IV. ACCOUNTING AND FINANCIAL

REPORTING PROCEDURES

BASIS OF ACCOUNTING

Accounting methods can be divided into two basic types: accrual accounting, which is designed for long-term operations, and cash basis accounting, which serves the needs of short-term operations. Between these two parameters, there can be various combinations of the methods, called modified cash or modified accrual depending on which method is predominant.

The life of a Community Stabilization Program is limited to three years, making it suitable for cash-based accounting. But the project authority needs to account for payables and receivables, a function of the accrual method. Therefore, a modified cash basis accounting method was chosen for recording its financial transactions. This system accounts on a purely cash basis by emphasizing the reporting of the sources and uses of cash funds (i.e., cash receipts and disbursements). Then these ending cash balances are adjusted by adding the summary-level accounts receivable and subtracting the accounts payable to arrive at an ending balance of unobligated funds. This fund balance in effect presents cash balances that are adjusted for the normal time lag in financial transactions.

FUNDS

To highlight from an accounting standpoint the various functions carried out by the project authority, each major function was designated as a fund. All accounting transactions are therefore identified by a particular fund and are so recorded. The funds to be established are:

239-555 O-77-4

A brief description of each fund and its purpose follows:

Security Deposit Fund. Accounted for in this fund
will be the receipt of damage deposits required of
each tenant when entering into the sublease. It will
also show the eventual refund of the deposit when
the tenant moves out of the property or the use of
some or all of the money to make repairs caused
by his or her negligence. An excess of receipts
over disbursements in this fund represents a de-
posit liability for the project authority; this excess
cash will be maintained in a separate escrow bank
account at all times.

Management Fund. All transactions resulting from an
administrative action of the project authority will be
accounted for in this fund. The fund will be credited
with the percentage of rental revenues and miscellan-
eous management fees specified in the management
plan. In addition, any grants that may be received
to reimburse the project authority for employee com-
pensation will be credited here, provided the employee's
work was management oriented and the salary had
therefore been recorded in this fund.

Neighborhood Services Fund. This fund will be credited
with the percentage of rental revenues designated in
the management plan and any applicable grant funds.
It will be charged with disbursements made for the com-
munity relations and social services in the subdivision
that were specifically provided for in the neighborhood
services plan approved by HUD.

Maintenance Fund. A percentage of rental receipts specified in the management plan and any applicable grants funds will be credited to this account. Charged against it will be financial transactions for normal repairs and maintenance of the rental properties that are specified in the maintenance plan. As mentioned in Section II, any unobligated fund balance may be distributed among those tenants who exercise their purchase options, for reducing their down payments. These allocations will be calculated by estimating the total available fund balance (described below in the section entitled "Budgeting") and dividing by the total estimated

number of tenant purchasers. These estimates are
to be revised periodically to reflect the project's
actual experience.

Maintenance Reserve Fund. The receipts recorded
in this fund will be a specified percentage of rental
revenues and any amounts withheld from the tenant's
security deposit refund to pay for the cost of repair-
ing damages. Disbursements from this fund are the
financial transactions resulting from maintenance
and repairs of a nonrecurring nature. It will also
show the costs incurred to return a unit to rentable
condition when the tenant leaves without taking the
option to purchase it.

Property Fund. The remainder of rent receipts will
be credited to this fund, as will any other miscellane-
ous receipts that are not appropriately credited to any
of the other funds. Disbursements will include rent
paid to HUD, property tax escrow, and payment of
hazard insurance premiums and utility costs not
charged to the tenants. As in the maintenance fund,
any unobligated fund balance will be available to for
distribution to tenant purchasers.

REPORTING FORMATS AND REQUIREMENTS

A multipurpose report format (shown in Figure 2) has been developed for the Community Stabilization Program. It is simple to complete and is responsive to the needs of HUD and the project authority in the following areas:

The master lease requires that the project authority
report its receipts and disbursements to HUD monthly.

The report provides this information on a current-
month and year-to-date basis.

The project authority needs to know unencumbered
cash balances in order to plan future activities. The
report shows where spending exceeds the amounts
budgeted in the initial management plan allocations,
as well as where excess funds are being accumulated'
that might, with HUD's approval, be used elsewhere.

The report format was designed to be simple to pre-
pare so that the city accountant who maintains the
books would not have to spend an undue amount of
time in carrying out this function. To accomplish
this purpose, the books of account are set up (as
discussed below under "Accounting Books and Rec-
ords") to supply this data at the necessary level of
detail.

The report serves many purposes: the same for-
mat is used for actual monthly reporting, for budget-
ing purposes, and for budget-to-actual comparisons.
The format also provides a common report basis
for analytical purposes.

Cash disbursements for the Community Stabilization Program will be reported by 12 broad categories within each of the funds maintained. These disbursement reporting categories correspond to those in the master cash flow budget (described below in "Budgeting") so that financial review and analysis information is readily available. Sufficient documentation is kept on file to verify that charges are allocated to the proper disbursement categories. This documentation may consist of vendor invoices and adequate descriptions on detailed payment authorization forms. This procedure will also allow for reconstructing the information in a different format if necessary.

The 12 cost categories and brief descriptions of the types of transactions to be recorded in them follow:

Property Payments to HUD. This account is used to
record the monthly payments made to HUD as re-
quired by the master lease agreement. These amounts
will typically represent the monthly rental charge im-
posed by HUD on leased property and 1/12th of the pro-
jected total of the annual property taxes HUD will owe
local jurisdictions on each property.

Insurance. Recorded in this account will be payments
for hazard insurance coverage on the leased properties.
Other insurance payments, such as for automobile
liability coverage, workmen's compensation, and pub-
lic liability coverage, should likewise be charged to
this account in the appropriate fund.