How we prepare your financial statements is changing soon. The Chartered Professional Accountants Organization of Canada is implementing standardized financial statements for year ends ending on or after December 14, 2021.
Currently, financial statements are prepared as what’s called a Notice to Reader (NTR). This is sort of like a buyer beware in sales terms. Starting this December, accountants across Canada are required to prepare a compilation engagement when preparing financial statements.
The change is CPA Canada’s way of standardizing financial statements while making sure they are accurate and not misleading.
Here’s what you need to know.
What are Standardized Financial Statements?
When an NTR is prepared, there is a wide range of the type of work various accounting offices do. Some will take the numbers from their client and create financial statements based on these numbers without verifying documentation to substantiate the client’s numbers. Other offices will verify many accounts as part of putting together the financial statements.
Standardized financial statements will help level the playing field, so to speak. This is CPA’s way of improving the quality of financial statements prepared across the country.
Why the Change?
Previously, NTRs assumed certain uses for financial statements: mainly the business’s owners and management. Sometimes, though, third parties like bankers and other financial professionals request a company’s financial statements.
In this case, with so many ways for accountants to prepare financial statements under the NTR method, third parties aren’t given enough information to understand what they’re looking at. For example, financial statements prepared by two different accounting firms as NTRs can vary drastically. Each firm uses their own judgment regarding how in-depth they analyze management’s figures before putting the financial statements together.
This change makes it clearer what type of work the accountant has done because, the basis of accounting must be specified on the financial statements. Under the compilation standards, accountants are required to ask management specific questions during the preparation of the financial statements. The answers to these questions form the basis of the accountant’s analysis of management’s figures and determine how the financial statements are put together.
Thus when third parties, like bankers, are evaluating financial statements, it will be much clearer what they are looking at.
How Does this Affect Your Business?
As mentioned, your accountant will need to ask you specific questions in regards to the financial information prepared by management. Depending on how your financial statements have been prepared in the past, these questions may not be completely new to you. Here’s what your accountant will need to know:
- Basis of accounting (eg. Whether the statements have been prepared in accordance with Accounting Standards for Private Enterprises, cash vs accrual method, etc.)
- Intended financial statement users (Who does management believe they are preparing the statements for?)
- Third party users (Will the statements be forwarded to anyone other than management or owners?)
In addition to the above questions that accountants are required (by CPA) to sign off on, we will likely ask further questions to verify other figures we deem appropriate.
Changes to the How the Financial Statements Appear
Financial information compiled by an accountant has always been the responsibility of management. The new standards require management to indicate they understand this. You may notice the wording of your representation letter changed slightly to reflect this.
Another change is the inclusion of a compilation report with your statements. This report clearly states the financials are prepared based on information provided by management. The basis of accounting will be indicated via a note disclosure. A note disclosure appears in a separate section at the end of your financial statements.
Page six of the Third Party Briefing prepared by CPA Canada (and found on this webpage) provides an excellent comparison of the NTR vs the new compilation standards if you are interested in seeing a side-by-side view of the changes.
While standardized financial statements across the industry will reduce confusion and improve reporting, this also means accounting fees will increase. We will be required to complete additional work in order to prepare financial statements in accordance with these new standards.
For more information on the change in financial statement standards, you may want to download the Management Briefing from this CPA Canada page. We know the news that your accounting fees will increase probably isn’t the best. We’re happy to discuss this with you further if you have any concerns.