GAAP Reporting: Making Sense of the New Illinois Rule

GAAP Reporting: Making Sense of the New Illinois Rule


By Brad Schneider, President, CondoCPA and Angela Duea, LMS Communication Manager

You may have heard the new regulation that Associations with 100 or more units must use generally accepted accounting principles (GAAP) – but what does that mean? GAAP is a framework of accounting standards, rules, and procedures defined by the professional accounting industry. GAAP accounting provides uniformity among financial statements.

By using GAAP standards, associations must use the accrual basis of accounting, meaning they recognize income when earned, and recognize expenses when incurred. This is different from cash basis, where income is recognized when received, and expenses are recognized when paid. GAAP standards are only required for annual reporting, not monthly financial reports to the board.

If an association is already receiving a year-end audit or review or a compilation prepared, it is likely those year-end financials will be in accordance with GAAP. The only exception is the rare case where the year-end financials are on cash or modified cash. In those cases, it is hoped that the CPA firm adjusted the services they provide to be on the accrual basis only. If the Association prefers, the CPA can place the cash basis financials in the supplementary information.

The independent accounting firm is required to submit the trial balance and journal entries that can show how the management company’s financial statements changed to accrual basis. GAAP also requires community associations to prepare a specific set of year-end financial statements. In addition to the accrual basis, the financial statements will need to include a Balance Sheet, an Income Statement, a Cash Flow Statement, the required note disclosures and an excerpt from the reserve study.

The Required notes will vary depending on what items show on the balance sheet and income statement, but will include a note of the entity, the basis of accounting, what is included in the cash and investments, a tax note; a note about the loan (if any), a note about large contracts, subsequent events, unions and other matters.

If prepared properly, the Audit or Review or Compilation will meet annual audit requirements. Most condominium associations over 100 units are already having an audit, review or compilation prepared annually.

It is important to note that LMS reporting will not change because of this change. If your Association has not contracted for either an audit review or compilation and you have 100 or more units, we recommend that your association obtain advice from your accountant or auditor about contracting for a yearly audit or review, or obtain a legal opinion from your attorney on how to proceed.