100.2 AR C 70does not apply when the accountant prepares financial statements to be

Transcription

1 Checkpoint Contents Accounting, Audit & Corporate Finance Library Editorial Materials Accounting Services SSARS Preparation Engagements Chapter 1 Introduction and Background 100 Introduction 100 Introduction AR C 70, Preparation of Financial Statements, is one of the four sections of SSARS No. 21, Statements on Standards for Accounting and Review Services: Clarification and Recodification, and introduces a new type of service: the preparation of financial statements. AR C 70 applies when an 1 accountant in public practice is engaged to prepare financial statements but is not engaged to perform a compilation, review, or audit of those financial statements. The new standard is engagement driven. That means that the accountant is required to comply with its requirements only 2 when he or she has been engaged to prepare financial statements. (Paragraph lists other limited situations in which AR C 70 does not apply.) However, the accountant must use professional judgment to determine whether he or she has been engaged to prepare financial statements or to merely assist in the preparation of those statements. In making this determination, the accountant has to consider what services the client has requested the accountant perform. Section 103 goes into detail on determining when AR C 70 applies AR C 70does not apply when the accountant prepares financial statements to be submitted solely to taxing authorities; included in written personal financial plans that he or she has prepared; used in conjunction with litigation services involving legal or regulatory proceedings, either pending or potential; used in connection with business valuation services. Simply stated, AR C 70 applies when an accountant is engaged to prepare financial statements that are not for any of those purposes.

2 100.3 Although the preparation of financial statements has always been a separate nonattest service that accountants performed in connection with other services they provided to clients, SSARS did not previously provide guidance on the conduct of a preparation engagement Like all other nonattest services engagements, the accountant who performs an AR C 70 financial statement preparation engagement is not required to consider whether he or she is independent, unless the accountant also performs, or may perform in the future, an attest service engagement for the same client. In those instances, the accountant determines whether he or she is independent with regards to the attest service engagement. Part of that consideration involves determining whether the nonattest service impairs the accountant's independence for the attest service It is important for the accountant to consider future services which may be provided to the client. If the client may require attest services requiring independence in the future, the accountant needs to be careful in structuring any current services so that independence is not impaired. Once independence is impaired for a specific time period, it is not possible to cure the impairment. Sometimes the nature of the services required evolves over time as a business grows and its financing (and thus reporting) needs change AR 80 provided accountants with a non reporting option; however, those statements were only appropriate for use by specified members of client management. AR C 70 supersedes that guidance and also provides accountants with a non reporting option; however, the AR C 70 financial statements may be distributed to third parties. Purpose of this Guide AR C 70 is effective for the preparation of financial statements for periods ending on or after December 15, Therefore, the purpose of this Guide is to enable accountants to quickly understand (a) the factors to be considered when determining whether AR C 70 applies and (b) the requirements of the new standard and how to comply with them. With the related glossary in Appendix 1A, listing of additional resources in Appendix 1B, illustrations included in the appendixes to Chapter 2, and the practice aids in Chapter 2, this Guide provides all the implementation guidance a firm needs to apply AR C Accountants who are not in public practice are not subject to the requirements of AR C 70. ET defines public practice as providing services for a client. 2 The Accounting and Review Services Committee (ARSC) issued an exposure draft in December 2015 that includes an omnibus SSARS. The issuance of the proposed SSARS, Omnibus Statement on Standards for Accounting and Review Services 2016, will expand the applicability of AR C 70 so that it applies to the preparation of prospective financial information. It will replace the interpretative guidance in the AICPA Guide: Prospective Financial Information regarding the

3 assembly of prospective financial information. The effective date has not yet been determined. However, it is anticipated that the effective date will be no earlier than May 1, Future editions of this Guide will update the status of this project Thomson Reuters/PPC. All rights reserved.

