No Code Website BuilderDEFICIENCY: The Ten year asset replacement Plan:
In most bodies corporate, this is the most miscalculated, overestimated value.
REMEDY:
Use the Body Corporate Affordability formula: An affordability goal is the preferred measure for adding responsibility to determining an acceptable value for the long-term asset replacement fund based on factual data that is scaled to any size of building.
Re-painting a building is not considered a replacement asset, but it is included in the plan to assist in future expenses.
DEFICIENCY: Calculating the Ten year levy:
This incorrect formula leads to huge miscalculations, specifically the 10 Year value/10.
We discovered three more deficiencies in a recent analysis of financial data.
During the ten-year period analysed, the miscalculations amounted to 300 percent more than the affordability level. To remedy miscalculations, levies need to be flexible and continually adjusted.
Disclaimer: Values quoted may change from Building to Building
REMEDY:
To maintain, track of work in progress, completed projects, and start dates for up to ten different projects, use a scientifically designed Ten Year Project Manager Template for continuous adjustments to prevent miscalculations.
Based on the combined starting dates of each project, the actual calculation of the levy will vary between 30% and 60% of the incorrect formula above.
DEFICIENCY: Project Accounting and GL Integration
Cash on hand is affected by the following postings under Long-term liabilities: Reserve funds balance, Ten-year plan provisions, Project & Maintenance provisions. These BS postings should be part of the project accounting element.
REMEDY:
A cash flow imbalance could appear as a negative balance due to the above postings.
1) Create a separate set of financials to deal with the reserve bank account, revenue and its projects.
2) Add a new dimension and element to accommodate project accounting.
DEFICIENCY: The Balance Sheet
A total of six deficiencies were discovered in this ledger. The most essential and vital piece of information that must be included to ensure sectional title compliance is absent due to the fact that BCAP principles, rules, and guidelines have not been followed.
REMEDY:
The custom designed balance sheet is required to comply with new sectional title laws, to satisfy insurance company requirements, and to offer many new features for property and section valuations, so it becomes a key asset for body corporations. We have included a project accounting dimension for better integration.
To completely report the Balance Sheet under sectional title legislation additional sub-account ledgers are included.
DEFICIENCY: Inflation (see below)
REMEDY: We use a combination of various types of inflation formula that can validate their accuracy.
DEFICIENCY: Waiting for an AGM to approve the financials and then apply the new period’s levies:
For inflation, R240, 000 is needed, or R20, 000 per month.
This practice seems to be the norm but one does not realise that if you wait six months before the AGM takes place then you only collect six months of inflation or a shortfall of R120, 000. As a result of these shortfalls, financials are stressed and reserves are soon dwindling. Backdating such a large amount is not sound governance.
DEFICIENCY: Year End statements & ADVANCED PAYMENTS DEFICIENCY
Statements should not be sent out during the financials closing month for two reasons.
It causes advanced payments to occur and upcoming period levies are not applied.
All accounting packages create the Advanced Payments deficiency in the Debtors Analysis.
Remedy (1): If the new period's inflation levies are available, send the statements out in the first week of the new period, thereby eliminating all advanced payments.
Remedy (2): Manually correct the Debtors aged Analysis or use our SMART-BOT.
Generally, audited financials aren't available at year's end to accurately calculate levies for the next period.
SMART-BOTS always remains fully audited and calculates all inflation and levies for every new period.
DEFICIENCY: A single levy payment is made by a Member:
A body corporate has to maintain three separate bank accounts.
The Current accounts, Admin account (Call account) and the Reserve fund account.
In addition to receiving revenue from inflation and ten year levy, the Reserve account serves as a custodian account for excess revenues, WIP payments and project payments.
Due to the fact that most members only pay directly into the current account, the Member's single monthly payment needs to be split between the current account and the reserve account.
Technically, sectional title schemes require two sets of financials or dual audits. Combining two financial sets into a single standard accounting system significantly distorts all aspects of a balance sheet. Integrity of the audit is totally compromised.
Our intelligent management system has developed a way to resolve this issue in a totally transparent manner, which allows property managers to continue processing data as usual and for Smart-Bots to guarantee the integrity of audits.
REMEDY: After research was done on how the auditing of this matter might be simplified, it was decided to adjust these three accounts once each year in accordance with sectional title legislation, to reflect the exact amounts to be held in each account. Further enhancements are to be made to the FPL & BS ledgers to record all the expense transactions for the Ten year plan. (Note these are opinions, of how they are should be applied and could be very complicated). The majority of accounting packages do not allow for multiple bank accounts to be audited separately and in accordance with legislation.
SMART-BOTS created a model that audits each bank account with the exact figures expected by Sectional Title laws, which is now part of the redesigned Balance Sheet and its supporting ledgers. To match theses adjusted balance sheet figures, funds must be transferred between bank accounts. The system also provides a "dual-audit" of the Reserve Fund and its Bank Account, project expenses, WIP, levies and other sources of income to compensate the need for holding two sets of financials that are open to misappropriation. Perhaps the dual-audit is a better option from a security perspective. There at least six ledgers and models to support the reserve fund.
DEFICIENCY: Rental and Allowable tax deductions.
