Some things never change, but after 35 years CPA Canada has decided that the standards surrounding how CPAs approach Compilation (aka Notice to Reader) engagements needed an overhaul.

Why things are changing

The new Canadian Standard on Related Services (CSRS) 4200 for Compilation Engagements strengthens the requirements and guidance for accepting, conducting, and reporting on compilation engagements. The reason the changes were needed, it goes, is that the work being done by CPAs on Compilation Financial Statements varied widely across the industry. Despite the report on these statements always having said:

“We have not performed an audit or a review engagement in respect of these financial statements and, accordingly, we express no assurance thereon. Readers are cautioned that these statements may not be appropriate for their purposes.”

many users were still, consistently, using these statements for reasons that were not appropriate for their purposes.

What is changing

Under the previous Section 9200, a compilation report simply stated, as above, that an audit or review hasn’t been performed, and that no assurance is expressed. Under the new CSRS 4200,  CPAs must prepare notes, or a letter, to the financial statements outlining the basis of accounting used as well as a description of the CPA’s responsibilities as well as management’s responsibilities in preparing the Compilation engagement. Before accepting an engagement, CPAs must understand the intended use of the financial statements. The two most likely intended uses are:

  1. The statements will be shared with a third party such as a bank, franchisor, lender or minority shareholders. In this case CSRS 4200 applies and the CPA must perform additional work in preparing the statements. (NOTE: for these purposes, the CRA is NOT considered to be a third party).
  2. The statements will not be shared with a third party. In this case, the shareholders will have the option of the CPA applying CSRS 4200, however it is not required. In the event that CSRS 4200 is not applied, the CPA may still provide a “bookkeeping report” (Balance sheet and P&L) and a tax return, however they cannot produce Compiled financial statements for their customer. The difference is that the CPA’s name and report will not appear on the “bookkeeping report”.

NOTE: at Achen Henderson CPAs, if CSRS 4200 does not apply to a yearend engagement, we will do the same amount of work that we always have done previously on Notice to Reader financial statements, however our “bookkeeping report” will not contain our letterhead our report.

If a third party is entitled to a copy of the compiled financial statements, and CSRS 4200 applies, the management of the company must also find out if the third party:

  1. Is entitled to request additional information from the company.
  2. Has agreed with management on the basis of accounting selected and applied by the company.

In addition to the above, the CPA must perform additional work to ensure that management agrees with and understands these changes, the basis of accounting they’ve selected, and the purpose for preparing the financial statements. The CPA must document management’s acknowledgement of these items.

Common basis of accounting

Under the new CSRS 4200, financial statements must now include a note in the financial statements describing the basis of accounting applied in the preparation of the company’s books and financial statements. Some common bases of accounting include:

  1. Cash basis
  2. Cash basis with certain accruals and accounting estimates (most common at AH)
  3. Agreed upon basis in a contract or other form of agreement established (often banking / debt agreements will refer to GAAP, ASPE or some other accounting framework – check your banking agreements to be sure!)

If accruals and estimates are used, the note needs to give details about the specific accounting policies selected. For example, a note relating to Property, Plant, and Equipment might include amortization rates, and a note on revenue recognition might include a reference to the percentage of completion or completed contract methods.

Scope of additional work

If no third parties are entitled to view the financial statements, and the shareholders of the company do not require a compilation engagement, Achen Henderson will perform the same amount of work as we always had performed on Notice to Reader engagements because it is still important to ensure that we understand the numbers which are presented to the tax authorities, and because our customers see value in us performing a ‘sanity’ check on their yearend numbers. If CSRS 4200 applies, additional work will be required.

Please visit our pricing page for details about our firm’s pricing.

Please visit our financial statement preparation page to read about the different types of financial statements that CPAs provide.