SUMMARY OF 7. Calculating the Interest Income Rate of Return
Why are writers using different ways to calculate reserve fund interest income, rates and accrued amounts? Our best-practice answer is that there is but one standard to calculate the interest accrued amount – and that all calculations are dependent on understanding what a fiscal-year is.
The interest income is derived by applying the condo | strata corporation’s historical Interest Income Rate (IIR) to the reserve fund’s opening balance amount.
Many condo | strata corporations have consultants calculate their annual reserve fund interest income by applying a market interest rate to the addition of the opening reserve fund balance to half the projected fiscal-year’s contributions.
Or sometimes, the calculation is expanded to included half of the year’s expenditures.
This complexity may appear to be skilful, but is best understood as a façade for not understanding strata finances or the importance of fiscal-year accounting.
Reserve fund planning that does not incorporate accurate rates and that does not apply the calculation to the right amount is doing all stakeholders a disservice.