4 END OF DOCUMENT 2016 Thomson Reuters/Tax & Accounting. All Rights Reserved.

5 Checkpoint Contents Accounting, Audit & Corporate Finance Library Editorial Materials Accounting Services SSARS Preparation Engagements Chapter 1 Introduction and Background 101 History of SSARS No History of SSARS No. 21 SSARS No. 1 and the Plain Paper Debate Amidst the accounting profession's concerns about legal action against its members, the AICPA issued SSARS No. 1, Compilation and Review of Financial Statements, in SSARS No. 1 established performance and reporting standards for compilation and review engagements. It also established a compilation as the minimum level of service for unaudited financial statements of a nonpublic entity by indicating that the accountant should not submit unaudited financial statements to a nonpublic client or others unless, at a minimum, the accountant compiled the statements in accordance with SSARS No According to SSARS No. 1, submission occurred when the accountant generated financial statements or modified client generated financial statements. Submission of the statements triggered the requirement to comply with the performance and reporting requirements of SSARS No Specifically, with respect to a compilation engagement, SSARS No. 1 contained the following requirements: Performance. The accountant was required to have or obtain a general understanding of the accounting principles and practices of the client's industry. have or obtain a general understanding of the client's business. obtain additional information if he or she believed that information the client had supplied appeared incorrect, incomplete, or otherwise unsatisfactory.

6 read the compiled statements and determine whether they were appropriate in form and free of obvious material error. Reporting. The reporting standards provided rules for the form of a standard compilation report. reporting when financial statements omitted substantially all disclosures. reporting when the accountant lacks independence. reporting when financial statements include departures from GAAP or a special purpose framework However, in the years after SSARS No. 1 was issued, changes within the accounting profession, the competitive environment, and technology all continued to fuel the so called plain paper debate, which had already been going on for decades. The term plain paper refers to a CPA's ability to prepare financial statements without having to, at a minimum, compile those statements. At the time, many CPAs believed that accountants should be allowed to issue plain paper financial statements, particularly when the financial statements were intended solely for management's use Allowing CPAs to issue plain paper financial statements, however, would have meant making major revisions to SSARS No. 1. In September 1995, the AICPA's Accounting and Review Services Committee (ARSC) issued an exposure draft, Assembly of Financial Statements for Internal Use Only, which would have provided an exemption from SSARS No. 1 for internal use only financial statements and created a fourth level of service an assembly service in addition to compilation, review, and audit services. ARSC issued the exposure draft because of concerns that SSARS No. 1 made it difficult for an accountant to provide needed services to nonpublic clients in a manner that was both timely and cost effective. The 1995 exposure draft was never issued as a final standard.

7 101.6 The accounting profession continued to hold public hearings over the plain paper debate. Supporters of plain paper services argued that the SSARS No. 1 requirement to compile and report on financial statements ignored client needs at a time of rapid technological changes. Many clients, they argued, did not want to pay for a compilation engagement when only management of the entity would use the financial statements. In addition, they believed that many practitioners were already violating the spirit of SSARS No. 1 by preparing computer generated financial statements and having the clients push the buttons to print them. Those against plain paper financial statements argued that CPAs already had ways to perform cost effective compilation engagements and omission of a report would cause confusion to the public and not communicate the limitations of the compilation, thereby increasing the risks of misunderstanding about the service performed. Management use only Financial Statements In December 1999, ARSC responded to the debate by issuing an exposure draft that would amend SSARS No. 1 by giving accountants a new communication option when compiling financial statements that were restricted to management's use only. While most of the ideas discussed previously involved providing an exemption from SSARS No. 1, a different approach was taken in the proposed SSARS. Rather than create an exemption from SSARS No. 1 or another level of service, the exposure draft continued to require an accountant who prepared management use only financial statements to comply with the SSARS No. 1 performance standards; however, the proposed SSARS provided accountants with the option of issuing an engagement letter in lieu of a report The exposure draft was finalized and issued in October 2000 as SSARS No. 8, Amendment to Statement on Standards for Accounting and Review Services No. 1. SSARS No. 8 brought about one of the most substantive changes to compilation engagements since the issuance of SSARS No. 1 in By issuing SSARS No. 8, ARSC believed it had finally brought the plain paper debate to an end SSARS No. 8, which was effective for financial statements submitted after December 31, 2000, made two significant changes to existing compilation standards. First, as discussed at paragraph 101.7, it expanded the communication options for accountants who submitted unaudited financial statements for management use only to their nonpublic clients. Under SSARS No. 8, the communication options included a. issuing a compilation report as previously required by SSARS No. 1, or b. documenting the services to be performed and the limitations on the use of the financial statements in an engagement letter, preferably signed by management. By incorporating the additional option of documenting the service in an engagement letter for management use only financial statements, SSARS No. 8 provided accountants with greater flexibility in providing services on statements that were not intended for use by third parties.

