I hope you will join us in Atlanta, Georgia on December 12,2014 for the Georgia Society of CPAs’ annual governmental conference.

I will be speaking about the new COSO framework and how to apply it to local governments. In addition, we will take a look at how the new framework impacts your fraud prevention controls.

See you there.

Date:December 12, 2014
Event:Georgia Society of CPAs' Governmental Conference
Sponsor: Georgia Society of CPAs
Location:Atlanta, Georgia
Public:Public
Registration:Click here to register.

Compilation Report Sample – SSARS 21

Are you looking for a compilation report sample? Here it is.

compilation report sample

The compilation report is shortened to differentiate it from audit and review (assurance) reports. The compilation report will not include paragraph headers; ARSC omitted the headers in order to differentiate compilation reports from assurance service reports (e.g., audits, reviews) that do include headers. Though not required, you can add a title such as “Accountant’s Compilation Report.”

Compilation Report Sample

Management is responsible for the accompanying financial statements of XYZ Company, which comprise the balance sheets as of December 31, 20X2 and 20X1 and the related statements of income, changes in stockholder’s equity, and cash flows for the years then ended, and the related notes to the financial statements in accordance with accounting principles generally accepted in the United States of America. I (We) have performed a compilation engagement in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA. I (we) did not audit or review the financial statements nor was (were) I (we) required to perform any procedures to verify the accuracy or completeness of the information provided by management. Accordingly, I (we) do not express an opinion, a conclusion, nor provide any form of assurance on these financial statements.

[Signature of accounting firm or accountant, as appropriate]
[Accountant’s city and state]
[Date]

Accountants add additional paragraphs to the compilation report when the following exists:

  • When financial statements are prepared in accordance with a Special Purpose Framework/OCBOA
  • When disclosures are omitted
  • When the accountant is not independent
  • When there are known departures from the applicable financial reporting framework
  • When supplementary information accompanies the financial statements 

Supplementary Information

SSARS 23 amended SSARS 21 and has changed the language regarding supplementary information. Click here to see the new supplementary language.

SSARS 21 Book

For information about my SSARS 21 book, click here.

SSARS 21 – A Summary of Preparation Services and Compilation Engagements

An overview of preparation of financial statements and compilation engagements

Today I listened to the AICPA SSARS 21 webcast. The speakers were Michael Brand (the chair of ARSC) and Mike Glynn (senior technical manager). They did an excellent job of presenting the SSARS 21 information.

Here is my summary of what I heard along with a few personal observations.

SSARS 21

Effective Date

SSARS 21 can be early implemented. The effective date is for financial statements ending on or after December 15, 2015. Also, interim (e.g., monthly) financial statements for the year 2016 will be performed in accordance with SSARS 21.

SSARS 21 – A Summary of Preparation Services and Compilation Engagements

So you are required to use SSARS 21 for your financial statements with periods ending December 31, 2015 and for all periods thereafter. You can apply SSARS 21 today (SSARS 21 was issued on October 23, 2014, and can be early implemented).

The effective date is based on the financial statement period-ends (e.g., 12/31/2015) and not the report date (e.g., January 20, 2016).

You do have to implement the standard in its entirety.

For now, you can apply the standard on an engagement-by-engagement basis; in other words, you can use SSARS 19 for ABC client and SSARS 21 for XYZ client. (It’s probably wiser to adopt SSARS 21 firm-wide, for all clients–to avoid confusion.) Of course, when the effective date of SSARS 21 occurs (December 15, 2015), you can no longer use SSARS 19.

Prepare and Present

The definition of “prepare and present”–the old trigger for issuing a compilation report–has blurred with the advent of cloud computing. For years, questions such as following have been asked:

  1. “Did you [the CPA] push the button” to create the financial statements?
  2. Am I (as a CPA) required to issue a compilation report?

SSARS 21 clarifies the trigger: the decision to issue a compilation report is based solely upon whether the CPA is engaged to do soand not upon whether the accountant prepares and presents (submits) the financial statements to the client.

