Comparison of Standards

International Capital Budgeting Institute (ICBI)

Reserve Study Standards Comparison

The ICBI Professional Reserve Study Standards are a comprehensive set of guidelines set forth within ICBI’s “Generally Accepted Reserve Study Principles” and “General Accepted Reserve Study Standards.”  Collectively these two documents are commonly referred to as the ICBI reserve study standards.

There are several major conceptual differences between ICBI standards and those followed by others. These differences can create divergent results for associations. The three distinct areas of difference relate to:

(1) The “components” included in the reserve study,

(2) The calculations in creating the reserve study, and

(3) The reporting of the results.

ICBI Standards recognize that the reserve study is a financial projection, not a maintenance plan, engineering study, or property condition assessment.  The financial community has long recognized that the general public gains a high level of confidence in financial reports only when those reports follow consistent, generally accepted standards.  ICBI standards, like those of the AICPA and FASB that serve the general financial public are designed to provide for clarity, consistency, and comparability in financial reporting. 

The concept of consistent and comprehensive standards is in the best interest of the community association industry and is a necessity to ensure those relying upon the reserve study report are presented with a valid and consistent work product.

Component Differences

A line by line comparison is difficult because the collective ICBI Principles and Standards contain more than a hundred distinct data points and has only a dozen data points in common with the non ICBI standards.

The non ICBI Standards include this four-part test to define a component in the reserve study:

(1) obligation of the association,

(2) significant in cost,

(3) predictable useful life, and

(4) predictable remaining life.

ICBI concurs with the first two points, but ICBI replaces points 3 and 4 with an expanded perspective in place of the arbitrary limitations imposed by predictable useful and remaining life.  These changes provide more flexibility and eliminate the confusion of what items may be included in the reserve study.  The revised steps 3 and 4 are:

(3) maintenance related “activity”, and

(4) non-annual expenditure

The predictable useful and remaining life approach can arbitrarily exclude normal reserve expenditures such as landscape replacement and major block wall repairs and any other items which fail the predictable life test.

ICBI standards specifically identify reserve expenditures as “activities” rather than components. This allows certain expenditures not directly related to a physical component to be included in the study. An example is a feasibility study related to multiple components. This is a maintenance related activity but not a physical component and has no “predictable life.” It is included in the reserve study under ICBI standards but not under non ICBI standards.

ICBI standards also require inclusion of all components with a useful life shorter than the life of the structures. Non ICBI standards specifically allow and encourage that certain long-lived components be excluded from the study.  The most common example of this is utility plumbing and wiring, be they inside walls, under slab or underground. These components generally have an average life of approximately 50 years. Non ICBI standards exclude these from the reserve study unless they begin to show signs of failure, typically near the end of the 50-year life.  They are excluded presumably because they cannot be inspected. Thus, the component’s condition is both unknown and undisclosed. These types of excluded components typically do have an estimated predictable life and reasonable assumption can be made based on age of the structures to calculate a remaining life. Failure to disclose such items can have devastating financial consequences to homeowners.

ICBI Standards requires that such components be included in the funding plan or specifically disclosed as to why they are being excluded from the funding plan.  Most associations will not include such items in the funding plan until they fail and will provide funding via a special assessment. Failure to disclose such components if they are not included in the funding plan results in inadequate disclosures to members regarding their future obligations.

Calculation Differences

ICBI requires that certified software be used in preparation of the reserve study to ensure that studies comply with the calculation standards.  This provides for consistency and eliminates reserve studies having different results with the same underlying component data.

ICBI standards do not require the disclosure of percent funding.  But if presented, the calculation standards require the use of the inflation adjusted method of calculating percent funded.  This method includes all financial resources available for funding net of any liabilities and best matches changes in future component pricing.

To illustrate the point, there are 64 possible variations of the percent funded calculation using the same input data.   Inconsistent application of approaches can lead to significantly different results.  The inflation adjusted method is advantageous because it attempts to match future obligations with the changing inflated component costs, providing a more realistic calculations vs. the current cost, future cost, or average cost methods.

Reporting Differences

ICBI Standards define the report content and format.  Specifically, ICBI standards require:

  • A narrative preparer report,
  • Five (5) basic summary level financial exhibits in a fixed format
  • Narrative disclosures that explain and define the financial exhibits, and
  • Two (2) supplemental financial exhibits.

The summary level report generally ranges from 18 to 30 pages in length. 

The primary goal of the report is to communicate actionable financial information and serves to:

  • Identify what work was done in performing the reserve study,
  • Identify the responsibilities of the preparer, and
  • Identify the responsibilities of the governing board of the association.

ICBI requires the reserve study report meet these standards to ensure clarity, consistency, and comparability. These characteristics are highly valued by those who rely on the information and result in a higher level of confidence in the analysis.

In addition, Reserve preparers are encouraged to supplement and support the summary level report with additional financial exhibits presented at the detail component level. The reserve preparer may include any additional exhibits desired.

The consumer should not be placed in the position of receiving different types of information based on who happens to perform the reserve study.  For those reserve preparers who do not follow ICBI standards there is no comparability; each preparer decides what  components to include, what calculations to use, what exhibits to include in the report, and what formats to use.  This can lead to inadequate disclosures and results in ambiguous information provided to boards and management. 

ICBI standards are the solution to the current challenges noted above by providing clarity, consistency, and comparability to the reserve study process.  ICBI also represents the future of reserve studies by being responsive to the ever changing operational, statutory, and regulatory environment.  ICBI has standing committees to address the systematic evolution of standards over time as may be necessary.  The committee members represent a cross-section of industry stakeholders to assure that all perspectives are considered.