Budgeting and Reserve Studies Flashcards

What is the key distinction between a 'repair' and a 'replacement' for reserve funding purposes?

Answer: Repairs restore function without extending useful life; replacements renew the component for a full new lifespan

Repairs maintain existing function without resetting useful life, while replacements start a new full useful life cycle.

A reserve study preparer recommends increasing annual contributions by 15% due to rising construction costs. The board decides to ignore the recommendation. What is the primary risk?

Answer: The association may face a funding shortfall requiring a special assessment

Ignoring professional recommendations leads to underfunding, which typically results in special assessments or deferred maintenance.

Which financial statement provides a snapshot of the association's reserve account balance at a specific point in time?

Answer: Balance sheet

The balance sheet shows assets, liabilities, and equity including the reserve fund balance at a specific date.

A manager is reviewing bids for reserve-funded roof replacement. The lowest bid is 30% below the next lowest. The best course of action is to:

Answer: Investigate the low bid for scope omissions or contractor qualifications before recommending acceptance

An unusually low bid often signals missing scope, inexperience, or financial instability, requiring due diligence before acceptance.

Under the accrual basis of accounting, reserve contributions are recognized:

Answer: In the period they are earned/assessed, regardless of cash receipt

Accrual accounting records revenue when earned (when assessed), not when cash is actually received.

What is the recommended frequency for a full Level I reserve study (with site visit) under CAI best practices?

Answer: Every three years

CAI recommends a full on-site Level I reserve study at least every three years, with annual updates in between.

A community association collects $50,000 in reserves annually but spends $80,000 on reserve-funded replacements. Over time, this will most likely result in:

Answer: A declining reserve balance and potential underfunding

Spending more than collected will deplete the reserve balance over time, leading to underfunding.