the reserve fund study standards landscape in north america_q1

The evolving landscape

August 2016

Prepared by Jacklyn Jolicoeur, CPA, CA Advisory Council Member, Associated Reserve Planners of Canada

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2

SEE SLIDE NUMBERS

3, 4, 5

6, 7, 8, 9, 10,11

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OBJECTIVES

Describe the existing standard landscape for reserve fund studies within North America

Summarize the key similarities and differences between the standards

Seek collaborative input from stakeholders

Reserve Fund Standards –The evolving landscape

Organizations and their designations for Reserve Fund Planning in Canada and the US

PRFA (Professional Reserve Fund Analyst)

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Reserve Fund Study Standards and Best Practices in Canada and the US

National Reserve Study Standards

Issued 1998

CAI Community Associations Institute

Best Practices for Reserve Studies/Management

Issued 2014

Foundation for Community Association Research

Reserve Fund Study Standards

Issued 2000

REIC Real Estate Institute of Canada

Canadian Uniform Standardsof Professional Appraisal Practice

Issued 2005

AIC Appraisal Institute of Canada

Updated 2016

Reserve Funding for Condominiums

Issued 2003CCI Canadian Condominium Institute

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Standards of Practice

Issued 2012APRA Association of

Professional Reserve Analysts

Australia Canada Dubai Kenya Mexico United Kingdom United States

Professional Reserve Study StandardsIssued 2015By ICBI International Capital Budgeting Institute

ICBI Membership:• International (see above)

• Multi disciplinary:Accountants, architects, appraisers, construction contractors, engineers, facilities managers, lawyers, project managers, reserve study professionals, software developers.

An International Reserve Fund Study Standard was issued in 2015

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Principles & Standards

Professional Reserve Fund Study StandardsIssued 2015By International CapitalBudgeting Institute (ICBI)

CRP Reserve Fund Study StandardsIssued 2000By Real Estate Institute of Canada (REIC)

Cdn Uniform Standards of Professional PracticeIssued 2016By Appraisal Institute of Canada (AIC)

US National Reserve Fund Study StandardsIssued 1998 By Community Associations Institute (CAI)


Issued 2012By Association of Professional Reserve Analysts (APRA)

Reserve Study Principles:

GeneralComponent*Calculation

Service LevelReportingSoftware

Reserve Study Standards:

GeneralField

ReportingSoftware

Interpretive Guidance:

Generally Accepted Reserve Study Principles:

Generally Accepted Reserve Study Standards

Principles and Concepts included as bullet points

in a technical bulletin

PartialPartialPartial

XPartial

X

PartialX

PartialX

Partial

Reserve Fund PlanningStandard included as bullet points (20 rules)


XPartial

X

PartialX

PartialX

Comments are provided for each of the 20 rules.

Levels of Service, definitionsand checklists for Study Contents and Disclosures

PartialDefinition only


X


X

The document provides guidelines only with a

glossary of terms.

Reserve Study defined with scope, Standards of Practice, Exclusions, Study Contents checklist.

PartialPartial PartialPartialPartial

X


X

The document provides guidelines only with a glossary of terms.

COMPARISON OF STANDARDS

BEST PRACTICE • Generally Accepted Reserve Fund Study Principles• Generally Accepted Reserve Fund Study Standards• Interpretative Guidance

* Component refers to the building and other real property items that are the subject of the reserve fund study (e.g. roofing, doors, balconies, hallways, fencing).

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Funding Calculation

Method




US National Reserve Fund Study StandardsIssued 1998 By Community Associations Institute (CAI)



Cash Flow Method:The future reserve fund contributions are calculated using cash flow projections. Projected reserve fund expenditures are offset with reserve fund contributions.

Component Method:The future reserve fund contributions are calculated by adding up the contributions required for individual components.

Only the cash flow methodshould be used to calculate funding requirements.

The component method should never be used to calculate funding requirements.

Component method used within a benchmark analysis is to be used to calculate necessary reserve fund contributions. Interest and inflation assumptions must be made. (Not straight line method)

The component method used within a benchmarkanalysis will provide an estimate of the amount that should be set aside.

A general statement describing the funding calculation method used* (cash flow, component, etc.) is a required element of the reserve fund study.

The funding plan shall be prepared using either the cash flow or component method.

