Ascend News

 

This article is designed to help strata managers identify and address the 5 most common financial red flags that occur at handover, ensuring a smooth transition and preventing future complications.

 

When taking on a new strata management, the financial reports provided by the ceasing manager can present several challenges.  Not all records are created equal, and discrepancies often hide in poorly kept documentation, inferior reporting systems or incomplete reports. In this article, we’ll explore the 5 most common red flags to watch out for when receiving handover financials, along with steps to investigate and resolve them.

 

1. Unexplained Asset and Liability Balances

Aside from regular cash, lot owner balances, GST and supplier creditor accounts, handover balance sheets sometimes contain entries for unexplained asset or liability accounts.  Things such as "Accruals", "PAYG WH Payable", "Bonds" "Sundry Creditors", or "Employee Leave".  These may be outdated or unsupported by documentation.

To verify / investigate / rectify:

• Verify if there is supporting documentation, such as invoices, contracts, or payment schedules, for each balance. This applies to any asset or liability not clearly identified as routine (ie: anything other than bank account/loans, lot owner balances, regular creditors or GST balances).
• If no support can be found, consider writing off these balances after the opening balance date. This can be done by coding the write-off to an appropriate income or expense account (e.g., “Sundry Expenses” or “Sundry Income”), with detailed notes explaining the adjustment.
• It’s important to address unexplained balances immediately, as leaving them on the balance sheet indefinitely may create issues for future reporting periods.

 

2. Discrepancies in Lot Owner Arrears or Prepayments

Accurate lot owner balances are essential.. but, believe it or not, there are strata accounting packages out there whose lot position breakdowns often don't even line up with the totals on the balance sheet.  Without naming any offenders, it's a big reason why we strongly recommend Property IQ, StrataMaster and Stratamax over the competition.

To verify / investigate / rectify:

• Simply cross-check arrears and prepayment totals on the balance sheet against the totals on the detailed lot owner breakdown reports. Every entry on the balance sheet should match a corresponding breakdown report, showing the individual transactions or balances per lot owner.
• If detailed breakdowns are missing, request them from the previous manager. Failing to verify lot owner balances can lead to missing arrears or double-counting of prepayments, both of which can cause long-term issues with levy management.  It can also result in the Opening Balances per your system not aligning with the prior year's approved financials.

 

3. Unreconciled GST Balances

GST discrepancies are common in the strata sector, especially when the previous manager used a different accounting method (cash vs accrual). Unreconciled GST balances can lead to under or overpayments to the ATO and may affect future Business Activity Statement (BAS) filings.

To verify / investigate / rectify:

• Review the GST reports provided at handover.  The better accounting packages out there provide a reconciliation report that compares the current period's BAS workings with the GST balances on the balance sheet.  Examples from StrataMaster and Property IQ are shown below for reference.  These should show only a minor discrepancy (under $10) at worst. 
• Consider reaching out to your accountant to confirm the correct GST balances per ATO records, especially if the system changeover involved different accounting methods (cash based to accruals).  Adjustments may be required via journal entries to ensure the financials match actual GST obligations.

 

4. Misaligned Year End Balances 

A commonly missed issue during handovers is a misalignment between the opening balance of the current year’s financials (in the 'Owners Funds' section) and the closing balance from the prior year’s AGM-approved financials. If the opening balance doesn’t match, this may indicate post-AGM adjustments or errors made during the handover process.

To verify / investigate / rectify:

• Compare the opening balance on the balance sheet with the prior year’s approved financials (as presented at the AGM). If the figures don’t align, contact the previous manager to understand if any adjustments were made after the AGM or if there were errors in the closing balance.
• Document any discrepancies for transparency, and communicate these to the council / committee to ensure there are no misunderstandings later on.

 

5. Cash-Based Financials

If the handover documents are based on a cash accounting system (eg: REST, Property Tree or (Heaven forbid) MS Excel), but your strata management business uses a proper, accrual-based system such as Property IQ, StrataMaster or Stratamax, you’ll need to carefully manage the transition to avoid errors such as double-counting income or missing expenses.  Cash-based financials only recognise income and expenses when money is received or paid, which can cause problems when transitioning to a accrual accounting, where transactions are recorded when they are incurred.

To manage the transition:

• The usual giveaways that a system is cashed basis is actual levies on the I&E not aligning with the budgeted levies.  A quick comparison between the two on the prior year's finalised financials should quickly give this information.  Alternatively, review the detailed revenue transaction listing.  If there are lots of different dates for levy income receipts, it's likely to be a cash based system.  A third indicator is the absence of arrears / prepayments on the balance sheet.
• Focus on aligning the I&E figures by initially making cash the only asset / liability on your balance sheet set up, avoiding the inclusion  of lot owner arrears or prepayments in your opening balances. This ensures that the previous year's cash-based closing balances match your accrual-based opening balances.  Once the opening balances are saved/locked, record any arrears, or prepayment credits for each owner, and ensure they are reflected as new levy income (or cancelled levy income for prepaid credits).  This prevents double-counting prepayments (received under the cash system but raised in the accrual system) or missing arrears.

 

A Couple of Tips:

• Have a checklist for handovers: Consider incorporating a standard process for reviewing handover financials before entering them into your strata management agreements.
• Fees for Complications: While most managers include setup at no additional cost, it’s a good idea to create carve-outs in your management agreement to charge fees for handling more complex issues like cash based handover conversions, unexplained asset/liability balances, GST discrepancies, or significant arrears and prepayments. This gives you insurance in the event things get particularly messy.
• We're Here to Help: If you find that the handover documents are becoming too complicated or if you encounter any of the issues mentioned above, feel free to reach out to us.  At Ascend, we have helped many of our strata manager partners navigate tricky handovers with services ranging between reviewing and providing video feedback on the manager's own setup; to completing the whole process for them directly into the software.  

 

Quick Takes:

• Make sure the opening balance figures of Owners Funds align with prior year closing balances.
• Investigate unexplained asset and liability balances and write off unsupported items after the handover date.
• Ensure lot owner arrears and prepayments breakdowns match the balance sheet, requesting detailed reports if necessary.
• Confirm GST balances with an accountant, adjusting the figures through journal entries if required.
• Consider including a free standard financial setup process in your management agreements but with scope to charge more for complex handover tasks.

 

For more information, please contact the Ascend office via your strata manager.

 

Links:

- Depreciation in Strata Financials

 

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The above content is of a general nature and should not be relied upon as professional advice. Ascend encourages readers to seek advice from suitably qualified professionals in relation to their specific circumstances and not to rely solely on the information provided above.  Please contact our office for more information.

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