Preparation of Financial Statements (Section 70)

Preparation of financial statements is a nonattest, non-assurance service. A signed engagement letter is required; the letter should be signed by management and the accountant. Evergreen letters (those that have no ending) are discouraged (not by the standard, but by common sense). The Peer Review Board recently issued an exposure draft to exclude preparation services from peer review; the final determination as to whether preparation services will be exempt from peer review has not been made at this time (October 23, 2014).

Section 70 applies whenever the accountant is engaged to prepare financial statements (and is not engaged to issue a compilation, review or audit report).

You are not required to be independent to prepare financial statements (since preparation is considered a nonattest service).

The accountant can omit disclosures if the client does not need them.

When preparing financial statements in accordance with a special purpose framework/OCBOA, the accountant is required to include a description of the financial reporting framework on the face of the financial statements or in a note to the financial statements.

Section 70 requires the use of a legend on each page of the financial statements stating no assurance is being provided. If management refuses or cannot include the legend, the accountant could issue a disclaimer report, perform a compilation engagement, or resign.

An example of a disclaimer follows:

The accompanying financial statements of XYZ Company as of and for the year ended December 31, 20XX, were not subjected to an audit, review, or compilation engagement by me (us) and, accordingly, I (we) do not express an opinion, a conclusion, nor provide any assurance on them.

[Signature of accounting firm or accountant, as appropriate]
[Accountant’s city and state]
[Date]

AICPA Code of Conduct Considerations

The AICPA Code of Conduct prohibits the CPA from being associated with financial statements that are misleadingSo if a client desires for the CPA to issue financial statements that are clearly misleading, then the CPA should not do so–even under the Preparation standard.

image

If the CPA prepares the financial statements for an audit or a review client, then Interpretation 101-3 (Independence) applies. The CPA needs to determine that the client has sufficient skill, knowledge, and experience (SKE) to assume the responsibility for the statements; if the client does not possess sufficient SKE, the CPA is not independent (and can’t perform an audit or a review). Independence is not required to issue a compilation report, but the lack on independence must be noted in the compilation report.

Compilation Engagements (Section 80)

The compilation report is shortened to differentiate it from audit and review (assurance) reports. The compilation report will not include paragraph headers; ARSC omitted the headers to distinguish compilation reports from assurance service reports (e.g., audits, reviews) that do include headers.

Section 80 requires an engagement letter signed by both the accountant and management/those charged with governance.

Section 80 can be applied to financial statements with or without disclosures.

A sample compilation report follows:

Management is responsible for the accompanying financial statements of XYZ Company, which comprise the balance sheets as of December 31, 20X2 and 20X1 and the related statements of income, changes in stockholder’s equity, and cash flows for the years then ended, and the related notes to the financial statements in accordance with accounting principles generally accepted in the United States of America. I (We) have performed a compilation engagement in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA. I (we) did not audit or review the financial statements nor was (were) I (we) required to perform any procedures to verify the accuracy or completeness of the information provided by management. Accordingly, I (we) do not express an opinion, a conclusion, nor provide any form of assurance on these financial statements.

[Signature of accounting firm or accountant, as appropriate]
[Accountant’s city and state]
[Date]

Accountants will still add additional paragraphs to the compilation report when applicable. Examples follow:

  • When financial statements are prepared in accordance with a Special Purpose Framework/OCBOA
  • Disclosures omitted
  • Lack of independence
  • Known Departure From the Applicable Financial Reporting Framework
  • Supplementary Information Accompanies Financial Statements and the Accountant’s Compilation Report Thereon

Key Differences in Compilation and Preparation Services

 Compilation ServicesPreparation Services
When does the standard apply?Engaged to compileEngaged to prepare
Is an engagement letter requiredYesYes
Is the accountant required to determine if he or she is independent of the client?YesNo
If the accountant is not independent, is that fact required to be disclosed?YesN/A
Does the engagement require a report?YesNo - legend required that no assurance is provided
May the financial statements go to users outside of management?YesYes
May the financial statements omit notes?YesYes

For a more expansive summary, click here.

Questions

If I assist a client with entries on their computer system (bookkeeping assistance), am I required to issue a compilation report?

No. Bookkeeping assistance (a nonattest service) does not fall under the SSARS guidance.

Can I issue management-use-only financial statements under SSARS 8?

SSARS 8 no longer applies (once SSARS 21 is implemented). SSARS 21 provides a “Preparation” option which is similar to SSARS 8. The “Preparation” option allows you to provide financial statements to clients without a compilation report.

