After nearly 40 years, Chartered Professional Accounts (CPA) Canada upgraded the Notice-To-Reader format to the new Compilation standard. What does this mean for your business?
“Internal Financial Statements and Compilation Engagements offer very different benefits to business owners.”
At Cambridge Financial Services, many of our Corporate Clients require both Internal Financial Statements and Compilation Engagements. The distinction between the two standards and their use is important to both business owners and business managers. When prepared and used properly, Internal Financial Statements are a very useful tool for management decision-making. When, then, do business owners need more than useful Internal Financial Statements? Why was the Notice-To-Reader format effectively retired by CPA Canada? What is the new Compilation Engagement standard?
Internal Financial Statements: Benefits for Business Owners
“Make informed decisions about your company's operations, investments, and future plans (including tax planning).”
1. Cost-Effective: Internal Financial Statements tend to be less expensive compared to other types of financial statement engagements. This makes them an attractive option for small businesses with limited financial resources.
2. Internal Decision Making: Internal Financial Statements are primarily intended for internal use. They provide business owners with a snapshot of their financial position, allowing them to make informed decisions about the company's operations, investments, and future plans (including tax planning).
3. Efficient Reporting: Internal Financial Statements streamline the process of compiling financial information. Accountants, Controllers, and Bookkeepers collect and organize the data, presenting it in a clear format without the need for extensive adjustments or verification. This efficiency saves time and effort for business owners.
Compilation Engagements: Benefits for Business Owners
“Improve communication with stakeholders, such as lenders, investors, or regulatory authorities.”
1. Enhanced Credibility: While compilations do not provide assurance, they offer a higher level of credibility compared to Internal Financial Statements. External parties, such as lenders or potential investors, may find compilation financial statements more reliable when assessing the company's financial health, although it's important to note that they do not provide the same level of credibility as reviewed or audited financial statements.
2. External Communication: Compilation financial statements can be shared with external parties to provide basic financial information. They help business owners establish transparency and facilitate communication with stakeholders, such as lenders, investors, or regulatory authorities.
3. Compliance with Reporting Standards: Compilations ensure that financial statements are prepared in accordance with generally accepted accounting principles (GAAP) or another applicable financial reporting framework. This compliance helps business owners adhere to regulatory requirements and industry standards.
Why were Compilation Engagements created to replace Notice-To-Reader Engagements?
“Adjustments and modifications to financial information provided by the client helps to enhance the reliability and credibility of the financial statements for externals users.”
Compilation engagements were created by CPA Canada (and other accounting standards-setting bodies) to provide a framework for accountants to assist clients in preparing financial statements. The introduction of compilation engagements was driven by several factors:
1. Increasing Demand: There was a growing need for accountants to assist clients in preparing financial statements that conform to generally accepted accounting principles (GAAP) and other applicable financial reporting frameworks. Compilation engagements were designed to address this demand and provide a level of assurance in the financial information presented.
2. Clarity and Consistency: By establishing specific guidance for compilation engagements, CPA Canada aimed to provide clear and consistent standards for accountants to follow when assisting clients in preparing financial statements. This helped ensure that the financial information presented was organized, free from obvious errors, and in compliance with relevant reporting standards.
3. Enhanced Credibility: Compilation engagements offer a higher level of credibility compared to notice-to-reader (NTR) engagements. While compilations do not provide assurance, they involve limited adjustments and modifications to the financial information provided by the client, helping to enhance the reliability and credibility of the financial statements for external users.
4. Regulatory Requirements: Regulatory bodies, such as lenders and securities commissions, often require businesses to provide financial statements that have been prepared in accordance with recognized accounting principles. Compilation engagements help businesses meet these regulatory requirements by providing financial statements that conform to applicable reporting frameworks.
By contrast, Notice-To Reader engagements are:
not required to include any accounting knowledge or expertise to present the financial information in the form of financial statements, ensuring they are free from obvious errors and inconsistencies.
not required to include limited adjustments or modifications to the financial information provided by the client, therefore not required to conform to generally accepted accounting principles (GAAP) or another applicable financial reporting framework.
not required to include any comprehensive documentation, such as additional explanatory notes and disclosures to provide further clarity on the financial statements.
not appropriate for external use, and should not be used to provide financial information to external parties.
Which Best Serves Your Business Needs?
It's important for business owners to consult with a qualified accountant or financial professional to determine the most appropriate engagements to meet their specific needs. By understanding the benefits of each type, business owners can make informed decisions about the level of service and reporting that best serves their business objectives.