Editorial Special Industries and Special Topics_11 doc

• Management has identified all key factors expected to affect the entity during the prospective period. • Management has developed assumptions for each key factor. • The assumptions are suitably supported. To determine whether management has identified all key factors and developed assumptions for each one, the accountant needs to possess, or obtain during the engagement, an appropriate knowl- edge of the industry in which the entity will operate and the accounting principles and practices of that industry. The accountant can conclude that the assumptions are suitably supported if the preponderance of information supports each significant assumption. Preponderance here does not imply a statistical majority of information. A preponderance exists if the weight of available information tends to sup- port the assumption. The AICPA Guide states, however, “Because of the judgments involved in de- veloping assumptions, different people may arrive at somewhat different but equally reasonable assumptions based on the same information.” The accountant need not obtain support for the hypothetical assumptions in a projection, since they are not necessarily expected to occur. For a projection, the accountant considers whether the hypothetical assumptions are consistent with the purpose of the projection and whether the other assumptions are suitably supported given the hypothetical assumption. In evaluating the support for the assumptions, the accountant considers six factors: 1. Whether sufficient pertinent sources of information, both internal and external to the entity, have been considered 2. Whether the assumptions are consistent with the sources from which they are derived 3. Whether the assumptions are consistent with each other 4. Whether the historical financial information and other data used in developing the assump- tions are sufficiently reliable for that purpose 5. Whether the historical information and other data used in developing the assumptions are comparable over the periods specified or whether the effects of any lack of comparability were considered in developing the assumptions 6. Whether the logical arguments or theory, considered with the data supporting the assump- tions, are reasonable Support for assumptions may include market surveys, engineering studies, general economic in- dicators, industry statistics, trends and patterns developed from an entity’s operating history, and in- ternal data and analysis, accompanied by their supporting logical argument or theory. The accountant determines whether the assumptions provide a reasonable basis for the statements but cannot conclude that any outcome is expected because (1) realization of prospective results may depend on management’s intentions, which cannot be examined; (2) there is substantial uncertainty in the assumptions; (3) some of the information accumulated about an assumption may appear contra- dictory; and (4) different but similarly reasonable assumptions concerning a particular matter might be derived from common information. (iii) Evaluating Presentation. The accountant compares the presentation of the prospective finan- cial statements to the AICPA presentation guidelines [see Subsections 38.4(b) and (c)]. (b) STANDARD EXAMINATION REPORT. The accountant’s standard report on an examination of prospective financial statements includes six statements: 1. A title that includes the word “independent” 2. An identification of the prospective financial statements presented 38 • 24 PROSPECTIVE FINANCIAL STATEMENTS 3. An identification of the responsible party and a statement that the prospective financial state- ments are the responsibility of the responsible party 4. A statement that the accountant’s responsibility is to express an opinion on the prospective fi- nancial statements based on the examination 5. A statement that the examination of the prospective financial statements was conducted in ac- cordance with attestation standards established by the AICPA and, accordingly, included such procedures as the accountant considered necessary in the circumstances 6. A statement that the accountant believes that the examination provides a reasonable basis for the opinion 7. The accountant’s opinion that the prospective financial statements are presented in confor- mity with AICPA presentation guidelines and that the underlying assumptions provide a rea- sonable basis for the forecast or a reasonable basis for the projection given the hypothetical assumptions 8. A caveat that the prospective results may not be achieved 9. A statement that the accountant assumes no responsibility to update the report for events and circumstances occurring after the date of the report 10. The manual or printed signature of the accountant’s firm 11. The date of the examination report The standard report on the examination of a financial forecast is as follows: Independent Accountant’s Report We have examined the accompanying forecasted balance sheet, statements of income, retained earnings, and cash flows of XYZ Company as of December 31, 20XX,* and for the year then end- ing. XYZ Company’s management is responsible for the forecast. Our responsibility is to express an opinion on the forecast based on our examination. Our examination was conducted in accordance with attestation standards established by the Ameri- can Institute of Certified Public Accountants and, accordingly, included such procedures as we con- sidered necessary to evaluate both the assumptions used by management and the preparation and presentation of the forecast. We believe that our examination provides a reasonable basis for our opinion. In our opinion, the accompanying forecast is presented in conformity with guidelines for presenta- tion of a forecast established by the American Institute of Certified Public Accountants, and the un- derlying assumptions provide a reasonable basis for management’s forecast. However, there will usually be differences between the forecasted and actual results, because events and circumstances frequently do not occur as expected, and those differences may be material. We have no responsi- bility to update this report for events and circumstances occurring after the date of this report. [Signature] [Date] * If the presentation is summarized, the opening sentence of the report would begin, “We have ex- amined the accompanying summarized forecast of XYZ Company as of December 31, 20X1 ” The standard report on the examination of a financial projection is as follows: Independent Accountant’s Report We have examined the accompanying projected balance sheet, statements of income, retained earn- ings, and cash flows of XYZ Company as of December 31, 20XX, and for the year then ending.