SSARS 23 Changes Preparation and Compilation Standards

SSARS 23 amends SSARS 21 to encompass prospective information

The Accounting and Review Services Committee (ARSC) issued SSARS 23 in October 2016. Parts of the standard (e.g., that applying to supplementary information language in compilation and review reports) were effective immediately, while other parts (mainly regarding preparation and compilation of prospective information) are required as of May 1, 2017. This post tells you how SSARS 23 affects Preparation (AR-C 70) and Compilation (AR-C 80) engagements.

SSARS 23 changes preparation and compilation standards

You’ll recall that ARSC issued SSARS 21 back in October 2014. It was effective for years ending December 31, 2015. A clarified version of the compilation and review standards is included in SSARS 21. SSARS 21 also provides new guidance for the preparation of financial statements. The Standard did not address prospective financial statements. Why? The AICPA was working on clarifying the Attestation Standards (SSAE 18), the place where compiled prospective financial statement guidance was (previously) housed. With the issuance of SSARS 23, the AICPA moved this guidance from the Attestation Standards to SSARS.

The primary impact of SSARS 23 is to provide standards for the preparation and compilation of prospective financial information.

How Preparation of Financial Statements (AR-C 70) Changed

The Preparation Standard (AR-C 70) now includes guidance regarding prospective financial information. Since significant assumptions are essential to understanding prospective information, SSARS 23 requires their inclusion. The accountant should not prepare prospective financial information without including the disclosure of the summary of significant assumptions. Also, a financial projection should not be created unless it includes:

  • an identification of the hypothetical assumptions, or 
  • a description of the limitations on the usefulness of the presentation

SSARS 23 deletes the word “accordingly” from the AR-C 70 disclaimer; the change is shown below:

How Compilation Engagements (AR-C 80) Changed

AR-C 80, Compilation Engagements, now applies to compilations of prospective financial information (new with SSARS 23), pro forma financial information (see SSARS 22), and other historical information (as provided for in SSARS 21). 

SSARS 23 also clarifies that accountants must disclose known departures from the applicable financial reporting framework in the accountant’s compilation report. Prior to SSARS 23, accountants could disclose such departures in the notes without doing so in the compilation report.

Prospective Financial Information Guidance

Both AR-C 70 and AR-C 80 were amended to clarify that the AICPA Guide Prospective Financial Information provides comprehensive guidance regarding prospective financial information, including suitable criteria for the preparation and presentation of such information.

Clarification Projects Complete

The AICPA has clarified the audit standards (AU-C), the attestation standards (AT-C), and the SSARS (AR-C).

Short SSARS 23 Video

If you desire additional information about SSARS 23, check out my video:

SSARS 21 Book

If you need SSARS 21 guidance, see my book on Amazon.

Financial Statement References (at the Bottom of the Page)

What financial statement page references are required?

What wording is required at the bottom of financial statement pages? Is there a difference in the references in audited statements and those in compilations or reviews? What wording should be placed at the bottom of supplementary pages? Below I’ll answer these questions.

financial statement references

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Audited Financial Statements and Supplementary Information

First, let’s look at financial statement references in audit reports.

While generally accepted accounting principles do not require financial page references to the notes, it is a common practice to do so. Here are examples:

  • See notes to the financial statements.
  • The accompanying notes are an integral part of these financial statements.
  • See accompanying notes.

Accountants can also–though not required–reference specific disclosures on a financial statement page. For example, See Note 6 (next to the Inventory line on a balance sheet). It is my preference to use general references such as See accompanying notes.

Audit standards do not require financial statement page references to the audit opinion.

Supplementary pages attached to audited financial statements should not include a reference to the notes or the opinion.

Preparation, Compilation, and Review Engagements

Now, let’s discuss references in preparation, compilation, and review engagements. 

Compilation and Review Engagements

SSARS 21 does not require a reference (on financial statement pages) to the compilation or review report; however, it is permissible to do so. What do I do? I do not refer to the accountant’s report. I just put See accompanying notes at the bottom of each financial statement page.

You are not required to include a reference to the accountant’s report on the supplementary information pages. SSARS 21 does suggest that such references be included in case the financial statements or supplementary information are separated from the compilation or review report. Examples include:

  • See Accountant’s Compilation Report.
  • See Independent Accountant’s Review Report.

What do I do? I include a reference to the accountant’s report on each supplementary page.

Preparation of Financial Statement Engagements

SSARS 21 provides an option (to compilations) called the preparation of financial statements (AR-C 70), a nonattest service. AR-C 70 requires that the accountant either state on each page that “no assurance is provided” or provide a disclaimer which precedes the financial statements. AR-C 70 does not require that the financial statement pages refer to the disclaimer (if provided), but it is permissible to do so. Such a reference can read See Accountant’s Disclaimer.

If your AR-C 70 work product has supplementary information, consider including this same reference (See Accountant’s Disclaimer) on the supplementary pages.

Selected Disclosures in Preparation and Compilation Engagements

You can include one or two notes rather than all

Do you ever want to include just one disclosure in your financial statements without providing all the notes? Selected disclosures can be included in certain situations.

Do professional standards allow this? Yes. But only if you use AR-C 70 (the preparation guidance) or AR-C 80 (the compilation guidance).

selected disclosures

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Selected Disclosures in Compilations

As you probably already know, a CPA can issue compiled financial statements without disclosures as long as the compilation report discloses the omission. An example follows.