8 SSARS No. 8 allowed accountants to submit financial statements to members of management who had knowledge of the company and the limitations of the financial information contained in those statements without issuing a report. Such knowledge allowed those users to consider the statements in the context of other relevant information they possessed about the entity. Because third parties usually did not possess such knowledge, management use financial statements were not meant for their use Secondly, SSARS No. 8 amended the SSARS No. 1 definition of submission of financial statements in an attempt to resolve questions about when SSARS No. 1 applied. SSARS No. 8 redefined that term as presenting to a client or third parties financial statements the accountant has prepared either manually or through the use of computer software. The revised definition was considered much broader in scope than the one included previously in SSARS No. 1 (see paragraph 101.2) SSARS No. 8, however, did not define the term prepare. Accordingly, accountants had to use professional judgment to determine whether they had prepared the financial statements. In making that judgment, CPAs considered the difference between mere bookkeeping services (such as making adjustments, corrections, or accruals to the financial statements) and financial statement preparation. Preparing financial statements involved using the accountant's knowledge, education, and experience to create statements that would not have otherwise existed. In other words, if a client's bookkeeper competently prepared the client's financial statements and the accountant only slightly modified a couple of items, the conclusion would have been that the accountant had not prepared the financial statements. On the other hand, if the client gave the accountant an unadjusted trial balance and the accountant made all of the adjustments necessary to convert that information into financial statements, the accountant would have prepared those statements. The advent of cloud computing and other technological advances compounded the confusion over preparation. Because cloud computing allowed both client personnel and the accountant to enter data into the client's accounting system, who had actually prepared the resulting financial statements was often unclear Neither SSARS No. 1, nor the amendments made by SSARS No. 8, defined the term presenting. Again, accountants were required to use professional judgment to determine when they had presented financial statements to a client. While it was obvious that physically giving printed financial statements to clients qualified as presenting, the determination was more difficult in other situations, especially those involving the electronic transmission of the statements to clients In summary, while acknowledging that accountants would still have to use judgment when deciding whether the SSARS applied, ARSC believed that the revised definition in SSARS No. 8 would solve most applicability problems. In addition, a compilation remained the minimum level of service that an accountant could provide on financial statements prepared and presented (i.e., submitted) to a nonpublic client. SSARS No In December 2010, ARSC brought about more changes to compilations engagements with

9 the issuance of SSARS No. 19, Compilation and Review Engagements, which was effective for compilations and reviews of financial statements for periods ending on or after December 15, For the first time, SSARS No. 19 recodified the SSARS literature into separate sections for compilation and review engagements. It also created a requirement for accountants to obtain a written understanding (for example, in an engagement letter) in all compilation engagements; amended documentation requirements; and permitted accountants to describe in the compilation report the reasons for their lack of independence. However, SSARS No. 19 did not address, or otherwise modify, the concept of submission of financial statements. SSARS No Compilation and Review Standards Clarity Project In May 2010, ARSC approved a project to clarify the compilation and review standards using the drafting conventions adopted by the Auditing Standards Board (ASB) and used by the ASB to clarify and converge the auditing standards with international auditing standards issued by the International Auditing and Assurance Standards Board (IAASB) as a basis. Unlike the auditing standards, convergence with international standards was not a primary factor for the compilation and review standards due to incompatibilities between the United States and international standards. The ARSC drafting conventions were establish objectives for each clarified AR section. include a definition section, where relevant, in each clarified AR section. The new definition sections include the term special purpose framework. separate requirements from application and other explanatory material. number application and other explanatory material paragraphs using an A prefix and present them in a separate section that follows the requirement section. use formatting techniques, such as bulleted lists, to enhance readability. try to eliminate all SSARS interpretations by pulling the information that is still applicable into the application or other explanatory material, into the requirements, or into the AICPA's Guide, Preparation, Compilation, and Review Engagements (AICPA Guide) The project culminated with the issuance of SSARS No. 21, Statements on Standards for

10 Accounting and Review Services: Clarification and Recodification, in October Section 102 presents an overview of that standard Thomson Reuters/PPC. All rights reserved.

