Compiled financial statements, often referred to as “Notice to Reader” statements due to the header on the report page, are prepared under professional standards that have been in place for 34 years.

On January 1, 2022, a new Canadian standard for compilation engagements will become effective.  The purpose of this newsletter is to highlight the major changes so you will know what to expect this coming year.

Under the current Canadian standard, compiled financial statements typically include only a cover page, a report page that includes the “Notice to Reader” heading, a balance sheet, and an income statement.  There is presently no guidance addressing the basis of accounting to be applied in preparing those financial statements.  Also, notes to the financial statements are not required.

The new standard, called CSRS 4200 Compilation engagements, introduces several new requirements that will affect compiled financial statements for years ending on and after December 31, 2021.

Information about uses and users of the compiled financial statements

The new standard requires us to ask about the uses of the financial statements, and for certain information about the specific users as well.

Uses of compiled financial statements may include supporting borrowing under a loan agreement, compliance with the terms of an agreement, and fulfilling tax reporting obligations, for example.

Under the new standard, we are allowed to compile financial statements where the only user is management.  However, where third parties are also users, the new standard allows us to compile financial statements in only two situations:

1. Where each third party user is in a position to request and obtain further information about the entity, or
2. Where management and third party users have agreed to the basis of accounting to be applied in the preparation of the compiled financial statements.

The logic behind these new rules is that compiled financial statements are not prepared in accordance with a financial reporting framework, such as Accounting Standards for Private Enterprises (ASPE) or International Financial Reporting Standards (IFRS), and hence they do not follow the detailed recognition, measurement, presentation, and disclosure requirements of ASPE or IFRS.  While such “general purpose financial statements” are intended to be a primary source of information about an entity, compiled financial statements are not.  The new standard is meant to safeguard third party users by ensuring they have access to additional information or have made an informed decision about the basis of accounting.

Our clients will notice that our compilation engagement letter for years ending on and after December 31, 2021 includes an acknowledgement that either there are no third party users of the compiled financial statements, or that third party users are either in a position to request and obtain further information about the entity or have agreed the basis of accounting with management.

We anticipate that banks and other lenders, and the Canada Revenue Agency (CRA), are users of the compiled financial statements of many of our clients.  Banks and other lenders are normally in a position to request and obtain additional information about their customers.  CRA and other taxation authorities have the statutory power to obtain additional information about taxpayers as well.

In some cases, we anticipate third parties may need to agree the basis of accounting with management.  For example, minority shareholders normally do not have a right to obtain additional information about the corporation of which they hold shares.  In such cases, management would need to agree the basis of accounting with those users.

Content of compiled financial statements

Users of compiled financial statements will notice two differences in the content of financial statements compiled under the new standard:

1. A new compilation engagement report replaces the “Notice to Reader” on the report page, and
2. A new “basis of accounting” disclosure that describes the basis upon which the financial statements have been prepared.  This will be a new, additional page to the compiled financial statements as a result.

A sample of the new compilation engagement report is attached below.

The new “basis of accounting” disclosure adds a brief description of the core principles that guided the preparation of the compiled financial statements.  For our current compilation engagement clients, this will document the basis of accounting that has been applied in past years.

Our work in providing compilation engagement services

The new standard includes additional work effect requirements that we must apply in providing compilation engagement services, including:

• Documenting our knowledge of the client’s business and operations, as well as its accounting system and accounting records.  We expect that we have most of this information in our files for many of our clients, but it may not be documented as fully as the new standard requires in some cases.
• Documenting the basis of accounting to be applied in compiling the financial statements.  In most cases we expect to continue applying the basis of accounting used in past years.
• Discussing significant judgments used in the preparation of the compiled financial statements with management to help ensure management understands the effect of those judgments on the compiled financial statements.  The need for such a discussion should only arise where there are particularly complex accounting matters that occurred during the year.

Acknowledgement from management

A significant additional requirement of the new standard is that we must obtain an acknowledgement from our client’s management that it has taken responsibility for the final version of the compiled financial statements.

The logic here is that the compiled financial statements are the responsibility of our clients’ management, and that while we assist management in preparing the financial statements, the representations to users contained within the financial statements come from management.

We are allowed to obtain this acknowledgement in writing or verbally, and we will be trying to few different ways to doing this as the new standard comes into effect.

Concluding thoughts

While we must adapt our approach to compilation engagements to comply with the new Canadian standard, we don’t expect our clients will experience a significant change in the way we provide these services.  As always, if you have any questions about this newsletter or anything else we can help you with, please contact your D&H Group LLP advisor.

APPENDIX – SAMPLE REPORT

COMPILATION ENGAGEMENT REPORT

To Management of Sample Company

On the basis of information provided by management, we have compiled the balance sheet of Sample Company as at December 31, 20X1, the statement of income and retained earnings for the year then ended, and Note X, which describes the basis of accounting applied in the preparation of the compiled financial information (“financial information”).

Management is responsible for the accompanying financial information, including the accuracy and completeness of the underlying information used to compile it and the selection of the basis of accounting.

We performed this engagement in accordance with Canadian Standard on Related Services (CSRS) 4200, Compilation Engagements, which requires us to comply with relevant ethical requirements. Our responsibility is to assist management in the preparation of the financial information.

We did not perform an audit engagement or a review engagement, nor were we required to perform procedures to verify the accuracy or completeness of the information provided by management. Accordingly, we do not express an audit opinion or a review conclusion, or provide any form of assurance on the financial information.

Readers are cautioned that the financial information may not be appropriate for their purposes.

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