Tag Archives for " Preparation of Financial Statements "

Feb 27

Preparing Financial Statements: Which Standards Apply?

By Charles Hall | Preparation, Compilation & Review

SSARS 21 added a new section to the compilation and review standards called Preparation of Financial Statements. Since then, I’ve received several questions about which standards apply when financial statements are prepared–especially if you concurrently provide another service such as a compilation, review, or audit.

Those questions include:

  • Can an accountant perform a compilation and not prepare the financial statements?
  • Are the preparation of financial statements and the performance of a compilation engagement two separate services?
  • If an auditor prepares financial statements and audits a company, what is the relevant standard for preparing the financial statements?
  • Is the preparation of financial statements a nonattest service, though the audit is an attest service?
Picture is courtesy of Dollarphoto.com

Picture is courtesy of Dollarphoto.com

Below I provide: (1) a summary of how compilations changed with the issuance of SSARS 21 and (2) a summary of how the preparation of financial statements service interplays with compilations, reviews, and audits.

The Old Compilation Standard 

Using SSARS 19, the performance of a compilation involved one service which encompassed:

  • Preparing financial statements,
  • Performing compilation procedures (e.g., reading the financials), and
  • Issuing a report

How Compilation Engagements Changed 

So, how did SSARS 21 change compilations?

If an accountant prepares the financial statements and performs a compilation engagement using SSARS 21, she is performing two services (not one). In this case, the performance of the preparation of financial statements is not subject to any formal standard (including SSARS 21).

When an accountant performs both the preparation of financial statements and a related compilation engagement, is AR-C 70, Preparation of Financial Statements, applicable?

No.

“Wait…you’re saying that a new standard called Preparation of Financial Statements was added with SSARS 21, but when the accountant prepares financial statements and performs a compilation engagement, the (SSARS 21) preparation standard is not applicable?”

Yes.

AR-C 70, Preparation of Financial Statements, states that the standard is not applicable “when an accountant prepares financial statements and is engaged to perform an audit, review, or compilation of those financial statements.” So if an accountant prepares financial statements as a part of a compilation engagement, AR-C 70 does not apply.

Why?

If AR-C 70, Preparation of Financial Statements, and AR-C 80, Compilation Engagements, were both in play, they would conflict. AR-C 70 requires the accountant to state on each financial statement page that “no assurance is provided” or to issue a disclaimer. AR-C 80 requires the issuance of a compilation report and does not allow the accountant to state that “no assurance is provided” on each financial statement page or for the accountant to issue a disclaimer.

Meaning?

When the accountant prepares financial statements and performs a related compilation, the creation of the financial statements is a nonattest service with no particular guidance–not even from SSARS 21. (Of course, the AICPA Code of Professional Conduct applies to all services.)

When a compilation engagement (an attest service) is performed and financial statements are prepared (a nonattest service), two separate services are being performed by the same accounting firm.

The Interplay of Financial Statement Preparation and Other Services

The table summarizes which standard is applicable when:
1. A preparation engagement is performed (alone)
2. Preparation and compilation engagements are performed for the same time period
3. Preparation and review engagements are performed for the same time period
4. Preparation and audit engagements are performed for the same time period

Preparation of Financial StatementsCompilation EngagementReview EngagementAudit EngagementStandard to Follow
YesAR-C 70 Preparation
YesYesAR-C 80 Compilation
YesYesAR-C 90 Review
YesYesAU-C Audit Sections

AR-C 70, Preparation of Financial Statements, applies only in the first example above. When the accountant performs a preparation service and a compilation, review, or audit service for the same time period, AR-C 70 is not applicable–that is, no formal standard applies to the preparation service.

In all the examples listed above, the preparation of financial statements is a nonattest service.

In examples 2, 3 and 4 (where a preparation service and an attest service are provided), your engagement letter should include language about performing nonattest services and how the client will assign someone with suitable skill, knowledge, and experience to oversee the preparation of financial statements service. Such language is only required when a nonattest and an attest service is provided.

SSARS 22 and 23

Since the above information deals with SSARS 21, you may be wondering what additional SSARS have been issued–and how those newer standards affect compilations. 

SSARS 22, Compilation of Pro Forma Financial Information was effective for compilation reports dated on or after May 1, 2017. So, what is pro forma information? It is a presentation that shows what the significant effects on historical financial information might have been had a consummated or proposed transaction (or event) occurred at an earlier date.

SSARS 23, Omnibus Statement on Standards for Accounting and Review Services, was issued in late October 2016. That standard changed supplementary information wording in compilation and review reports

The primary impact of SSARS 23 is to provide standards for the preparation and compilation of prospective financial information.

While portions of SSARS 23 were effective upon issuance (the supplementary language change), the remainder of the standard was effective for prospective financial information prepared on or after May 1, 2017, and for compilation reports dated on or after May 1, 2017, respectively.

Printing Financial Statements From QuickBooks
May 30

SSARS 21 and Printing Financial Statements from Quickbooks

By Charles Hall | Preparation, Compilation & Review

Many CPAs are still asking if printing financial statements from Quickbooks triggers a requirement to follow SSARS 21. Previously, if a CPA created and submitted financial statements to a client, he had to issue a compilation report. Hear the answer in this video. 

Also, we’ll take a look at whether you as a CPA can issue monthly financial statements in accordance with SSARS 21 and then perform an audit for the same client at the end of the year. 

