HOA Detective™ | November 25, 2025: HOA financial language has inherited decades of clutter, often from sources of questionable expertise. Legacy jargon, outdated phrasing, and misused accounting terms. Phrases like “budget pro forma,” “rainy-day fund,” and “Capital Budget” linger from an era when HOA finance was more folklore than discipline.
Financial Terminology Glossary: This glossary resets the vocabulary to modern, accurate, and regulator-aligned definitions – written for today’s Boards, auditors, and owners who want clarity instead of confusion. Use it as your clean reference for correct usage, transparent documentation, and sound decision-making.
Annual Operating Budget: A forward-looking budget projecting income and expenses for an upcoming budget year. Typically adopted by the Board before the upcoming budget year, toward the end of the current budget cycle. A rough translation of the term pro forma is “according to form.” Correct use of the term pro forma budget calls for the term to be used when no previous spending history is available, such as the budget prepared by a developer before the HOA has commenced operation, and has therefore not started to receive revenues. If no previous expense history is available when forecasting next year’s budget, the budget forecast is said to be a “pro forma budget.”
The Operating Budget for a typical HOA covers annual operating expenses – utilities, maintenance, management, insurance, admin, etc.
Key point: The operating budget does not include reserve fund expenditures. The annual reserve contribution should appear in the budget as an expense line. When the monthly or annual assessment revenue is received, the budgeted amount is transferred to a segregated bank account designated and clearly identified as the replacement reserve account.
Reserve Fund: A legally distinct fund for major capital repairs and replacements. Never co-mingled with operating cash. Avoid calling it a ‘savings account’ or ‘rainy-day fund.‘
Reserve Study: A long-term (20–30 year) capital planning document identifying components maintained by the HOA, useful life and condition, replacement/repair cost, and a funding plan. Important: Most reserve studies include non-capital items such as painting or seal-coating — cyclical maintenance, not capital improvements.
Current Reserve Study: Begins with the HOA’s current budget year.
Example: Through the end of 2025, a current study begins on January 1, 2025.
Percent of Fully Funded: (AKA – percent funded level). The percent funded metric is determined by dividing the accumulated reserve balance by the fully funded amount. The calculation is tied to the year-end reporting of the accumulated reserve fund balance. Many reserve studies report the accumulated reserve as the opening or beginning reserve fund balance, which is the amount of money in the reserve fund as of the first day of the current budget year; hence, the opening balance for the current year and closing balance for the previous budget year are synonymous.
The percent funded metric measures the funding position, not the adequacy of funding, often using data that is flawed. A high ratio may mask outdated data or structurally flawed data, such as inaccurate replacement cost estimates. A major flaw in the percent funded metric is the reliance on a linear (straight-line) calculation of depreciation, with the sum of the percent funded amount for each reserve expenditure reported as “the reserve fund percent funded level.”
Fully Funded Balance (FFB): The cumulative amount that should be in the reserve fund at year-end based on a theoretical straight-line calculation of asset depreciation. Calculating the FFB is subject to the garbage in garbage-in-garbage-out problem inherent with the data analysis process. If any aspect of the replacement cost calculation is wrong, the FFB will be wrong, leading to a cascade of wrong assumptions.
Special Assessment: A one-time charge levied on owners to cover unfunded or underfunded expenses outside the regular budget.
Operating Deficit: Operating expenses exceed operating income during the reporting period. YTD operating deficits may be explained by seasonal cash flow demands, which may resolve themselves over the course of the budget cycle. An operating deficit reported on the annual income statement is a far more troublesome issue.
Operating deficits may result in one of two common forms of reserve raiding:
1) Spending reserve cash on items not listed in the study and not reimbursing the reserve fund.
2) Under-funding the reserve contribution to cover operating budget shortfalls.
Reserve Contribution: The annual transfer from the operating account to the reserve fund – a disciplined, non-optional expense.
Capital Improvement: An enhancement or addition, not a replacement. Replacing a roof = reserve expense. Adding solar panels to the clubhouse = capital improvement.
Deferred Maintenance: Work that should have been completed, but was postponed. Deferred maintenance is the top driver of special assessments.
Annual Financial Statement (‘Annual Report’): Year-end package including: Balance Sheet (assets/liabilities/equity) and Income & Expense Statement (revenues/expenses). In many states, the annual financial statement (report) is the ONLY financial reporting required by law, even if the HOA is a 300-unit high-rise condominium with $4 million-plus in annual revenues, and a multi-million-dollar reserve fund that must be monitored.
Independent Auditor’s Report: An Independent Auditor’s Report provides the highest level of financial assurance an HOA can obtain regarding its financial condition at a specific point in time – typically the end of the Association’s budget year. This report is issued by a licensed Certified Public Accountant (CPA) who performs a full financial audit in accordance with Generally Accepted Auditing Standards (GAAS).
During an audit, the CPA examines supporting records, tests transactions, evaluates internal controls, and verifies key account balances. At the conclusion of this work, the auditor expresses an opinion on whether the association’s financial statements are presented fairly and in conformity with the applicable accounting framework. If the auditor determines that the financial statements do not meet these standards, the report must clearly state the deficiencies and provide the appropriate form of modified opinion or guidance outlining the nature of the issues identified.
Independent Financial Review Report: An Independent Accountant’s Review Report offers a moderate level of assurance – higher than a compilation, but well below the assurance offered by a full audit. as its name implies. As the name implies, the review is also prepared by a licensed Independent Certified Public Accountant (CPA) who conducts the engagement under the Statements on Standards for Accounting and Review Services (SSARS).