Document Reference(s) See Calculation Principles – item 5and sections 3-5.1, 3-5.2

See section with title “Reserve Fund Benchmark Calculations”

See 13.13.1 See checklist item 16. See Section 2, item F and checklist item 5.

BEST PRACTICE :The cash flow funding method should be used to calculate reserve fund contribution requirements.

* A recent scan of US reserve fund study reports available in the public domain showed that the overwhelming majority used the cash flow method.


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Reserve Fund Benchmark

Analysis




US National Reserve Fund Study StandardsIssued 1998 By CommunityAssociations Institute (CAI)

Standards of PracticeIssued 2012By Association of Professional Reserve Analysts (APRA)

For each reserve component this analysis calculates:current replacement costs, future replacement costs, current reserve fund requirements, future reserve accumulations, future reserve fund requirements, future reserve fund contributions andpresents them in a tabular format. It portrays the component method of reserve funding calculations.

The International Standard does not require a benchmark analysis. It is not a term included in the standard.

These calculations are required in order to determine the necessary reserve fund contributions.

A benchmark analysis must be provided. (a compulsory element of the report)

Not required. A benchmark analysis in not a term included in the standard.

Not required. A benchmark analysis in not a term included in the standard.

Document Reference(s) See section with title “Reserve Fund Benchmark Calculations”

See sections 12.2.13 and 13.13

BEST PRACTICE :Include a benchmark analysis only when required for regulatory reporting purposes.


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Percent Funded Calculations

Professional Reserve Fund Study Standards

Issued 2015By International CapitalBudgeting Institute (ICBI)

CRP Reserve Fund Study Standards

Issued 2000By Real Estate Institute of Canada (REIC)





This is a ratio (at a point in time) of the actual reserve fund balance to the fully funded balance. The fully funded balance is a theoretical amount that ties the estimated current replacement cost to the effective age and condition of each reserve component. It measure the total deterioration of components in dollar terms. This figure is determined by multiplying the fractional age of each component by its current estimated Replacement Cost, then summing them all together. This the current reserve fund requirement amount that is tabulated within the benchmark analysis.

Optional. If made, they must be inflation adjusted method.

Not required. PercentFunded is not a term included in the standard.

Not required. PercentFunded is not a term included in the standard.

A general statement describing the methodsand objectives utilized in computing or evaluating the reserve fund status (percent funded or otherwise)

The funding status (cash or percent funded) of the reserve is a requireddisclosure.

Document Reference(s) See section 3 Calculation Principles -Item 4 andsection 3-4.1

See checklist item 4. See checklist item 17.

COMPARISON OF STANDARDSBEST PRACTICE : Percent Funded calculations are not required.

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Opinion on the Adequacy of the

Reserve Fund






Reserve Adequacy may be measured in terms of a percentage of the theoretical fully funded balance. (see previous slide for an explanation of the fully funded balance)

Not required. Reserve fund adequacy is not a term included in the international standard.

A reserve fund study should provide a conclusion as to the adequacy of funding.

An analysis of the adequacy of reserve fund contributions must be provided.

General statement or opinion describing the current reserve fund status (good, fair, poor, adequate or inadequate or percent funded) must be provided.

Not required. Reserve fund adequacy is not a term included in this standard.The financial analysis “opines” on the funding plan and the current reserve status.

Document Reference(s)

See section with title “Analysis and Estimate of Reserve Fund Adequacy”

See sections 12.2.15, 13.12.1,13.15.1

See Checklist item 3. See section C. item 2 within Part 1. Definitions and Scope.

COMPARISON OF STANDARDSBEST PRACTICE: An opinion on the Adequacy of the Reserve Fund Balance is not required or appropriate.

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Reserve Study Recommendations






The reserve study is a financial planning tool and the recommendations should support this fact

The study should outline a funding plan that considers the organization’s funding goals and financing ability.

The study should lead to the full implementation of a reserve plan.

A reserve fund model is required. Report should include final conclusions/Recommendations.

Recommended reserve contributions (for a minimum of 20 years) must be provided.

The financial analysis portion of a reserve study recommends afunding plan based on the current fund status and the future financial needs of projects within the component list.

Document Reference(s)

See Field Standard 5. See section with title “Recommendations”

See 12.2.18, 13.12.1,13.17 See checklist item 8. See Section 2 Financial Analysis item E.

BEST PRACTICE: The Reserve Study culminates in a funding plan that considers the organizations funding goals and financing abilities.


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