This article discussing ways to manage strata assets has been provided by James – Chairman and Treasurer, Sydney.
Strata Plans, through the Capital Works budget1, spend considerable amounts over time on major capital works (like external painting, replacing roofs), building upgrades and renovations, and strata asset replacement, such as lifts, pools, washing machines and other items of value. We spend thousands upon thousands (in some cases up into the hundreds of thousands) on strata assets, but when we look into the financial reports of our plans, we find nothing to recognise this past spending.
Does this suggest the value of the plan is not that much? We know our individual lots have value – but built into this value is the value of the strata assets that support them, the value that the Owners Corporation has paid for over many years. We also know that poorly run strata plans with poor quality assets (like old rickety lifts and poor paint jobs) detract from the value of our lots.
This situation stands in stark contrast to the business world where the balance sheet is a vital part of decision making and holds a historic record of the assets of the business. This is something that is sorely lacking in Strata financial reporting, with successive committees having to rely on memory or strata records like agendas, minutes and emails (which depending on your manager may or may not be up to scratch) and other extra mechanisms (if there is a committed lot owner who is motivated to maintain them) to know what has happened in the past.
In many cases, strata committees, lot owners and strata managers simply don’t know when the electrical board was last replaced or how old the roof is (and if it is nearing replacement age). When setting the capital works budget for future periods, it is sometimes unclear if the assumptions being used about useful lives are appropriate or not to our Plan or if the generic assumptions are leading to over (or under) collections of capital funding for the future. This lack of information may impact negatively on the decisions made when spending capital funds.
It is puzzling, therefore, why we are left with an outdated, decades old, cash-based accounting process for strata plans instead of adopting modern accounting and management processes for strata assets that could help us make better decisions and increase the value for money received by lot owners.
Being able to clearly detail the strata assets that the owners corporation owns (like washing machines) and that it has created (like major components of the building – roofs, major paint works) will clearly demonstrate what strata assets the Committee has and needs to manage and has to use in carrying out its role. Assets would be recorded at their cost, with useful lives (and residual values) allocated as necessary. This would provide information to easily make capital works plans that factor in real strata assets and their specific useful lives, instead of generic ones that are applied. The capital works levies would more accurately reflect what would need to be spent in the future.
There are structural reasons why we don’t already use asset account notwithstanding the legislation not requiring it. Strata managers are not accountants and would need to learn what is and what is not a strata asset, and their strata management computer systems would need to be modernised to provide asset accounting capability. Finally, there would need to be an annual assessment of useful lives, residual values and whether strata assets should still be held on balance sheet to ensure the balance sheet reflected the true asset position and may in some more complex situations require professional advice (though the engineers that prepare our 5 yearly capital works plans may be qualified to fulfil this task).
All of these processes would, however, help ensure that a high-quality balance sheet was available for better record keeping and decision making by committees, and therefore better-managed strata plans. In my view, the costs would outweigh the benefits, and the support they would give would help many committees make decisions that are currently a complex challenge.
1 As it is known in New South Wales legislation.
- NSW: Q&A How to augment a 10 Year Capital Works Fund Plan
- NSW: Q&A Reducing the Cost of Our Lift Maintenance Contract
This post appears in Strata News #216.
Chairman and Treasurer, Sydney