Management has elected to omit substantially all of the disclosures required by accounting principles generally accepted in the United States of America. If the omitted disclosures were included in the financial statements, they might influence the user’s conclusions about the Company’s financial position, results of operations and cash flows. Accordingly, the financial statements are not designed for those who are not informed about such matters.

If the financial statements include one or two notes, then the financial statements still omit substantially all of the disclosures, so the accountant (still) uses the wording in the preceding paragraph.

Sample Selected Disclosure

An example of a selected disclosure follows:

ABC Company

Selected Information –

Substantially All Disclosures Required by Accounting Principles

Generally Accepted in the United States of America are Not Included

December 31, 2017

Note 1. Long-Term Debt.

ABC Company borrowed $450,000 on July 15, 2017, from XYZ Bank. The rate of interest is 5%, and the loan is collateralized by equipment of the Company. Payments are $10,000 per month plus interest for two years with a balloon payment for the balance of the amount owed.

Preparation Engagements

AR-C 70 says:

The accountant may prepare financial statements that include disclosures about only a few matters in the notes to the financial statements. Such disclosures may be labeled “Selected Information—Substantially All Disclosures Required by [the applicable financial reporting framework] Are Not Included.”

So, the selected-disclosure option is available in a Preparation of Financial Statements engagement. Include the required disclaimer at the bottom of the page such as “No assurance is provided on these financial statements.” 

Other Considerations

The accountant should consider whether management’s election to include only selected disclosures causes the financial statements to be misleading (for example, by omitting the disclosures that contain negative information). If so, the accountant should request that the financial statements be revised to include the omitted disclosures.

The selected-disclosure option is not available for financial statements subject to a review engagement. Such financial statements must be full disclosure.

What About You?

Do you ever use this selected-disclosure option? Any reservations about doing so?

The Most Efficient Way to Issue Financial Statements

SSARS 21 Tax Basis Financial Statements

What is the most efficient way to issue financial statements?

Tax basis financial statements without disclosure, using the Preparation of Financial Statements option (Section 70 of SSARS 21).

efficient way to issue financial statements

This answer assumes you are preparing financial statements in conjunction with a tax return and that those financial statements are issued separately—apart from the tax return—to your client.

Bookkeeping or Preparation of Financial Statements: Being Clear About the Intended Service

When performing bookkeeping, communicate whether financial statements are a part of the engagement

Many accountants have asked, “When am I subject to SSARS 21?” This question often arises when a CPA provides bookkeeping services using a cloud-based accounting package such as Quickbooks. Bookkeeping or preparation of financial statements–which is it? Why the confusion? Well, once the bookkeeping is complete, the CPA or the client can print the financial statements–and we know that SSARS 21 is triggered when we are engaged to prepare financial statements.

Bookkeeping or Preparation of Financial Statements

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Bookkeeping or Preparation of Financial Statements

Suppose you enter the client’s monthly transactions in QuickBooks, and you reconcile the bank statements. Now you or the client can print the financial statements. Have you unintentionally wandered into a requirement to follow SSARS 21? Let me answer this question with another question.

Has your client engaged you to prepare financial statements? If yes, then SSARS 21 is in play. If not, then compliance is not required. The AICPA says, “the accountant has only been engaged to prepare financial statements when the client has ‘hired’ the accountant to do so.”

Using QuickBooks to provide bookkeeping services does not–necessarily–mean you have been engaged to prepare financial statements. But how can you be clear? When in doubt spell it out–in an engagement letter. Use an engagement letter for all client services–even nonattest work such as bookkeeping. When you provide bookkeeping services, and the customer has not “hired” you to prepare financial statements, make it clear that you are not engaged to provide financial statements. The AICPA’s 2016/17 Audit Risk Alert–regarding Preparation services–advises that you might include this sentence when you are not engaged to prepare financial statements: This engagement does not contemplate us preparing financial statements.

More Information About Preparation Services

For more a fuller explanation regarding whether the use of QuickBooks triggers SSARS 21, click here.

For a deep dive into Preparation services, see my book on Amazon: Preparation of Financial Statements and Compilation Engagements.

Episode 7 – A Comparison of Preparation and Compilation Engagements under SSARS 21

You’ve been wondering how the Preparation of Financial Statements option in SSARS 21 compares with the Compilation Engagement option in the same standard. Maybe you’ve also been wondering, “Which is the best to use?” Here’s a brief summary of how the two standards compare as well as information about how to choose between the two.

Episode 4 – Questions and Answers for the New SSARS 21 Preparation of Financial Statements Standard

Here are answers to your most pressing AR-C 70 questions

CPAs have had many questions about the use of AR-70, Preparation of Financial Statements. Those questions include:

When is the standard applicable?

What work papers must I retain?

Is an engagement letter required?

What should the preparation report look like?

Should I include a disclaimer page?

How do I communicate departures from the applicable basis of accounting?

Can I add supplementary information?

Can AR-C 70 be used in reference to prescribed forms?

Today we answer your most pressing questions about using the SSARS 21 preparation standard.

SSARS 21 and Printing Financial Statements from Quickbooks

Is AR-C 70, Preparation of Financial Statements, triggered by printing financial statements from Quickbooks?

Many CPAs are asking if printing financial statements from Quickbooks triggers a requirement to follow SSARS 21. Hear the answer in this video. Also, we’ll take a look at whether you as a CPA can issue monthly financial statements in accordance with SSARS 21 and then perform an audit for the same client at the end of the year.

Check out my new SSARS 21 book on Amazon.com by clicking here.