Can the accountant use one engagement letter to cover preparation services and compilation services?

Yes. If the accountant, for example, provides monthly financial statements for eleven months (as a preparation service) and compiled statements for the year-end, then one engagement letter can be used to cover both services. Alternatively, two separate engagement letters can be used, one for the preparation service and one for the compilation service.

 Update to Post

My SSARS 21 book is available on Amazon.com. You can see the book by clicking here: Preparation of Financial Statements & Compilation Engagements.

For a SSARS 21 Preparation Services Questions and Answers post, click here.

The above pictures are courtesy of DollarPhoto.com.

Using Two Capitalization Thresholds for Greater Efficiency

Should governments use two different capitalization thresholds, one for infrastructure and another for all other capital assets?

Asphalt crew

Courtesy of iStockphoto.com

It is common for governments to use a single capitalization threshold of $5,000 for all capital asset purchases. This threshold encompasses, for example, purchases of equipment and road construction. But does it make sense to capitalize road work costing $22,000 or $34,000 or $38,000? Most small road, bridge, or other infrastructure expenses are better treated as non-capitalizable expenses.

So doesn’t it make sense to create a second capitalization threshold for infrastructure expenses? I think a minimum of $25,000 would work for smaller governments and a much larger amount–say $100,000–would be appropriate for mid-sized governments. Larger governments (such as states) could use an even higher number.

The second higher threshold will yield greater efficiency in recording capital assets. And since infrastructure is less likely to be stolen, it makes sense to implement a second capitalization amount. (Moveable capital assets require greater accountability [since they can be stolen]–so the lower threshold for these assets is advisable.)

Keep in mind the capital asset threshold is an accounting policy. Governmental accounting standards provide no required dollar amounts, so this is a judgment call. If you make a change, consider whether your governing body should approve it.

GFOA Capitalization Guidelines

The Government Finance Officers Association (GFOA) recommends that state and local governments consider the following guidelines in establishing capitalization thresholds:

  • Potentially capitalizable items should only be capitalized only if they have an estimated useful life of at least two years following the date of acquisition;
  • Capitalization thresholds are best applied to individual items rather than to groups of similar items (e.g., desks and tables), unless the effect of doing so would be to eliminate a significant portion of total capital assets (e.g., books of a library district);
  • In no case should a government establish a capitalization threshold of less than $5,000 for any individual item;
  • In establishing capitalization thresholds, governments that are recipients of federal awards should be aware of federal requirements that prevent the use of capitalization thresholds in excess of certain specified maximum amounts for purposes of federal reimbursement; and
  • Governments should exercise control over potentially capitalizable items that fall under the operative capitalization threshold.

Trick or Treat? GASB 68 — The New Pension Standard

GASB 68 (Accounting and Financial Reporting for Pensions) has eaten GASB 27–RIP.

The magic date when the Great Pumpkin–the net pension liability–will rise out of the footnotes and land on the statement of net position is quickly approaching (year-ends of June 30, 2015). Instead of saying, “It’s the Great Pumpkin Charlie Brown!” we’ll be saying, “It’s the Great Debt Charlie Brown!” ARRG.

Courtesy of iStockphoto.com

Courtesy of iStockphoto.com

GASB 27 was a kind spook, allowing governments to bury pension liabilities in the notes. As long as public entities paid the “annually required contribution–ARC,” no liabilities were recognized on the statement of net position. But this is all changing. We have a new beast: the net pension liability–NPL, which will be recognized on the statement of net position. And, of course, as liabilities increase, equities (net positions) decrease. One saving grace: modified accrual accounting; governmental funds will not record the NPL, but the pension liability will appear on full accrual statements (i.e., government-wide statements and enterprise funds).

Under GASB 27, the ARC was treated as the funding amount. No longer. GASB 68 divorces funding from the pension expense.

So what is net pension liability?

It is the portion of the present value of projected benefit payments to be provided through the pension plan to current active and inactive employees that is attributed to those employees’ past periods of service, less the amount of the pension plan’s fiduciary net position.

In simple terms, it’s the computed debt less assets set aside for future payments.

What journal entry will be made to record the NPL?

