Preparing financial statements properly and efficiently is important for accountants and their clients as they directly affect a company’s future planning when it comes to vital decision-making for their business.
There have been recent amendments made to one of the three types of financial engagements. Previously called “Notice to Reader,” the most common financial statement for small businesses for the past 20+ years, has been replaced with the “Compilation Engagement Report.” What impact does this change have on tax work and small businesses alike? Let us first review the types of financial engagements.
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3 Types of Financial Engagement
To add systematic credibility to financial statements, Charters Professional Accountants (CPAs), work with three varieties of reports: audit engagement, review engagement, and notice to reader (compilation engagement).
1. Audit Engagement
Out of the three types of reporting, audit engagements are the most detailed process for providing the highest level of assurance. Every detail is reported in alignment with modern accounting standards. This type of engagement is mandatory for any publicly traded company, is highly intensive, and is the most expensive route for a business.
2. Review Engagement
While less extensive than audits, review engagements provide a detailed financial review that assures nothing is significantly out of line with current accounting standards. This type of engagement is typically required by financial institutions and falls between audits and compilation in terms of price point.
3. Notice to Reader (Compilation Engagement)
Notice to Reader is a simple set of financial statements. It’s ideal for small business owners and management, as it’s not required to follow specific accounting standards like the former two. Notice to Reader is by far the least costly option for businesses as it does not require the same level of extensive detail to be approved.
The New “Notice to Reader”
Out with the old, in with the new! The above Notice to Reader has been modified and is now called the Compilation Engagement report. With this change in name, comes updates to what needs to be disclosed for the approval of financial statements and for determining the basis of accounting.
As previously discussed, this type of statement does not follow specific accounting standards, therefore, is often completed with a wide range of methods. This lack of cohesion made it difficult to assess the level of financial health when comparing different companies that used alternate methods of assessment.
With these updated regulations comes a more specific structure to more closely adhere to the basis of accounting. This adds further clarity and readability to help financial statement users understand how the statements were prepared. The two most common methods of small-business accounting are cash-basis and accrual-basis. The former carries greater simplicity and matches cash flow, while the latter more accurately reflects the business’s activity. Moving forward, the basis of accounting used will be specified on financial reports.
For all financial statements with periods ending after December 14th, 2021, CPA firms and small-business owners in Vancouver will need to adhere to these updated standards.
How Will This Change Affect Business Owners?
This change in accounting results in a change for clients. Here are some of the changes you can expect moving forward with your accounting firms in Vancouver:
1. More In-depth Conversations With Your Accountant
Your accountant will need to obtain more information regarding your finances to be in accordance with the new standard of engagement. You can expect questions like (but not limited to):
- Who are the intended users of the financial statements? (Management, banks, investors, etc.)
- Which method of basis accounting would you like to use? (cash, accrual, etc.)
- Do you consent to third-party users requesting and obtaining further information if needed?
2. Engagement Letter
These are used to outline the scope of work to be provided by the accountant, which includes compensation and a timeline for completion. Moving forward, these letters may look different than the previous ones sent by your accountant, as they will include the new updated standards.
3. Increase in Accounting Fees
It’s possible that this change may lead to a higher bill from your accountant, due to an increase in the level of detail, work, and documentation needed.
4. Management Has Final Say
With the updated changes, accountants will require management to sign off on the final tax forms. This is to verify the details disclosed, such as the basis of accounting chosen and grants financial responsibility to management.
As the most trusted CPA firm in Vancouver, Genesa has already begun its adjustment period to accommodate these new standards of Compilation Engagement. You can trust that with their years of experience and expertise, Genesa puts the best interest of you and your business at the forefront.