New SSARS 21 pronouncement brings new options to financial reporting
Effective for years ending after December 15, 2015, accountants in pubic practice will have new options available when working with their clients in regards to their financial reporting. Statement on Standards for Accounting and Review Services 21 (or “SSARS 21”) was issued to help clarify and revise the standards for reviews, compilations, and engagements to prepare financial statements. The following outlines key questions and answers to consider when analyzing the impact of this pronouncement.
1. Why does the issuance of SSARS 21 matter to me?
In one word, flexibility. This new SSARS gives the CPA much more flexibility in working with their clients to determine the level and scope of services that are needed. The CPA can help clients by putting together a single financial statement in proper form without having to include all the extras that would accompany the financial reporting when issuing an accountants’ report. The CPA can also work with their client so they can provide a specific schedule or statement that is needed by an interested third party without the CPA having to require that they also perform the other services that were required under the compilation literature.
2. What prompted the issuance of SSARS 21?
Historically for a CPA to be associated with a financial statement, the CPA was required to attach an accountants’ report to the financial statement identifying the level of service performed. This helped the reader of the statements to clearly understand what type of assurance was provided on the statements to determine their level of reliance. There were three levels of services (compilation, review, and audit) the CPA can provide in connection with the issuance of financial statements.
A few years ago, the accounting board provided for a new level of compilation which was called a “management use only financial statement.” This reporting was limited in that the financial statements could not be shared with a third party, but only with the management of the company – thus the name “management use only.” This new service offering was helpful, but severely restricted because of the limitations placed on the use of the statements. These limitations left a void when the client wanted their CPA to assist with the production of the financial statement, but did not need them to go through all the detail required when issuing a report with the financial statements.
In addition to this reporting void, the technology age has also caused difficulties for the CPA in determining the nature of the services provided. The advent of cloud computing and the resources made available through software producers have made it much easier for the client to produce their own financial statement directly from their own software. However, there is still typically some assistance still needed from the CPA. This assistance varies from client to client and ranges from helping record certain transactions to the internal setup of the financial statement coding within the software. With some assistance from their CPA, a client can simply hit the print button and have a balance sheet and income statement available and ready for distribution. The CPA had to determine where a line should be drawn as to the services being provided and when they should be attaching a report to the financial statement.
The issuance of SSARS 21 provides much needed clarity. Instead of the CPA needing to make an assessment of what level of service could be perceived, they now simply need to ask their client what level of service is needed and follow the literature that applies to the desired service offering. The CPA is either engaged to prepare financial statements, or perform a compilation or a review.
3. When is SSARS 21 effective?
SSARS 21 is effective for years ending after December 15, 2015, although early adoption is permitted.
4. What is changing under SSARS 21?
SSARS 21 allows the CPA to separate the preparation services from performance services (e.g., compilation, review, or audit) services. The CPA can now assist in the preparation of the financial statement without having to issue a report to be attached to the financial statements.
5. So how is this determination made between preparation and performance?
The determination is based on what the client is asking the CPA to do. If they want a compilation, review, or audit report, then the CPA must follow the rules pertaining to that of performance. However, should the client simply want assistance in preparing their financial statements so the numbers can be properly presented, then the CPA can follow this new literature that provides guidance for the preparation of the financial statements.
6. What will these new statements look like?
- The new preparation statements will not have an accountants’ report attached to the statements. Each page of the financial statement must have a legend that makes it abundantly clear to the reader of the financial statement that no assurance of any kind is implied or intended. These pages will contain wording similar to the following:
- “No assurance is provided on these financial statements.”
- “These financial statements have not been subject to an audit or review or compilation engagement, and no assurance is provided on them.”
- The balance sheet and income statement will look the same as their compilation counterpart. The headings used on the statements should be consistent with the accounting principles being used for their preparation.
- Similar to the requirements for a compilation, the preparation of the financial statements does not require the inclusion of financial statement footnotes/disclosures.
- The preparation of the financial statement is considered a non-attest service, which means the CPA does not have to be independent from the client.
- Unlike its compilation financial statement counterpart, the preparation of the financial statement can include only specific statements (e.g., balance sheet only, income statement only, etc.)
7. Does SSARS 21 change anything in relation to the traditional compilation service?
The accountants’ compilation report will change. The report will now be streamlined so it looks different from the review or audit report. The general report will consist of one paragraph with no headings. Additional paragraphs maybe required depending upon the circumstances.
8. Does SSARS 21 change anything in relation to the CPA’s performance of a review report?
The literature is primarily a clarity redraft of SSARS 19 with very few changes. Included in the minor changes, the accountants’ review report will now use headers (making it look more like the auditors’ report) as well as mandating the city and state of the issuing office be included on the report page. Also, the previous literature stated that emphasis paragraphs were never required in the report letter, but SSARS 21 requires the accountant to include emphasis-of matter or other-matter paragraphs in the accountants’ report when certain conditions exist.