Generally, a body corporate should not have to pay tax on any rentals, since permissible allowances are very generous in this area that may even exceed the rental income.
REMEDY: As a building may have many sections where rental is produced, each section has its own set of deductions, SMART-BOTS is in the process of building a proper rental ledger that incorporates all sections rental deductions. In recent meetings with tax legislators, we discussed the correct way to apply their formula as deficiencies were discovered in some areas that needed to be resolved to prevent inaccurate calculations.
DEFICIENCY: BULK ELECTRICITY METER READING
There are a few thousand buildings with both bulk meters and individual meters. The meter billing company receives all meter readings, and upon subtracting the owners' consumption from the bulk consumption, it discovers an under-recovery (common property consumption), and we are typically billed accordingly at a higher flat rate tariff to compensate for common property consumption. This action is unacceptable.
Body corporates have been financially punished because of pure misconception by the meter billing company.
In addition to the ordinary levies collected for the running expenses, we include the electricity portion for the common areas. Due to billing errors we collect approximately double the amount for common property.
DEFICIENCY: SHORT PAYMENTS OF CREDITORS
In some cases if monthly expenses exceed income, instructions are given to the treasurer or property manager to short-pay creditors, including municipal accounts. Such inept management has a negative impact on the corporation's credit ratings. For what reason are Creditors not paid in full?
A lack of true financial reporting and ignorance of the corporation's financial position are behind this action.
DEFICIENCY: CORRECT PROPERTY VALUATIONS & MAINTAINING AN ASSET REGISTER
A sectional title asset register should be properly maintained : Two asset registers are required, Sections and Common Property that includes Buildings, Store Rooms, Pool Area, and Maintenance Equipment.
Capital Gains Tax:
Every section will change ownership at some point, either through a sale, inheritance, or an estate.
This is why it is crucial to record proper valuations including improvements.
Valuations:
A property or section can be valued in five ways: replacement costs via STATS SA, market value, inflation-based, virgin value or restored and improved valuations.
SMART-BOTS will specify all of the above values in our asset register for comparison purposes.
The asset register values will automatically recalculate annually.
In the event of a natural disaster or fire, how is the insurance going to determine its payout. Are renovations to a section covered by insurance, standard sectional title insurance does not cover contents? These are the types of questions that should be addressed.
Smart-Bots have opted for the in-house valuation approach, which is absolutely fair on all sections.
Each section is entered into an Asset Register which is recorded in the Balance Sheet in order to determine which sections are virgin units and which are improved or renovated for Insurance purposes. In addition, sections are billed proportionately to the monthly insurance charges in all fairness to members.
Property valuations research over a 10 year period using our asset register produced the following results.
A margin of 235 percent was measured between the lowest and highest SQM values in a single scheme.
Virgin units are 30 percent less valuable than renovated units. No section has the same value per SQM.
Current Market valuations were the lowest in the scheme. A true market valuation tool is a must for schemes.
Disclaimer: Valuations quoted may change from Building to Building.
INFLATION IN A BODY CORPORATE
It is important to note that there are nine different types of inflation formulas, but none of them apply to a Body Corporate.
There is the correct and the wrong way to apply inflation.
It is vital that a Body Corporate develops its own scalability inflation formula that will ensure precise funding for running costs and inflation that is unique for each building.
Our true inflation method is the only 100% guarantee to provide funds to recover running costs and inflation for the new period.
The SMART-BOTS program is not structured around budgets because they provide no financial stability.
Budgets can't correct mismanaged funds, so the program relies on the allocation tool instead.
SMART-BOTS INFLATION ALLOCATOR- A FINANCIAL SCALE
THIS IS THE ONLY MODEL NEEDED BY A BODY CORPORATE
The following items you will never need to worry about again:
1. Provisions for perfect Inflation and running costs
2. Having difficulty raising funds or experiencing financial distress
3. A 5-year average or an increase or decrease in maintenance.
4. There are always going to be unexpected expenses or emergencies that are catered for.
5. Retained earnings are absorbed into the admin fund
6. Admin fund value is automatically increased or decreased.
7. The Cash Balance in the Admin Fund will always be sufficient
8. You can never have too many reserve funds or too little funds because they are always totally balanced out.
9. The model is fully automated. it cannot default.
In order to test for long-term accumulation of known deficiencies over a 10-year period, we created an analytical study which includes the ten-year plan which can reach anywhere from R1m to R3m (in small to large schemes).
SMART-BOTS nips these common errors in the bud and will recalculate them. We have closed every single loophole to ensure that future financials are properly balanced.
We will utilize our three strategic methods of correction to correct all deficiencies, the Body Corporate Affordability Level, the Ten year Levy Project Manager, and the Inflation allocator, which will correct the entire financial system in accordance with the Sectional Title legislation.
Corporate's should not accumulate excess funds through miscalculations or hold more funds than necessary.
Conclusion:
In the event that there are 200 different sized buildings, one shoe will fit only one building.
SMART-BOTS can fix any error because there are so many checks and balances in the system to solve them.
Levy Allocations: are not budgets at all as funds are collected and allocated to cover running costs and inflation.
We like thank everyone for their collective suggestions and providing input for this report.
Researched by: Issy Salkinder February 2022
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