Preparation, Compilation & Review
Do you ever want to include just one disclosure in your financial statements without providing all the notes? Selected disclosures can be included in certain situations.
Do professional standards allow this? Yes. But only if you use AR-C 70 (the preparation guidance) or AR-C 80 (the compilation guidance).
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Selected Disclosures in Compilations
As you probably already know, a CPA can issue compiled financial statements without disclosures as long as the compilation report discloses the omission. An example follows.
Management has elected to omit substantially all of the disclosures required by accounting principles generally accepted in the United States of America. If the omitted disclosures were included in the financial statements, they might influence the user’s conclusions about the Company’s financial position, results of operations and cash flows. Accordingly, the financial statements are not designed for those who are not informed about such matters.
If the financial statements include one or two notes, then the financial statements still omit substantially all of the disclosures, so the accountant (still) uses the wording in the preceding paragraph.
Sample Selected Disclosure
An example of a selected disclosure follows:
Selected Information –
Substantially All Disclosures Required by Accounting Principles
Generally Accepted in the United States of America are Not Included
December 31, 2017
Note 1. Long-Term Debt.
ABC Company borrowed $450,000 on July 15, 2017, from XYZ Bank. The rate of interest is 5%, and the loan is collateralized by equipment of the Company. Payments are $10,000 per month plus interest for two years with a balloon payment for the balance of the amount owed.
AR-C 70 says:
The accountant may prepare financial statements that include disclosures about only a few matters in the notes to the financial statements. Such disclosures may be labeled “Selected Information—Substantially All Disclosures Required by [the applicable financial reporting framework] Are Not Included.”
So, the selected-disclosure option is available in a Preparation of Financial Statements engagement. Include the required disclaimer at the bottom of the page such as “No assurance is provided on these financial statements.”
The accountant should consider whether management’s election to include only selected disclosures causes the financial statements to be misleading (for example, by omitting the disclosures that contain negative information). If so, the accountant should request that the financial statements be revised to include the omitted disclosures.
The selected-disclosure option is not available for financial statements subject to a review engagement. Such financial statements must be full disclosure.
What About You?
Do you ever use this selected-disclosure option? Any reservations about doing so?