MASTER ANNUAL REPORT

Frenchman’s Creek, Inc. and Subsidiary

Notes to Consolidated Financial Statements ______________________________________________________________________________________________________________

Note 1. Nature of Organization and Significant Accounting Policies (Continued) Fair value measurements: Generally accepted accounting principles establish a framework for measuring fair value, and expand disclosures about fair value measurements. This guidance enables the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. Under this guidance, assets and liabilities carried at fair value must be classified and disclosed in one of the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data

Level 3: Unobservable inputs that are not corroborated by market data

The Association’s recurring fair value measurement is for deferred compensation investments and the interest rate swap agreement, which is based on the London Interbank Offered Rate (LIBOR) swap rate. The LIBOR swap rate is observable at commonly quoted intervals for the full term of the swap and, therefore, is considered a Level 2 input (see Note 7). The Associ- ation’s fair value measurement for deferred compensation investments is Level 1 (see Note 6).

Fund accounting: The assets, liabilities and fund balances of the Association are reported in two self-balancing funds, as follows:

The Operating Fund includes all resources other than association dues allocated to the Replacement Fund. The Operating Fund reports the revenues and expenses of operating and maintaining the Association’s facilities and the activities of Realty.

The Replacement Fund reflects the accumulated funds for the purpose of certain future major repairs and replace- ments. Major repairs and replacements are expensed as incurred and charged to this Fund.

Operating income (loss) performance measurement: The Association considers the excess of revenues over expenses before other revenue (expenses) on the accompanying consolidated statements of revenues and ex- penses and changes in fund balances to be operating income (loss) for performance measurement purposes, as this is the line item to which it budgets for financial management and internal reporting purposes. Revenue recognition: Club membership and association dues are recognized as revenue on a pro rata basis over the period covered by the billing. Food, beverage, tennis, golf activities, fitness and golf shop sales revenue are recognized at the point of sale. Security badge, commercial vehicle fees and architectural review board fees are recognized as revenue when billed.

Capital assessments are recognized as changes in fund balances when received.

Food and beverage service charges: In accordance with accepted industry practice, the Association offsets ser- vice charges directly against payroll and related expenses, for financial reporting purposes.

Cash and cash equivalents: For purposes of reporting cash flows, the Association considers repurchase agreements secured by U.S. Treasury obligations, demand deposits and short-term investments with original maturities of three months or less to be cash equivalents. Cash and cash equivalents are held at financial institutions that may, at times, exceed federally-insured limits. The Association has not ex- perienced any losses in these accounts.

2018/2019 Annual Report Page 34