amounts accumulated in the replacement fund may not be adequate to meet all future needs for major repairs and replacements. If additional funds are needed, the association has the right, subject to membership approval, to increase regular assessments, pass special assessments, or delay major repairs and replacements until funds are available. 12. Concentration of Credit Risk The Association s major source of revenue is assessments from members. At two entities owned multiple intervals at the Association. The following is information regarding these entities at the reporting dates: Assessments receivable at December 31, $-0- $-0- Percent of total assessments receivable 0% 0% Assessment revenue for year ended December 31, $896,064 $740,913 Percent of total assessments 30% 25% 13. Supplemental Cash Flow Disclosures For the reporting periods, cash flows from operating activities include state and federal income tax payments of $18,239 and $16,043 for the years ended and 2016.

16 Notes to Financial Statements (Summarized Totals for 2016) Page Commitments and Contingencies The Association entered into a twenty-year management agreement with Trading Places International (TPI) beginning August 24, 2011 and expiring August 24, The Association will have the right to terminate this agreement, without cause, on the tenth anniversary of the commencement, and each successive anniversary thereafter, with a prior written notice of no less than 90 days. TPI will provide administrative, financial, and accounting services for the Association for a sum of $400,867 per year with the right to increase the fee by the percentage of the published Consumer Price Index (CPI) each year as follows: Year Ended 2018 $400, , , , Thereafter -0- Total $1,461,792 Per the management agreement with TPI, the Association is required to repay certain contributions made by TPI if the 20-year agreement is terminated prior to August 24, At December 31, 2017, the contingent liability, if the contract was terminated, would be $504,747. The Association is party to various legal claims and counter claims with the property developer and other associations in the vicinity. The possible outcome of these actions cannot be determined and as such, no estimate of potential gains or losses can be made at this time. 15. Financial Instruments The Association maintains operating and reserve accounts at certain financial institutions that are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. The Association occasionally maintains deposits in excess of federally insured limits. At the reporting dates, the Association's uninsured cash balance totaled $235,128 for and $337,986 for December 31, Subsequent Events Management has evaluated subsequent events through March 3, 2018, the date that the financial statements were available for issue. Management has determined there are no subsequent events that require recognition or disclosure in these financial statements.

17 Supplemental Information

18 Owners' Association, Inc. Supplemental Information on Future Major Repairs and Replacements (Unaudited) Page 15 Complex Solutions, Ltd. conducted a study in February 2014 to estimate the remaining useful lives and replacement costs of the components of common property. The estimates were based on future estimated replacement costs. Funding requirements consider an annual inflation rate of 3% and interest of 0.25%, net of taxes, on amounts funded for future major repairs and replacements. The following table is based on the study and presents significant information about the components of common property. Estimated Estimated Reserve Remaining February 2014 Estimated Expenditures Replacement Useful Replacement 2018 Funding For the Year Cash Balance Component Life (Years) Cost Requirement Ended 12/31/17 at 12/31/17 Roofing 1-6 $ 216,991 $ 32,323 $ - $ 105,091 Painted surfaces 0 44,820 6,676-21,707 Siding materials ,234 81, ,999 Drive materials 0 22,900 3,411 (850) 11,091 Property access ,100 4,186 (1,360) 13,609 Decking 0 77,800 11,589-37,679 Mechanical equipment , , ,059 Property identification 0 4, ,339 Life and safety 1 24,000 3,575 (193) 11,623 Fencing ,800 30,358-98,702 Pool and spa ,184 9,710 (10,459) 31,569 Courts 0 9,240 1,376-4,475 Recreation equipment ,020 3,131-10,180 Interiors 0-7 2,557, ,024 (242,056) 1,238,803 Light fixtures ,561 8,127-26,424 Utility equipment 0 33,050 4,923 (17,666) 16,006 Utility systems 0 84,000 12,513 (36,252) 40,682 Buildings and structures 0 135,500 20,184-65,624 Cash deficit (2,329,617) Totals $ 4,859,833 $ 723,927 $ (308,836) $ 24,048 See independent auditors' report.