American Institute of CPAs

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1 Statement on Standards for Accounting and Review Services No. 21, Statements on Standards for Accounting and Review Services: Clarification and Recodification DISCLAIMER: This publication has not been approved, disapproved or otherwise acted upon by any senior technical committees of, and does not represent an official position of, the American Institute of Certified Public Accountants. It is distributed with the understanding that the contributing authors and editors, and the publisher, are not rendering legal, accounting, or other professional services in this publication. If legal advice or other expert assistance is required, the services of a competent professional should be sought. Copyright 2011 by American Institute of Certified Public Accountants, Inc. New York, NY All rights reserved. For information about the procedure for requesting permission to make copies of any part of this work, please copyright@aicpa.org with your request. Otherwise, requests should be written and mailed to the Permissions Department, AICPA, 220 Leigh Farm Road, Durham, NC

2 Today s Objectives Discuss SSARS No. 21. Discuss the changes to practice expected as a result of the issuance of SSARS No. 21 including significant revisions to the requirements for financial statement preparers. - Understand the reasons for the changes Slide 2

3 Today s Presenter Kelly J. Hunter, CPA Shareholder Fitts, Roberts & Co., P.C. Member, Accounting & Review Services Committee

4 DISCLAIMER Views expressed by AICPA staff and other presenters are expressed for purposes of deliberation, providing member services and other purposes exclusive of practicing public accounting. Views expressed by AICPA staff and other presenters do not necessarily represent the official views of the AICPA unless otherwise noted. Official AICPA positions are determined through certain specific committee procedures, due process and deliberation.

5 SSARSs Clarity Project: Overview

6 Clarity Project Goals Same as ASB s Clarity Project Goals Address concerns over length and complexity of standards Make standards easier to read, understand and implement Lead to enhancements in engagement quality Same format and drafting guidelines No inclusion of special considerations for smaller, less complex entities or governmental entities SSARS No. 21 represents the ARSC s efforts to clarify and revise the standards for reviews, compilations, and engagements to prepare financial statements

7 Statement on Standards for Accounting and Review Services - SSARS No. 21 Effective for financial statements for periods on or after December 15, 2015 Early implementation is permitted 7

8 SSARS No. 21 Supersedes all existing AR sections except for AR Section 120, Compilation of Pro Forma Financial Information, which is expected to be exposed for public comment in clarified format in 2015 along with a proposed standard on assembly/compilation of prospective financial information. Prospective financial information is currently codified in Attest Standards 8

9 Significant Changes to Standards for Financial Statement Preparers

10 Submission of Financial Statements AR section 80 applies when an accountant is engaged to report on compiled financial statements or submits financial statements to the client or to third parties. Submission is defined as prepare and present Determining Whether Financial Statements Have Been Prepared by the Accountant Cloud computing and other applications have made it difficult to determine who (or what) has prepared the financial statements: - The accountant? - Management? - The computer application?

11 Submission of Financial Statements AR-C section 80 applies when an accountant is engaged to perform a compilation service.

12 Financial Statement Preparation Recently issued standards clarify that preparation of financial statements is a nonattest service, consistent with the guidance in; AICPA Code of Conduct clarified Interpretation (effective 12/15/14) - Previously ET Interpretation The 2011 version of Government Auditing Standards 12

13 SSARS No. 21

14 SSARS 21 - Format SSARS No. 21 is formatted into four separate sections: Section 60, General Principles for Engagements Performed in Accordance With Statements on Standards for Accounting and Review Services Section 70, Preparation of Financial Statements Section 80, Compilation Engagements Section 90, Review of Financial Statements These sections will be codified with the prefix AR- C to denote them from the extant AR sections. 14

15 Section 60 - General principles for SSARS engagements Replaces AR Section 60, Framework for Performing and Reporting on Compilation and Review Engagements. In addition to complying with preparation, compilation and review sections the accountant must comply with the general principles in Section

16 Section 60 - General principles for SSARS engagements Section 60 includes requirements and guidance with respect to: Ethical requirements Professional judgment Conduct of the engagement in accordance with SSARSs Engagement level quality control Acceptance and continuance of client relationships and engagements 16

17 Section 70 Preparation of Financial Statements Intended to be short and easy to apply Only 22 requirement paragraphs and 19 application paragraphs Applies when the accountant is engaged to prepare f/s but not engaged to perform an audit, review, or compilation on those f/s Does not apply when the accountant has been engaged to merely assist in preparing financial statements or when the accountant prepares financial statements as a by-product of another engagement

18 Section 70 Preparation of Financial Statements Does not apply when the accountant prepares financial statements: Solely for submission to taxing authorities, For inclusion in written personal financial plans prepared by the accountant, In conjunction with litigation services that involve pending or threatened legal or regulatory proceedings, or In conjunction with business valuation services. Professional judgment will need to be applied as to when the accountant is engaged to prepare financial statements.