Initial Entry to Record Pension Liability

AccountDr.Cr.
Net Position (Equity)XXXX
Net Pension LiabilityXXXX

Additionally, if the government previously recorded a net pension obligation (the result of the ARC not being paid), then this liability will also be removed (debited) as you record the NPL.

More Volatility

Governments will experience more volatility in their pension expenses since smoothing techniques are no longer used. Keep in mind that funding can (and I expect will be) fairly level. The pension expense is not intended to establish funding amounts. As a consequence, cash paid to fund the pension plan may remain fairly stable while the pension expense swings widely. Changes in the market value of pension plan investments will be felt more abruptly as they impact pension expense.

Changes Included in Current Pension Expense

Statement 68 requires that most changes in the net pension liability be included in pension expense in the period of the change. For example, changes in the total pension liability resulting from current-period service cost, interest on the total pension liability, and changes of benefit terms are required to be included in pension expense immediately. Projected earnings on the pension plan’s investments also are required to be included in the determination of pension expense immediately.

Changes Included in Current and Future Pension Expense

The effects of certain other changes in the net pension liability are required to be included in pension expense over the current and future periods. Changes in the net pension liability not included in pension expense are required to be reported as deferred outflows of resources or deferred inflows of resources related to pensions.

The effects on the total pension liability of (1) changes of economic and demographic assumptions or of other inputs and (2) differences between expected and actual experience are required to be included in pension expense in a systematic and rational manner over a closed period equal to the average of the expected remaining service lives of all employees that are provided with benefits through the pension plan (active employees and inactive employees), beginning with the current period.

The effect on the net pension liability of differences between the projected earnings on pension plan investments and actual experience with regard to those earnings is required to be included in pension expense in a systematic and rational manner over a closed period of five years, beginning with the current period.

Trick or Treat

When Charlie Brown would go Trick or Treating, he’d say, “I got a rock.” Governments, after knocking on the GASB 68 door, may feel the same way. Those entities that have not properly funded their pension plans will see sizable hits to their net position. Worse yet, a poorly funded plan is required to use a lower discount rate which increases the net pension liability.

If your government has debt covenants, it would be wise to consider the potential effects of these changes now.

Peer Reviews to Exclude “Preparation Services”

The Accounting and Review Services Committee (ARSC) is still working on the new (proposed at this point) compilation and preparation services standards. I have been asked whether CPA firms will be subject to peer reviews if they only prepare financial statements–under the soon-to-be-issued new standards–and don’t issue compilation reports.

It appears the answer to that question will probably be no (exposure draft now pending–see below).

I just received the AICPA August Peer Review Update and it contains the following:

Peer Review Exposure Draft on new SSARS Services

The Peer Review Board has issued an Exposure Draft that proposes the exclusion of preparation services performed under SSARS from the scope of peer reviews for enrolled firms. Additionally, firms would not be required to enroll in the peer review program if their highest level of service is preparation services performed under SSARS. Paragraph .06 of the Standards currently indicates “an accounting and auditing practice for the purposes of these Standards is defined as all engagements performed under Statements on Auditing Standards (SASs); Statements on Standards for Accounting and Review Services (SSARS); Statements on Standards for Attestation Engagements (SSAEs); Government Auditing Standards (the Yellow Book) issued by the U.S. Government Accountability Office; and engagements performed under Public Company Accounting Oversight Board (PCAOB) standards (see interpretations). Engagements covered in the scope of the program are those included in the firm’s accounting and auditing practice that are not subject to PCAOB permanent inspection.”

My Comments

What does this mean?

If you are a small firm and only prepare financial statements (under the proposed standards), you will not be required to enroll in a peer review program. One possible exception–your state board may require it (but I doubt this will happen). If you issue compilation reports, you will be subject to the peer review standards. (Under the proposed ARSC standards, firms will be able to prepare and issue financial statements without a compilation report; preparing financial statements is a non-attest service.)

When will the new preparation services standard be issued?

I don’t know for sure, but ARSC will meet in November 2014; I expect issuance at that time.

When will the peer review exposure draft be considered?

The Board will consider the proposed changes and the comments received during open session on January 28, 2015. The proposed changes, if approved, will be effective upon approval.