As your KMSS trusted advisor meets with you to discuss your financial statements this year, a report that has become well known for decades in the Canadian accounting landscape will no longer be attached to your statements. Goodbye Notice to Reader… Hello Compilation Engagement.
What exactly is a Compilation Engagement?
For any period that ends on or after December 14, 2021, Canadian public accounting firms must complete your year end work within a new set of standards called the Canadian Standard on Related Services (CSRS) 4200, Compilation Engagements, more fondly referred to by most of us as “CSRS 4200”. These standards were developed over a number of years and officially codified by Canada’s standard setter in this area, the Auditing and Assurance Standards Board (AASB). The new standard will now refer to “financial information” instead of “financial statements” and the report attached to this information will be worded differently, providing more explanation of the responsibility of the accountants and management. Further, all financial information will be required to have a “Basis of Accounting” note, which fully discloses how certain line items within the information are presented. But more on that a bit later.
Why did we need a new standard?
For decades, the Notice to Reader has been prepared by almost every accounting firm across Canada, and relied upon by lenders, potential investors, current shareholders, executives, and potential business targets to assess the financial results of an organization. It’s inevitable that business changing and potentially life changing financial decisions have been made based upon the information provided in the pages that followed the all too familiar Notice to Reader report. And this… is exactly why we needed a new standard.
You see, the Notice to Reader was never intended to be something to be distributed to third parties, it was to be used only by an organization’s management. The report that a public accountant attached to the information was meant to tell the reader of the statements that the information was not audited, and no work was done to provide any type of assurance to the completeness, accuracy or presentation of the statements. But inevitably what happened over time, was very few paid attention to what the Notice to Reader actually said, and instead saw a public accounting firm’s name/logo on the front of the financial statements, and invariably concluded that the financial statements must be worth something since they are “prepared by ABC Public Accountant”.
To further compound the problem, the old standards did not specify a consistent approach as to the amount of work required, the supporting documentation in our files, the understanding of our client’s business, or even the basis of accounting that the statements were required to be prepared under. The standards only suggested that a practitioner should ensure that the financial statements were not false or misleading. This meant that it was conceivable that an organization could have very different financial results presented by different practitioners, and neither would technically be “wrong”. Let’s say for example one practitioner prepared the information using a full cash basis of accounting, while another practitioner prepared the information using the accrual basis of accounting. Without having to disclose which basis was used, the reader of the financial statements had absolutely no idea how the information was presented. The same organization could show significantly different net income under each of these approaches … and, to reiterate, neither approach was technically “wrong” since there was no requirement under the old standards!
What Basis of Accounting Do I Have to Use?
Interestingly, this doesn’t change. Your financial information can still be prepared and presented the exact same way as you’ve always done. In fact, for many organizations, the new standards will result in more “behind the scenes” work, a few more discussions with our team working on your file, and a new note attached to the end of your financial information. But the income statement and balance sheet will still look the same as they always have. The key is, this basis of accounting must now be fully disclosed in this very important note. In the previous discussion of cash basis vs. accrual basis (on certain financial items), this would have to be disclosed to the reader. This allows a financially literate reader to be able to differentiate between two different approaches and determine how this may unjustly skew the financial results in a certain direction (i.e. using the accrual basis for sales and accounts receivable, but using the cash basis for expenses).
So What Else Will be Different?
A few things. First, you will be required to advise us if the financial information will potentially be made available to any third party. This may include lenders, investors, or potential buyers of your business. Second, we will have to discuss with you the basis of accounting used for particular financial items, and have you agree to this basis which will be included in the engagement letter – after all, this is still your financial information. Third, we are required to gain an understanding of and document several business and accounting processes used within your organization. Finally, upon completion of the engagement, and reviewing the financial information with you, we will require your acknowledgement of accepting responsibility for the financial information. The date you provide this to us then becomes the date that appears on the Compilation Engagement Report. One key thing that won’t change – a Compilation Engagement is still not an audit or review, and is not intended to provide any assurance around the completeness, accuracy, or presentation of your financial information.
Don’t Worry, It’s Not That Bad
We’ve already completed a few organizations’ first reporting period under these new standards (remember, if you have a December year end, you will fall under these new standards). The results have been resoundingly painless. Yes, it means a bit more communication with your KMSS trusted advisor and our team, including a bit of questioning around your accounting systems and processes – plus it involves a new report and a new note at the end of your financial information. Yes, it means a couple of extra hours of work on our end, and maybe even some initial growing pains as your lenders and other users adapt to the new look and learn what’s changed. But overall, we don’t expect you will find the process to you or your organization to be overly burdensome.
As always, if you have any questions or concerns about these new standards and how it may affect you or your business, your trusted KMSS advisor is always ready to chat and would love to discuss further.