11 END OF DOCUMENT 2016 Thomson Reuters/Tax & Accounting. All Rights Reserved.

12 Checkpoint Contents Accounting, Audit & Corporate Finance Library Editorial Materials Accounting Services SSARS Preparation Engagements Chapter 1 Introduction and Background 102 Overview of SSARS No Overview of SSARS No SSARS No. 21, Statements on Standards for Accounting and Review Services: Clarification and Recodification, is effective for engagements for financial statement periods ending on or after December 15, SSARS No. 21 supersedes all of the existing AR sections other than AR 120, 3 Compilation of Pro Forma Financial Information. The new standards have AR C references to differentiate them from the extant literature. This is the same method that the AICPA used to differentiate between the old (AU references) and clarified auditing standards (AU C references) SSARS No. 21 is comprised of four sections: AR C 60, General Principles for Engagements Performed in Accordance with Statements on Standards for Accounting and Review Services, AR C 70, Preparation of Financial Statements, 4 AR C 80, Compilation Engagements, and AR C 90, Review of Financial Statements This Guide deals specifically with the requirements of AR C 60 and 70 as they relate to financial statement preparation engagements. The following paragraphs provide an overview of those sections, while Chapter 2 discusses each in further detail. Compliance with Relevant AR C Sections

13 102.4 When engaged to prepare financial statements, AR C 70 specifically requires compliance with the general principles in AR C 60. AR C 60 states that accountants are required to comply with all SSARS requirements relevant to a SSARS engagement. Among other things, AR C states that a requirement is considered relevant unless it is a conditional requirement, which is only relevant when the conditions described in the requirement exist Accountants should understand AR C 70 in its entirety to understand the objectives of the standard and properly apply its requirements. In addition to the requirements, AR C 70 contains the following: Introductory Material. The introductory material in AR C 70 addresses the applicability of the section. (AR C ) Objective of the Engagement. The objective of a preparation engagement is to prepare financial statements in accordance with a specified financial reporting framework. (AR C 70.06) Definitions. This section includes descriptions attributed to certain terms for purposes of AR C (AR C 70.07) Application and Other Explanatory Material. This section provides additional explanation of the requirements of AR C 70. Although such guidance is not, in itself, considered a requirement, it is relevant to the proper application of the requirements of an AR C section and accountants are required to understand it. The accountant then uses professional judgment to determine how best to apply that guidance throughout the preparation engagement. (AR C 70.A1.A20) Appendix. The appendix in AR C 70, which is part of the application and other explanatory materials, provides guidance an accountant may use when determining whether the accountant has been engaged to prepare financial statements. (AR C 70.A19) Exhibit. The exhibit in AR C 70, which is also part of the application and other explanatory materials, contains an illustrative engagement letter. (AR C 70.A20) Defining Professional Responsibilities in SSARS AR C uses two specific terms to describe the degree of responsibility accountants have in complying with professional requirements: Unconditional Requirements An accountant must always comply with an unconditional

14 requirement if it is relevant to the engagement. SSARS use the word must to indicate an unconditional requirement. Presumptively Mandatory Requirements An accountant must comply with a presumptively mandatory requirement if it is relevant to the engagement, except in rare situations discussed in AR C SSARS use the word should to indicate a presumptively mandatory requirement If an AR C section requires an accountant to consider whether a specific procedure should be performed or action taken, that procedure or action is presumptively mandatory. The accountant should determine whether to perform the procedure or action based on the accountant's consideration and professional judgment AR C discusses the rare situations in which an accountant may determine that it is necessary to depart from a relevant presumptively mandatory requirement. Typically, these situations only arise when the requirement is for a specific procedure to be performed and, in the specific circumstances of the engagement, the accountant determines that the procedure would be ineffective in achieving the intent of the requirement. In such situations, the accountant is required to perform alternative procedures designed to accomplish the intent of the requirement. Relevant Interpretive Publications and Other Preparation, Compilation, and Review Publications When performing a financial statement preparation engagement, AR C also states that the accountant should consider other relevant interpretive publications. While interpretive publications are not SSARS, they are issued under the authority of ARSC and present recommendations on how to apply SSARS in specific circumstances In addition, AR C requires accountants to assess the relevance of other preparation, compilation, and review publications to the circumstances of the engagement. While these publications have no authoritative status, they may assist the accountant in understanding and applying AR C 70. Other preparation, compilation, and review publications that may be relevant in a financial statement preparation engagement are listed in the exhibit to AR C 60 and in Appendix 1B of this Guide. AR C Section AR C 60, General Principles for Engagements Performed in Accordance with Statements on Standards for Accounting and Review Services, includes the following: General principles for engagements performed in accordance with Statements on Standards for Accounting and Review Services (SSARS).