Note: This video was created in 2015, but the information is still current. SSARS 23 does not alter the answers.

SSARS 23 changes preparation and compilation standards
May 17

SSARS 23 Changes Preparation and Compilation Engagements

By Charles Hall | Preparation, Compilation & Review

SSARS 23 changes preparation and compilation engagements. The article summarizes the effects of the new standard.

The Accounting and Review Services Committee (ARSC) issued SSARS 23 in October 2016. Parts of the standard (e.g., that applying to supplementary information language in compilation and review reports) were effective immediately. Other parts (mainly regarding preparation and compilation of prospective information) are required as of May 1, 2017. This post tells you how SSARS 23 affects Preparation (AR-C 70) and Compilation (AR-C 80) engagements.

SSARS 23 changes preparation and compilation engagements

You’ll recall that ARSC issued SSARS 21 back in October 2014. It was effective for years ending December 31, 2015. A clarified version of the compilation and review standards is included in SSARS 21. SSARS 21 also provides new guidance for the preparation of financial statements. The Standard did not address prospective financial statements. Why? The AICPA was working on clarifying the Attestation Standards (SSAE 18), the place where compiled prospective financial statement guidance was (previously) housed. With the issuance of SSARS 23, the AICPA moved this guidance from the Attestation Standards to SSARS.

The primary impact of SSARS 23 is to provide standards for the preparation and compilation of prospective financial information.

How Preparation of Financial Statements (AR-C 70) Changed

The Preparation Standard (AR-C 70) now includes guidance regarding prospective financial information. SSARS 23 requires the inclusion of significant assumptions since they are essential to understanding prospective information. Therefore, accountants should not prepare prospective financial information without including a summary of significant assumptions in the notes. Also, a financial projection should not be created unless it includes:

  • an identification of the hypothetical assumptions, or 
  • a description of the limitations on the usefulness of the presentation

One other change to AR-C 70 is the slight change to the preparation disclaimer. SSARS 23 deletes the word “accordingly.” See below:

How Compilation Engagements (AR-C 80) Changed

AR-C 80, Compilation Engagements, now applies to compilations of prospective financial information (new with SSARS 23), pro forma financial information (see SSARS 22), and other historical information (as provided for in SSARS 21). 

Another change is that accountants should report known departures from the applicable financial reporting framework in the compilation report. Prior to SSARS 23, accountants could disclose such departures in the notes without doing so in the compilation report.

Prospective Financial Information Guidance

Additionally, AR-C 70 and AR-C 80 were amended to clarify that the AICPA Guide Prospective Financial Information provides comprehensive guidance regarding prospective financial information, including suitable criteria for the preparation and presentation of such information.

Short SSARS 23 Video

If you desire additional information about SSARS 23, check out my video:

 

financial statement references
May 10

Financial Statement References (at the Bottom of the Page)

By Charles Hall | Accounting and Auditing , Preparation, Compilation & Review

What wording is required at the bottom of financial statement pages? Is there a difference in the references in audited statements and those in compilations or reviews? What wording should be placed at the bottom of supplementary pages? Below I’ll answer these questions.

financial statement references

Picture is courtesy of Dollarphotoclub.com

Audited Financial Statements and Supplementary Information

First, let’s look at financial statement references in audit reports.

While generally accepted accounting principles do not require financial page references to the notes, it is a common practice to do so. Here are examples:

  • See notes to the financial statements.
  • The accompanying notes are an integral part of these financial statements.
  • See accompanying notes.

Accountants can also–though not required–reference specific disclosures on a financial statement page. For example, See Note 6 (next to the Inventory line on a balance sheet). It is my preference to use general references such as See accompanying notes.

Audit standards do not require financial statement page references to the audit opinion.

Supplementary pages attached to audited financial statements should not include a reference to the notes or the opinion.

Preparation, Compilation, and Review Engagements

Now, let’s discuss references in preparation, compilation, and review engagements. 

Compilation and Review Engagements

SSARS 21 does not require a reference (on financial statement pages) to the compilation or review report; however, it is permissible to do so. What do I do? I do not refer to the accountant’s report. I just put See accompanying notes at the bottom of each financial statement page.

You are not required to include a reference to the accountant’s report on the supplementary information pages. SSARS 21 does suggest that such references be included in case the financial statements or supplementary information are separated from the compilation or review report. Examples include:

  • See Accountant’s Compilation Report.
  • See Independent Accountant’s Review Report.

What do I do? I include a reference to the accountant’s report on each supplementary page.

Preparation of Financial Statement Engagements

SSARS 21 provides an option (to compilations) called the preparation of financial statements (AR-C 70), a nonattest service. AR-C 70 requires that the accountant either state on each page that “no assurance is provided” or provide a disclaimer which precedes the financial statements. AR-C 70 does not require that the financial statement pages refer to the disclaimer (if provided), but it is permissible to do so. Such a reference can read See Accountant’s Disclaimer.

If your AR-C 70 work product has supplementary information, consider including this same reference (See Accountant’s Disclaimer) on the supplementary pages.

selected disclosures
May 08

Selected Disclosures in Preparation and Compilation Engagements

By Charles Hall | 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).

selected disclosures

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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:

ABC Company

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.

Preparation Engagements

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.” 

Other Considerations

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?

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