Issue Financial Statements in the Most Efficient Way

What is the most efficient way to issue financial statements?

Tax basis financial statements without disclosure, using the Preparation of Financial Statements option (AR-C 70).

This answer assumes you are preparing financial statements in conjunction with a tax return and that those financial statements are issued separately—apart from the tax return—to your client.

Issue Financial Statements Efficiently

Accountants often create financial statements as a part of a tax return. So why not use the tax basis of accounting to create separately issued financial statements? Doing so eliminates the need to convert the tax return numbers to another basis of accounting.

Using the AR-C 70 preparation option, the accountant can include on each financial statement page that “no assurance is provided” and should include “tax basis” in each financial statement title. If management elects to omit substantially all disclosures, the accountant should disclose the omission in the financial statements. This can be done either on the face of the statements or in a note to the financials. Additionally, the preparer is required to obtain a signed engagement letter.

Tax basis financial statements are considered an other comprehensive basis of accounting and, therefore, do not require a cash flow statement. Moreover, if the notes are omitted, efficiency is enhanced even more. The end product: (1) a tax basis balance sheet and (2) a tax basis income statement—both agreeing with the tax return. You can’t get any simpler than that.

Another nice part of using the Preparation standard is you don’t have to be independent. You could, for example, assist with management decisions and issue financial statements without making an independence report disclosure (which is required in compilations). A preparation is considered a non-attest service. Consequently, independence is not an issue.

One other potential efficiency advantage to using the preparation method: a firm is not required to have a peer review. This is true if a firm only issues financial statements using the provisions of AR-C 70. (Check with your state board as some states may require a peer review even though AICPA rules do not.)

Advantages of Tax Basis Financial Statements

In summary, the advantages of the tax basis financial statements are:

1. No cash flow statement is required
2. No journal entries are needed to convert to another basis of accounting (and no need to explain differences to your client)
3. Disclosures can be omitted
4. No need to disclose a lack of independence
5. No report required (e.g., compilation report)
6. Peer reviews are not required by the AICPA (if the firm provides no higher level services such as compilations, reviews, or audits)

Distribution of AR-C 70 Financial Statements

Management and third parties can receive financial statements created in conformity with AR-C 70.

Documentation Requirements

The Preparation of Financial Statements guidance in SSARS requires the following documentation be maintained:

• Copy of the engagement letter (or contract)
• Copy of financial statements issued

AR-C 70 Disclaimer

AR-C 70 provides for an alternative to placing “no assurance is provided” on each page of the financial statements: issue a disclaimer on a separate page. The disclaimer can be placed on firm letterhead and signed by the firm. Some CPAs prefer this method since it clearly discloses the firm’s involvement in preparing the financial statements. It also communicates that the firm is not expressing an opinion, conclusion, or any assurance.

The disclaimer wording provided in SSARS is as follows:

The accompanying financial statements of XYZ Company as of and for the year ended December 31, 20XX, were not subjected to an audit, review, or compilation engagement by me (us) and, I (we) do not express an opinion, a conclusion, nor provide any assurance on them. 

[Signature of accounting firm or accountant, as appropriate] 

[Accountant’s city and state]

[Date] 

The Most Efficient Financial Statement Option – Simple Summary

If you are preparing financial statements as you prepare a client’s tax return (and those financial statements are to be issued separately from the tax return), the most efficient financial statement option is to:

• Prepare tax basis financial statements without disclosure, and
• Use the Preparation standard (AR-C 70) 

See my article titled AR-C 70: The Definitive Guide to Preparations.