15 Requirements addressing financial statements, ethical requirements, professional judgment, conduct of the engagement in accordance with SSARS, engagement level quality control, and acceptance and continuance of client relationships and engagements Each of these matters is addressed further in Chapter 2. In addition, as stated at paragraph , the exhibit to AR C 60 and Appendix 1B of this Guide identify other publications that might be helpful when performing a preparation engagement. AR C Section New Level of Service Among other things, AR C 70 introduces a new level of service the 6 financial statement preparation service. It states that there is a difference between being engaged to prepare financial statements and merely assisting in preparing financial statements. It requires judgment to determine whether the CPA has been engaged to prepare financial statements. An appendix to AR C 70 includes a table with indicators to help a CPA make that determination. (See section 103 and Exhibit 1 1.) If the accountant determines that he or she has been engaged to prepare financial statements, the accountant is required to follow the performance requirements in AR C 70. AR C 70's requirements address the following: Accepting or continuing the engagement;

16 Agreeing with management on the terms of the engagement; Understanding the client's applicable financial reporting framework (cash, tax, GAAP, etc.); Preparing the financial statements in accordance with the applicable financial reporting framework, with specific requirements related to financial statements that omit substantially all disclosures and financial statements prepared using a special purpose framework; Preparing sufficient documentation for the engagement to provide a clear understanding of the CPA's work; and Including a statement, commonly referred to as a legend, on each page of the financial statements that no assurance is being provided. (If the financial statements do not include a legend indicating no assurance is provided, the CPA should either perform a compilation engagement or issue a disclaimer that makes it clear that the CPA is providing no assurance.) Each of these requirements is discussed further in Chapter The new financial statement preparation service is not the same as the AR 80 managementuse only compilation engagement. AR C 70 supersedes that guidance, which allowed accountants to prepare financial statements for management's use only and state in the engagement letter that material departures from the applicable financial reporting framework may exist and the effects of those departures, if any, may not be disclosed AR C 70 now allows an accountant to prepare financial statements for use by a third party not just management without having to issue a compilation report. However, the CPA is required to a. describe the financial reporting framework used if the financial statements are prepared in accordance with a special purpose framework, and b. disclose any material misstatements such as those caused by a known departure from the applicable financial reporting framework or inadequate disclosures.

17 These descriptions and disclosures may be included on the face of the financial statements or in a note to the financial statements Effective Date As discussed in paragraph 100.7, AR C 70 is effective for the preparation of financial statements for periods ending on or after December 15, ARSC issued an exposure draft in December 2015 that includes the following proposed SSARS: Compilation of Prospective Financial Information, Compilation of Pro Forma Financial Information, and Omnibus Statement on Standards for Accounting and Review Services The effective date has not yet been determined. However, it is anticipated that the effective date will be no earlier than May 1, Future editions of this Guide will update the status of this project. 4 The omnibus exposure draft discussed in the footnote to paragraph changes the title of AR C 80 from Compilation Engagements to Compilation of Financial Statements. 5 Appendix 1A contains a glossary that defines terms found in AR C 60 or AR C Because the preparation of financial statements is a nonattest service, the CPA is not required to consider whether he or she is independent. Instead, the CPA considers independence only in how it relates to any attest services the CPA may also provide to the client Thomson Reuters/PPC. All rights reserved. END OF DOCUMENT 2016 Thomson Reuters/Tax & Accounting. All Rights Reserved.