- a valuation account that shows the estimated or actual decline in value of an asset and is always subtracted on a balance sheet from the related asset account to show net value <a reserve account for depreciation> <reserve accounts for bad debts> <reserve account to reduce investments to market value> —called also allowance account, provision account, valuation account
- an account that shows an accrued usually estimated liability <reserve account for income taxes>:
- an account that shows profits or surplus segregated or appropriated for a particular purpose<reserve account for contingencies> <reserve account for replacement of fixed assets>
“A reserve study provides a current estimate of the costs of repairing and replacing major common area components (such as irrigation and landscaping) over the long term. Ideally, all major repair and replacement costs will be covered by funds set aside by the association as reserves, so that funds are there when needed. This requires:
- examination of the association’s repair and replacement obligations;
- determination of costs and timing of replacement; and
- determination of the availability of necessary (reserve) cash resources.
Because the board has a fiduciary duty to manage association funds and property, a replacement reserve budget is very important. Not only does this information supplement the annual pro forma operating budget in providing owners with financial information; the reserve study is also an important management information tool as the association strives to balance and optimize long-term property values and costs for the membership.
For buyers, understanding the reserve study is an important part of evaluating the value of a CID property. For association members, reserve planning helps assure property values by protecting against declining property values due to deferred maintenance and inability to keep up with the aging of components.
A good reserve study shows owners and potential buyers a more accurate and complete picture of the association’s financial strength and market value. The reserve study should disclose to buyers, lenders, and others the manner in which management of the association (i.e., the board and outside management, if any) is making provisions for non-annual maintenance requirements. Preparing a reserve study calls for explicit association decisions on how to provide for long-term funding, and on the extent to which the association will set aside funds on a regular basis for non-annual maintenance requirements. A good reserve study may also function as a maintenance planning tool for the association.”
RESERVE STUDY GUIDELINES – for Homeowner Association Budgets – State of California, Department of Real Estate
RESERVE STUDY GUIDELINES – State of California, Department of Real Estate