Notice to Reader engagements are by far the most common amongst owner-managed businesses. Typically, if there are no external requirements for our clients’ financial statements to be reviewed or audited, clients opt for a Notice to Reader (in an attempt to be hip, we refer to these as “NTRs”). Depending on the size of lending facilities, banks are often satisfied with NTR financial statements to make lending decisions.
Interestingly, despite the prevalence of these statements on the market, there has always been a disconnect between what business owners and users thought accountants did to issue NTRs, versus what the standards required from us. Also interestingly, the existing NTR standards have been in effect since 1987, with virtually no revisions.
The standard-setting bodies have been aware of this expectation gap for a number of years. After much anticipation, the new standards governing Notice to Reader engagements are coming into effect for fiscal years ending on or after December 14, 2021, with early adoption permitted. To simplify the transition process, we will be adopting these new standards for all year ends that we begin working on from January 1, 2022 onward.
These new rules will impact nearly every client we have, and so we thought it would be worthwhile to provide an overview of the changes and speak to how they will impact the year end process this upcoming year.
What Did the Old Standards Require of Us?
In short, not very much. We were allowed to take management-prepared numbers, organize them into a set of financial statements, and would only be required to ask questions if information appeared to be false or misleading. Not sure if the irony is obvious here, but if there was no requirement to ask too many questions, how were we ever supposed to figure out what could be false or misleading?
We should also note that although the requirements in the standards were not overly rigorous, our firm’s approach has always been value-centric. Our clients expect us to get a level of understanding of their numbers and look to us for advice. To deliver, we have always done far more than what the standards required. Generally, we found that firms’ interpretations of how much work is enough has always varied widely, which is why working with different accounting firms would often yield a different set of experiences.
What Are the Rules Now?
When the language of the new standards was released, we felt that it now more closely reflected what we have been doing for years. That being said, there are a number of considerations (some of which are new), which now require documentation in our files.
Terminology
First and foremost, the term “Notice to Reader Engagement” will no longer be used. The technically correct term is now “Compilation Engagement”.
Understanding of the Users
In the past, when being engaged to issue a Notice to Reader Report, we were never required to consider who would be using the statements and for what purpose. The new standards now require that we understand and document who the financial statements will be shared with.
Furthermore, we are required to understand whether the users of the statements are in a position to request additional clarifying information from management.
Defining the “Basis of Accounting”
When financial statements are audited or reviewed, the report we issue is in reference to a set of generally accepted accounting principals (known as “GAAP”). In Canada, two sets of standards are widely used – ASPE (Accounting Standards for Private Enterprises), which is used for private companies, and IFRS (International Financial Reporting Standards), used by publicly-listed entities.
Previously, with Notice to Reader engagements, there was no mention of what basis of accounting was used. Since we were not asked to issue an opinion or conclusion on the figures, it was not required to stipulate how the financial results were determined or measured. This meant that two businesses in exactly the same industry, having exactly the same operating results, could have shown different profitability (if one used the cash basis of accounting, and the other used the accrual basis, for example).
The new standards require that the basis of accounting be disclosed in a note to the financial statements.
Understanding of the Business
In the past, although not explicitly required, we have had sufficient discussions to understand the nature of your business. Now, the required minimum documentation would include an understanding of the business, accounting systems and policies, as well as significant judgements made by management in summarizing the financial results for the year.
Changes to the Financial Statements
The Notice to Reader Report will be replaced with the new Compilation Engagement Report, which is meant to more clearly address the responsibilities of the accounting firm and management, as well as to make reference to the basis of accounting, which will be described in a note to the financial statements.
Management Acknowledgement
Upon completion of the compilation engagement and management’s approval of the financial statements, management will be asked to sign a letter of acknowledgement, which we are now required to add to our working paper file.
What Does All of This Mean?
This begs the question – are all of these changes a formality, or will they result in changes in your experience of working with us?
The answer is – they will absolutely result in a change. We will be asking more questions, getting a more thorough understanding of your accounting processes, and will be working together to define your basis of accounting.
The good news: it is an opportunity to engage in more dialogue and identify areas for improvement. The slightly less good news: an increase in time will be required to complete the engagement. Based on the views shared with us from CPA Ontario members, firms expect to see a 2-3 hour increase in the time required to complete each engagement. The view of the standard-setting bodies is that the increase in the amount of work required to complete a compilation engagement is a worthwhile investment in the pursuit of giving users access to better quality of information.
We hope that you found this overview helpful. If there are any questions on the new requirements, please reach out to Ana Rebro at anastasia@farnhamco.ca.
Sincerely,
The Farnham Team