During a review, the CPA performs inquiry and analytical procedures, but does not examine source documents, test transactions, or evaluate internal controls. The objective is to determine whether the financial statements appear reasonable and free of obvious material misstatements. The resulting report provides limited assurance, stating that the CPA is not aware of any necessary material modifications for the statements to conform to the applicable accounting framework.
Because a review does not involve the depth of verification found in an audit, the level of confidence it provides is meaningful to the reader, but is intentionally more restricted by the standards.
Reserve Equity: Expressed as a percentage, reserve equity reflects the percentage of projected spending (based on the current reserve study), that is currently held in the reserve fund. If the project reserve spending liability is $10 million, and the accumulated reserves at a point in time are $1 million, the reserve equity is said to be 10% of the projected spending liability. The older the HOA is, the more important this metric becomes. When projected spending liabilities exceed current reserve assets, and the asset base of the Association is 20 years old or more, a low-funded equity position could be a major red flag linked to chronic deficits or uncollected assessments.
Key Point: Due to the use of cash flow funding models by most reserve study providers, the reserve equity will invariably be less than 100%. Negative reserve spending equity is not as bad as other forms of negative financial conditions, such as a negative reserve fund balance (VERY bad). Depending on the average age of the assets captured in the reserve study, a reserve equity of 20% to 25% of projected spending could be a high level of funding.
Cash Flow Projection: A forward-looking schedule of anticipated inflows and outflows showing whether cash supports upcoming obligations.
Capital Plan: A high-level outline of anticipated major renewal and replacement projects and the anticipated costs. The capital plan should be a complement to the replacement and renewal spending in the reserve study. In the context of HOAs, a capital plan is most often associated with reinvestment when existing capital assets are replaced or renewed. Discretionary capital improvements may be included in a capital plan, but since most HOAs have a hard time maintaining the existing asset base, it is far less common for HOAs in general to engage in capital planning that results in an addition to the asset base.
Income Statement: The income statement reports revenues and expenses for a specific period. Most commonly, a year-to-date (YTD) captures revenues and expenditures from the first day of the current budget cycle, and the most recent month ended. An organized HOA with an efficient bookkeeping process should be able to provide a YTD financial statement by the end of week three of every month.
Balance Sheet: The all-important balance sheet is the heart and soul of every organization that requires money to sustain itself. The balance sheet is a standardized financial reporting format that identifies and reports account balances – whether actual bank and investment accounts – or accounts that exist only as ledger entries within the Association’s bookkeeping system. The balance sheet provides a snapshot view of assets, liabilities, and equity. Arguably, the most important piece of the financial puzzle. So important that chapters in textbooks, and entire books, have been devoted to the subject of the balance sheet.
Financial Statement: Includes, at a minimum, the balance sheet and statement of income, revenue, and expense. Sometimes referred to incorrectly as a profit and loss (P&L) statement. Because the HOA is a not-for-profit entity, the use of the P&L terminology should be avoided. Financial reporting is about accuracy and exactitude. Using incorrect nomenclature reinforces the perception among knowledgeable members of your audience that the individual using such incorrect terminology does know what they are talking about. The casual use of terms like “P&L,” when you really mean the income statement, or “fiscal year,” when you have no idea what it means, makes the user look foolish and lazy.
Annual Financial Reports: Financial reports are typically compiled as year-to-date (YTD) or annual reports. Regardless of whether we are talking about the YTD or annual report, the format and information contained in the report should be presented in the same, standardized format. Under the bylaws of many HOAs, an annual financial statement/report consisting of a balance sheet and statement of income and expense is the only financial reporting that is required. Some states require that the annual financial statement be reviewed or audited by an independent CPA. However, as of November 2025, fewer than a dozen U.S. states require HOAs or condominium associations to have their annual financial statements reviewed or audited by an independent CPA.
Fiscal Year: One of the most misused financial terms among HOA “professionals” is fiscal year. Reserve study providers are among the biggest culprits in this regard, but many a “professional management” operation is guilty of using the term incorrectly. To be specific, in the world of professional accountants and corporate finance, a “fiscal year” is a 12-month reporting period that ends on ANY day other than December 31st.
Conversely, a 12-month reporting period that begins on January 1st and ends on December 31st of the same year – like the budget year used by 95% of the HOAs in the U.S. – is NOT a “fiscal year.” In this instance, it is correct to state that the HOA uses a calendar year for financial reporting and budgeting purposes.
Interfund Transfer/Activity: Movement of money between operating and reserve accounts. Good governance practices demand that interfund activity be approved by the Board of Directors. Approved interfund borrowing should be documentation in meeting minutes, including schedules for reimbursing “borrowed” funds, if the use of funds is temporary. Furthermore, interfund activity should automatically trigger an annotation (footnote) to the balance sheet that explains what the entry means.
Interfund activity can and does cause many financial analysts to reach for the bottle of Maalox when trying to interpret the balance sheet of a large HOA. At the very least, an extreme level of interfund activity should be viewed with a cautious eye. At worst, it may be a sign that a forensic auditor should be called in.
Detective’s Summary: In HOA governance, precision equals protection. Clear terminology prevents misunderstandings, reinforces transparency, and safeguards the Board’s credibility with auditors, regulators, and owners. Financial clarity isn’t just good communication required by good governance standards; it is a moral and ethical imperative.
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