19 Section 70 Preparation of Financial Statements Does not require the accountant to consider whether he or she is independent Requires an engagement letter signed by both the accountant and management/those charged with governance Can be applied to f/s with or without disclosures

20 Section 70 Preparation of Financial Statements If the financial statements omit substantially all disclosures disclose the omission in the financial statements If the financial statements contain a known framework departure disclose in the financial statements May be on the face of the financial statements or in a note Do not prepare financial statements if omission of disclosures or other known framework departures are done to mislead users

21 Section 70 Preparation of Financial Statements Report is not required even if financial statements are expected to be used by a third party Requires a legend on each page of the f/s stating that no assurance is being provided If management refuses or cannot include the legend, the accountant could issue a disclaimer report, perform a compilation engagement, or resign. Ensures that users are able to readily identify that the accountant is providing no assurance with respect to the financial statements. Software vendors are expected to include in their software

22 Section 70 Preparation of Financial Statements If the accountant is unable to include a statement on each page of the financial statements, the accountant is required to Issue a either a disclaimer that makes clear that no assurance is provided on the financial statements or Perform a compilation engagement in accordance with section 80 of SSARS No. 21.

23 Section 70 Preparation of Financial Statements An example of a disclaimer : 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, accordingly, 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]

24 Section 70 Preparation of Financial Statements When preparing financial statements in accordance with a special purpose framework/ocboa, the accountant is required to include a description of the financial reporting framework on the face of the financial statements or in a note to the financial statements.

25 Section 80, Compilation Engagements Intended to be short and easy to apply Only 38 requirement paragraphs and 43 application paragraphs Applies when the accountant is engaged to perform a compilation engagement Other than the applicability, the compilation literature is largely unchanged from SSARS No. 19

26 Section 80, Compilation Engagements Retains the independence requirements from the SSARS 19. Requires an engagement letter signed by both the accountant and management/those charged with governance Can be applied to financial statements with or without disclosures.

27 Section 80, Compilation Engagements Primary difference from SSARS No. 19 is in the reporting requirements Report is always required. Report is shortened to differentiate from audit and review (assurance) reporting Management use only financial statements are be covered by the preparation standard

28 Example - Accountant s Compilation Report Management is responsible for the accompanying financial statements of XYZ Company, which comprise the balance sheets as of December 31, 20X2 and 20X1 and the related statements of income, changes in stockholder s equity, and cash flows for the years then ended, and the related notes to the financial statements in accordance with accounting principles generally accepted in the United States of America. I (We) have performed a compilation engagement in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA. I (we) did not audit or review the financial statements nor was (were) I (we) required to perform any procedures to verify the accuracy or completeness of the information provided by management. Accordingly, I (we) do not express an opinion, a conclusion, nor provide any form of assurance on these financial statements. 28

29 Comp. Report Add l paragraphs When financial statements are prepared in accordance with a Special Purpose Framework/OCBOA Disclosures omitted Lack of independence Known Departure From the Applicable Financial Reporting Framework Supplementary Information Accompanies Financial Statements and the Accountant s Compilation Report Thereon 29

30 Comparison of Compilation and Preparation Service Compilation Preparation When does the standard apply? Engaged to compile Engaged to prepare Is an engagement letter required? Yes Yes Is the accountant required to determine Yes No if he or she is independent of the client? If the accountant is not independent, is Yes N/A that fact required to be disclosed? Does the engagement require a report? Yes No 1 May the financial statements go to users outside of management? Yes Yes May the financial statements omit notes? Yes Yes 1 legend required that no assurance provided.

31 Compilation and Preparation SSARSs Results in a bright line between accounting services and reporting services. Accountant no longer has to be concerned about whether the financial statements would be used internally or by third parties.

32 Section 90, Review of Financial Statements Is primarily a clarity redraft of SSARS No. 19 with respect to review engagements. The SSARSs review literature is converged with the requirements of AU-C section 930, Interim Financial Information Results in consistency between limited assurance engagements. 32

33 Section 90, Review of Financial Statements Scope The Standard may be applied to historical financial information other than historical financial statements, such as: - Specified elements, accounts, or items of a f/s - Supplementary information - Required supplementary information - Financial information included in a tax return 33

34 Section 90, Review of Financial Statements Requires an engagement letter signed by both the accountant and management/those charged with governance Reporting on financial statements Requires the use of headings in the accountant s review report Required to name the city and state of the issuing office - May be included on letterhead 34

35 Helpful Information and Resources 35

36 Helpful Information and Resources More information Dedicated ARSC Clarity page on AICPA Website at arityproject.aspx - Will be updated frequently Developments in Review, Compilation, and Financial Statement Preparation Engagements 2014/2015 aicpa.org/frc

37 Helpful Information and Resources Authoritative standards for non-issuers (SASs, SSARSs, SSAEs, SQCSs) as of June 1 are available at ccounting+and+auditing/audit+and+attest+stan dards/authoritative+standards+and+related+g uidance+for+non-issuers/default.htm aicpa.org/frc

38 Helpful Information and Resources AICPA Accounting and Auditing Technical Hotline (877) Auditing/Accounting+and+Auditing+Technical+Help/ aicpa.org/frc

39 Questions?