Why strata financials aren’t like corporate reports (and don’t need to be)
This article explains the concept of special purpose financial reports and why they are perfectly suited for strata companies, even if they don’t look like the corporate financial statements some owners expect.
It's not uncommon to encounter a financially savvy owner — perhaps a retired accountant or business professional with too much time on their hands — who questions the financial reports provided by the strata manager of their building. A typical scenario might involve an owner ascerting, "the insurance needs to be apportioned over the life of the policy" or "the assets need to be depreciated over their usefule lives". Such questions usually stem from a misunderstanding about the type of financial reports that strata companies are required to produce.
General Purpose Financial Reports vs Special Purpose Financial Reports
All financial statements, strata or otherwise, can be categorised as either 'General Purpose' or 'Special Purpose' in nature. General purpose reports are required to be prepared in line with the Australian Accounting Standards (AAS), and the detailed classifications that accompany them, to enable a wide range of external users (ie: people external to the reporting entity) to assume they have been presented in a manner that is consistent with other entities.
There are many, many MANY entities that exist however that do not have such external users dependent upon their financial statements. Your suburban plumbing business, the local Indian restaurant...
...and the vast majoriy of strata companies!
If it is deemed that no such external users exist then an entity is permitted to instead prepare 'Special Purpose Financial Reports'... which in essence just means that as long as they comply with any other applicable legislation (eg: the various strata acts across Australia), they can display their financial information without the burden (and cost!) of rigorously adhering to accounting standards. In short, as long as it meets the needs of owners, it will suffice.
For strata companies/owners corporations, the goal is not to provide the same level of detailed financial disclosures found in corporate boardrooms but to deliver clear, concise information that satisfies the owners’ needs. This means items like depreciation, accrued/prepaid expenses, fixed assets and other such jargon often found in corporate reports are usually not included, as they rarely add significant value in the context of strata reporting.
Navigating Owner Expectations: Why Special Purpose Reports Are Sufficient
Owners with corporate experience may push for reports that resemble those they are accustomed to seeing in their professional lives. However, it’s important for a strata manager to understand — and communicate — why special purpose reports from their software, in line with the strata manager's reporting policies, are not only compliant but also the more practical and cost-effective option for strata companies:
- Designed for Strata Needs: Strata financial reports generated by solid accounting platforms like Property IQ, StrataMaster and Stratamax are specifically tailored to strata companies, focusing on the most relevant financial information. This includes reporting levy income based upon due date, expenses being based on invoice date, and expensing capital works in full at purchase.
- Cost-Effective and Compliant: Producing reports that comply with full Australian Accounting Standards is costly and unnecessary for strata companies. Unlike publicly listed companies or large corporations, strata companies do not have external investors or complex financial structures that justify such detailed reporting. Adopting general purpose reports would add significant costs and complexity without providing meaningful benefits to the majority of owners.
- Avoiding Unnecessary Complexity: Special purpose reports keep financial information straightforward and understandable. Including complex accounting treatments, such as depreciatio, fair value adjustments or reserves, would not only complicate the reports but could also overwhelm those without a professional accounting background. Special purpose reports ensure the financial information remains clear and focused on the strata’s practical, day to day needs.
How to Address Pushback
Strata managers occassionally need to manage the expectations of owners who may not be familiar with the differences between strata and corporate reporting. Here’s how you can address these concerns effectively:
- Educate Owners on Strata Reporting: Explain that the special purpose financial reports presented are tailored specifically to meet the needs of the strata company and its owners. Highlight that these reports are legally compliant and focus on providing the most relevant information without unnecessary extras.
- Provide Written Explanatory Notes: A quick overview explaining that the financials recognise levies based on the first date of the period they apply to, and supplier invoices are based upon the date of the invoice (and any other relevant points deemed necessary) can go a long way to preventing queries from more financially savvy owners.
- Highlight Practicality and Relevance: Emphasise that these reports are designed to provide clear and useful financial insights. By keeping reports simple and to the point, owners can make better-informed decisions without getting lost in corporate-style disclosures.
- Reinforce the Cost-Benefit Argument: General purpose reports come with added costs (auditors, accountants, additional management fees) that ultimately are borne by owners. Strata companies are not required to meet these standards, and incurring these costs voluntarily often provides little added value. Money talks, so highlighting that the your current model is prudent, cost-effective choice can often censure the would-be critics.
- Focus on Compliance and Best Practice: Reassure owners that the preparation of special purpose reports is in line with industry best practices for strata companies. These reports are fully compliant with legal obligations, ensuring transparency and accountability without the unnecessary burden of corporate reporting standards.
Quick Takes:
- The mutuality principle exempts most income derived by strata companies from it's owners from being subject to income tax.
- Income from common facilities (such as laundry machines) used by tenants is taxable, while owner-occupier contributions are non-assessable.
- Use a percentage allocation method to quickly calculate and document non-assessable income.
For more information, please contact the Ascend office via your strata manager.
Links:
- Depreciation in Strata Financials
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.
(C) 2024 Ascend Strata Pty Ltd