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Does the new standard affect your business?

Will the Compilation report, informally known as Notice to Reader (“NTR”), be used by a third party, such as lenders who will rely on the information to provide financing? If so, please continue reading.

Examples of third party include, but not limited to:

  • bankers
  • suppliers or customers
  • purchasers of the business
  • parties to a dispute or litigation, such as matrimonial cases
  • funders for a not-for profit organization

The third party may be in a position to request and obtain further information from the entity through:

  • law or regulation
  • contract
  • negotiation
  • other arrangements

When does the new standard come into effect?

CSRS 4200, Compilation Engagements, is effective for compiled financial information for periods ending on or after December 14, 2021.

Why was a change needed?

The previous standards were outdated and have not been updated for over 30 years. The original intention of NTR was for internal use and management discussion. However, with the passage of time, their purpose and scoped evolved to where external parties relied on the financial information for decision making purposes. This has created increasing misunderstanding among users of the financial information about the work of practitioners, and the lack of general accounting framework has made it difficult to determine how the compiled information was prepared.

In summary, under the old standard, financial statements could vastly differ from practitioner to practitioner using identical information and users would be unaware of the fact.

What is changing?

The new standard provides more transparency where the engagement is clearly defined which include the following.

  • It requires a note describing the basis of accounting applied. This allows users to easily compare financial information.
  • It will clearly outline the responsibility of the practitioner and management along with the limitations of the compiled financial information.
  • Lastly, it outlines for the practitioners the minimum level of documentation and effort required to compile the information in efforts to promote consistency amongst practitioners

A compilation engagement does not provide any form of assurance over the compiled financial information.

What is the Basis of Accounting?

The basis of accounting is a note describing how the data is compiled. Examples of bases of accounting commonly encountered in compilation engagements are:

  • a cash basis of accounting
  • a cash basis of accounting with selected accruals and accounting estimates
  • a basis of accounting prescribed by a contract or other form of agreement established by a creditor or a regulator, which could be one area of discussion you could have with management

The description of the basis of accounting will depend on the circumstances of the engagement. Although we may assist you with determining the basis of accounting, the basis of accounting applied to the compiled financial information is the responsibility of management.

What additional requirements are needed under the new standard?

  • Management will be asked to acknowledge that a third party is in a position to request and obtain additional information or has agreed with management on the basis of accounting
  • Management and the practitioner will agree on the terms of the engagement
  • Management will be asked to acknowledge that they are responsible for the selection of the basis of accounting
  • Management will be asked to take responsibility for the final version of the financial statements
  • Practitioner will obtain knowledge about the entity’s business operations, accounting systems and accounting records
  • Practitioner will discuss significant judgements with management

What does the new compilation engagement report look like?

Compilation Engagement Report

To Management of ABC Company,

On the basis of information provided by management, we have compiled the balance sheet of ABC 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 [and, if applicable, other explanatory 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.

[Practitioner’s signature]

[Date of the report]

[Practitioner’s address]

Need more clarity?

Please do not hesitate to contact DDL & Co. with any questions or concerns you may have.