Homeowner’s Association in Mexico – Case Study

Randy Bozarth loosened his grip on the tiller of his sailboat and let the bow turn slowly into the
breeze. Soon the craft nosed into the wind and was virtually dead in the water giving Randy
time to think about what had been troubling him for days now. If only he had taken an
international finance course rather than wasting his time on “fun” electives when in college. But
that was in the past and if he had learned anything so far in life it was you cannot change the
past.

Randy had relocated from the Chesapeake Bay area to the west coast of Mexico a couple of
years earlier to be able to sail more and to experience a different culture. So far, he was quite
happy with his decision although life in Mexico did present some unique challenges. Most of the
challenges came from his housing arrangements. Upon moving south, he decided he would
forgo living in a single-family dwelling and instead opt for a condominium. There were several
condo complexes to choose from and most were owned predominately by Canadians, U.S.
citizens, and Europeans. Randy chose Bahia Mar Condominiums as his home and in general was
very satisfied with his choice.

Given Randy’s educational background (B.S. in accounting) and years spent as a hospital
controller it was no surprise that he was called upon by his neighbors to assist in the governance
of the homeowner’s association (HOA). With some reluctance he had allowed himself to be
elected treasurer of the Bahia Mar HOA’s Board of Directors last year. This means that he is
obligated to review the quarterly financial statements prepared by the management of the HOA.
Additionally, he is responsible for presenting the proposed budget for the upcoming year to the
annual meeting of all 150 condo owners. It is the budget that is troubling him.

The HOA is responsible for building and grounds maintenance, security, maid service (if
desired), as well as general administration of the HOA which includes paying taxes, utilities,
billing owners, etc. Virtually all costs incurred are denominated in pesos. The current year’s
budgeted expenditures are 5,250,000 pesos. Approximately two-thirds of the budget is
comprised of salaries for various HOA employees.

The budgeting process is largely driven by the expenditures requested by management. Once
those have been justified and agreed upon by the Board of Directors of the HOA, management
converts the budget into U.S. dollars. The budgeted expenditures amount is then divided by 150,
(the number of condominiums), to determine the annual condominium fees. The resulting annual
fee is then divided by four as homeowner fees are paid quarterly on the first day of each quarter.
Since most condo owners’ primary residences are in the U.S. it was decided that condo fees
would be denominated in U.S. dollars rather than the local currency.

During the last few years management used an an average Spot Exchange Rate of 10.5 pesos to
the U.S. dollar to convert the peso denominated budget into dollars. Actual exchange rates
fluctuated between 9.9 and 13.9 pesos per U.S. dollar during that period. The manager of the
HOA is insisting on utilizing the same conversion factor as in the past years. His arguments
range from “consistency” to “no one can predict the future”. Randy is uncomfortable with this approach.

He takes his fiduciary responsibilities seriously and while on his watch as treasurer he
wants the budgeting process accomplished in a professional manner.

As the budgeting process moves forward Randy knows he must decide how he wants the
currency translation to be handled. He will also need to provide a coherent argument for his
position and draft a memo for the HOA’s Board and manager. As Randy contemplates these
exchange rate issues, he notices a squall building rapidly a few miles to the west and moving his
way. Apparently, it’s time to make some decisions both financial and navigational

Information You Will Need

• The types of exchange rates. Investopedia explains them very well.
• The expected interest rate in the US for 20X1 is approximately 0.25%
• The expected interest rate in Mexico for 20X1 is approximately 4.50%
• The current Spot Rate (cash value rate) is 13.03 pesos/US$

A chart of the Forward Rate prices offered by a local bank:
Date Futures Price: USD / Peso
Sept. 20X0 0.076925
Oct. 20X0 0.076400
Nov. 20X0 0.076100
Dec. 20X0 0.076275
Jan. 20X1 0.075775
Feb. 20X1 0.075475
Mar. 20X1 0.075125
Apr. 20X1 0.074975
May 20X1 0.074625
June 20X1 0.074400
July 20X1 0.074225
Aug. 20X1 0.074025
Sept. 20X1 0.073600
Dec. 20X1 0.072800

Question: Mr. Bozarth has approached you as a professional accountant to provide guidance on what appropriate exchange rate he should adopt in converting 2019 budget from pesos to U.S. dollars. You are required:

Prepare a memo to be submitted to Mr. Bozarth with your professional advice to include answers to the following:

• What exchange rate should be adopted • What alternate methods might Mr. Bozarth propose to the Board for dealing with foreign currency fluctuations

• Will you consider the use of the exchange rate from 2018 at 10.5 pesos per U.S. dollar Provide detail explanation of the drivers and assumptions behind your decisions and show all workings.