11 Mar Regulatory Changes to Corporate Financial Statements at the End of 2021
As a registered Chartered Professional Accounting (CPA) firm, Clearline is governed by regulations and standards that are administered both provincially and nationally. Fairly recently, changes to the regulatory standards that govern how Canadian CPA firms assist their clients with the preparation of their financial statements have been finalized. Changes such as these are normal in the accounting world and at Clearline we seek to keep our clients informed of these matters so they can understand the impact on their businesses. These new rules will impact most of the accounting work that we perform for our corporate clients.
There are several reasons why these standards are changing:
- The standards had not been updated in over 30 years and were outdated;
- The new rules promote more consistency amongst CPA firms in the amount of work done on compilation engagements, particularly in understanding their clients’ businesses;
- The new standards will provide more useful information for the readers, also known as users, of compiled financial statements (i.e. banks, bonding companies, etc.); and
- They will also help CPAs clearly outline the work they have done on the financial statements from management’s responsibility for the financial information.
The following is a Q&A of how these changes may impact you and your company:
Q1. Will this change impact my company’s financial statements?
If we perform a Compilation Engagement for your company, which was sometimes also referred to as a Notice to Reader (NTR), then yes, this will impact your company’s financial statements.
Q2. If Clearline performs an audit or a review engagement of my company’s financial statements, will these changes still impact my company?
No, if the company’s financial statements are audited or reviewed then these changes will not apply. However, many of our audit and review clients have multiple companies and some of these companies, such as holding companies or smaller operating companies, are not required to be audited or reviewed and in these cases these changes may apply.
Audit vs. Review vs. Compilation
What is the difference between an audit, a review and a compilation? The answer and much more is discussed in our post on financial statement reporting options.
Q3. What is the effective date of these changes?
These changes will impact all compiled financial statements for years ending on or after December 14, 2021. So if your company’s next fiscal year end is December 31, 2021, then these changes will be effective. However, if your company’s next fiscal year end is November 30, 2021 or earlier then these changes will not impact you until 2022.
Q4. What will the financial statements look like after these changes?
There are two significant changes to the appearance of the compiled financial statements that we prepare on your behalf:
- The report that we place on the front of the financial statements will look much different. It will be longer and include more information about the nature of a compilation, our responsibilities and management’s responsibilities. This new report will be titled Compilation Engagement Report instead of Notice to Reader; and
- A note will be included on a page after your company’s balance sheet and statement of income that will be titled Basis of Accounting. This note will briefly explain how the financial statements were prepared and will likely include a few short accounting policies for the significant items recorded within your company’s financial statements.
Q5. What will be the changes to the engagement process?
The good news for our clients is that most of these changes will impact us more than they will impact you but there will be some noticeable impact. Here is a summary of the key changes that you will see:
- The engagement letter, which we send to you for your approval at the beginning of the process, will look a little different than before;
- We may ask more questions about who other than you receives copies of these financial statements and for what purpose do they use the financial statements. A typical example would be a bank for lending purposes;
- We may ask more questions about your business operations and your processes for keeping financial data and bookkeeping practices. This will enable us to draft the wording for the Basis of Accounting note disclosure which will be accurate; and
- The acknowledgement letter, which we ask you to sign at the end of the process to approve the financial statements, will also look a little different than before.
Q5. Is this going to lead to a significant fee increase?
No, we do not expect that these changes in standards will directly lead to fee increases for our clientele.
Q6. Is there anything required from me?
Not at this time but yes, we will be sending a separate email to you later this year which will ask you to answer some questions, in particular, who the expected users of your financial statements are. This will help make the transition to the new standards easier.
More Information to Come
In order to keep you informed and make this process as smooth as possible we will elaborate further on some of the above changes such as the new compilation engagement report, the basis of accounting note, and the expected process changes in subsequent posts throughout 2021.
If you have any questions regarding anything discussed in this post or any other matter that you wish to discuss, please reach out to your contact at Clearline and we will be pleased to discuss further with you.