Compiling Information on your Financial Statements has Changed – Are you Ready?

Accountants across Canada are preparing their clients for a new standard for compilation engagements. Along with the new standard comes a new name for the report, the ‘Compilation Engagement Report’, which in essence contains organizations’ compiled financial information and must now also disclose the basis of accounting used to prepare the compiled financial information for the financial statements and additional information on the nature of the engagement. This new Canadian Standard on Related Services (CSRS) 4200 Compilation Engagements is effective for periods ending on or after December 14, 2021.

Are ‘Notice to Readers’ still possible – do they still exist?

Not exactly. Accounting practitioners, business owners and the business community often referred to compiled financial statements as “Notice to Readers”; which was the title of the report that was issued by the public accountants under the old compilation standard (Section 9200 in the CPA Canada Assurance Handbook). Under the new compilation standard, Canadian Standards on Related Services (CSRS) 4200 – Compilation Engagements, the title of the report is simply the “Compilation Engagement Report”.

In addition to changing the title and the content of the report issued under the new standard, the accounting practitioner must now perform additional procedures and document the related information obtained before the compilation report can be issued. I will delve more into the specifics of the changes further below.

Why are these changes necessary?

The old compilation standards were introduced decades ago and were not necessarily designed with the intention that they would be circulated to and relied upon by third party users. Consequently, the procedures required to compile the financial statements were very limited.

However, over time, standard setters noted that compiled financial statements were in fact provided by management to third party users, such as lenders, and they were uncomfortable with that fact given the limited requirements of the old standard.

The standard setters also noted variations in the basis of accounting used to prepare the financial statements (more on this key concept later), the extent of work performed in compilation engagements and the amount of documentation included in practitioners’ working paper files.

To address these concerns, the standard setters have now introduced more detailed and explicit requirements for compilation engagements and paid particular attention to circumstances where the financial information, such as financial statements, would be provided to third-party users.

What are the changes?

When it comes to the financial statements themselves, the figures and format of the financial statements will not change but you will notice the following two key changes:

  1. The Compilation Engagement Report: As alluded to above, the practitioner’s report now includes a broader description of the roles and responsibilities for both management and the practitioner and more information on the nature of the engagement.
  2. Notes to the compiled financial information: The compiled financial statements must now include a note that describes the Basis of Accounting used to compile the information.

Who are the users and what is the Basis of Accounting?

The changes were designed to assist the users of the compiled financial information in understanding how the financial results were prepared. The users are anyone to whom the compiled financial information will be provided. The users may include shareholders and investors, creditors and lenders, government ministries and agencies, regulators, suppliers etc.
The basis of accounting provides important details as to the way transactions were recorded in the books of account and presented in the compiled financial statements.
There are many different basis of accounting, including the below common examples:

  1. A cash basis of accounting
  2. A cash basis of accounting with select accruals (e.g., accruing an expense for an invoice received but not yet paid) and accounting estimates
  3. A basis of accounting prescribed by a contract or other form of agreement established by a creditor or regulator.

A Welch advisor can help you describe the basis of accounting used to compile your organization’s financial statements.

What other changes can I expect under the new standard?

A few new or enhanced requirements will be introduced to prepare the compiled financial information, including those outlined below:

  1. Your accountant will be required to ask you more questions around the expected users of the compiled financial statements and document the responses.
  2. You accountant will need to work with you to document and describe the basis of accounting used and the processes in place to capture financial transactions and to prepare your compiled financial statements.
  3. A new Engagement Letter to be signed by management with the updated terms of engagement.
  4. Additional questions will be posed to you to develop a more detailed understanding of the organization’s operations.
  5. Your accountant will pose incremental questions and take additional steps to document your review and approval of the compiled financial statements (e.g. is the compiled financial information complete and accurate).

Overall, these changes will result in more inquires and communication between management and the accounting practitioner.

Will these changes result in higher costs to me?

We expect that the increased work effort required by the new standard will lead to higher costs. The level of the cost increase will vary on an engagement-by-engagement basis. A higher proportion of the cost increase will likely be incurred in the first year.

If you have questions about the new compilation standard and how it applies to your organization, please contact your Welch advisor.

Author
Cody Lombardo​, CPA
[email protected]
Manager

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