As small and medium-sized businesses across Canada head into what is one of the busiest seasons of the year, a regulatory change will soon demand their attention.
Getting ready for year-end accounting will now require business owners to provide additional documentation and acknowledgements due to new reporting requirements issued by the Auditing and Assurance Standards Board of Canada.
The Canadian Standard on Related Services (CSRS) 4200 Compilation Engagements is coming into effect for periods ending on or after December 14, 2021. Christina Kirchhofer, partner at Manning Elliott LLP, a CPA firm offering professional accounting, taxation and business advisory services, recommends that “business owners should be prepared when their accountants request additional information this year.”
The new standard is a significant update to what was previously called a “Notice to Reader” engagement and aims to provide a higher level of consistency in the execution of financial statements. It defines a minimum level of documentation and certain acknowledgments from management, which Kirchhofer sees as an opportunity for business owners to better understand business-related accounting.
Exploring some of the key questions – including who assumes responsibility for compiling financial information, what is the basis of accounting used for preparing the statement, and which third parties will use the data – can provide greater clarity for everyone, she says. “Business owners can still rely on the guidance of their accountants, but there will be more engagement and discussions, and this means the planning process leading up to the year-end probably has to happen a bit earlier.”
Who will be using the financial information?
Under the previous standard, it was commonly assumed that only management was using compiled financial information, yet in practice, this information was often shared with third parties, such as banks or other lenders, says Kirchhofer. “One of the main things accountants now have to ask is, ‘Who is going to use this information?’”
She explains that the goal is to provide financial information that meets the needs and objectives of the third parties for whom it is intended. “This will ensure more comfort for all parties using the financial statements.”
What is the basis of accounting used for preparing the statements?
Since compiled financial information does not need to follow a general-purpose accounting framework, it was difficult to determine how financial statements were prepared under previous regulations.
“The new standard requires supplementary notes outlining the applied basis of accounting, which could be the cash-basis accounting system used by many businesses, or the framework from the Accounting Standards for Private Enterprises (ASPE),” says Kirchhofer.
For the authorities, this allows for more clarity and easier comparisons across entities, but it can also give business owners “a better understanding of their accounting system and financial statements,” she adds.
Who assumes responsibility for compiling financial information?
The new regulation also calls for a compilation engagement report that clearly outlines the separate responsibilities of accountants and management as well as the extent of the work performed.
“Where accountants could have prepared financial statements with less input from business owners in the past, the new standard requires more involvement from management going forward,” Kirchhofer explains. “While the accountant may assist you in preparing the compiled information, management retains the responsibility for financial statements.”
This will likely inspire in-depth discussions about significant judgments, for example, “for estimates on bad debts or amortization,” says Kirchhofer. “With these changes, it becomes necessary to assess them together, so everyone understands their impact.”
Such conversations might already have happened, but a signing-off process will now ensure that business owners are fully aware of the numbers, where they’re coming from and what they mean for the business.
While the regulatory changes are designed to increase transparency and clarity, “this reaches by no means the level of assurance that a review or audit would provide,” says Kirchhofer. “It’s still a compilation, but it provides the users of the financial statements with more information, so they have a better understanding of how the finished statements were put together.”
To learn more about the changes or book a business advisory consultation, visit www.manningelliott.com.