* XYZ Company’s management is responsible for the projection, which was prepared for [state spe- cial purpose, for example, “the purpose of negotiating a loan to expand XYZ Company’s plant”]. Our responsibility is to express an opinion on the projection based on our examination. Our examination was conducted in accordance with attestation standards established by the Amer- ican Institute of Certified Public Accountants and, accordingly, included such procedures as we 38.7 EXAMINATION SERVICES 38 • 25 considered necessary to evaluate both the assumptions used by management and the preparation and presentation of the projection. We believe our examination provides a reasonable basis for our opinion. In our opinion, the accompanying projection is presented in conformity with guidelines for presen- tation of a projection established by the American Institute of Certified Public Accountants, and the underlying assumptions provide a reasonable basis for management’s projection [describe the hy- pothetical assumption, for example, “assuming the granting of the requested loan for the purpose of expanding XYZ Company’s plant as described in the summary of significant assumptions”]. How- ever, even if [describe hypothetical assumption, for example, “the loan is granted and the plant is expanded”], there will usually be differences between the projected and actual results, because events and circumstances frequently do not occur as expected, and those differences may be mater- ial. We have no responsibility to update this report for events and circumstances occurring after the date of this report. The accompanying projection and this report are intended solely for the information and use of [identify specified parties, for example, “XYZ Company and DEF National Bank”] and are not in- tended to be and should not be used by anyone other than these specified parties. [Signature] [Date] * If the presentation is summarized, the opening sentence of the report would begin, “We have ex- amined the accompanying summarized projection of XYZ Company as of December 31, 20X1 ” When the prospective financial statements are presented as a range, the report also includes a sep- arate paragraph describing the range [see Subsection 38.6(d) for an example]. (c) MODIFIED EXAMINATION REPORTS. There are four types of modified examination reports: 1. A qualified report, used when the statements depart from the AICPA presentation guidelines but the deficiency does not affect the assumptions (although if the matter is highly material, the accountant may issue an adverse report) 2. An adverse report, used when the statements fail to disclose significant assumptions or when the assumptions do not provide a reasonable basis for the presentation 3. A disclaimer used when the accountant is precluded from applying procedures considered necessary in the circumstances 4. A reference to another accountant, used when another accountant examines the prospective fi- nancial statements of a significant portion of the entity, such as a major subsidiary (i) Qualified Opinion. The accountant issues a qualified opinion if there is a material presenta- tion deficiency that does not affect the assumptions. The following is an examination report qualified because of a presentation deficiency: Independent Accountant’s Report We have examined the accompanying forecasted balance sheet, statements of income, retained earnings, and cash flows of XYZ Company as of December 31, 20XX, and for the year then ending. XYZ Company’s management is responsible for the forecast. Our responsibility is to express an opinion on the forecast based on our examination. Our examination was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants and, accordingly, included such procedures as we considered necessary to evaluate both the assumptions used by management and the prepara- tion and presentation of the forecast. We believe our examination provides a reasonable basis for our opinion. 38 • 26 PROSPECTIVE FINANCIAL STATEMENTS The forecast does not disclose significant accounting policies. Disclosure of such policies is re- quired by guidelines for presentation of a forecast established by the American Institute of Certified Public Accountants. In our opinion, except for the omission of the disclosure of the significant accounting policies as discussed in the preceding paragraph, the accompanying forecast is presented in conformity with guidelines for presentation of a forecast established by the American Institute of Certified Public Accountants, and the underlying assumptions provide a reasonable basis for management’s fore- cast. However, there will usually be differences between the forecasted and actual results, because events and circumstances frequently do not occur as expected, and those differences may be mater- ial. We have no responsibility to update this report for events and circumstances occurring after the date of this report. [Signature] [Date] (ii) Adverse Report. The accountant who believes a significant assumption is unsupported or not disclosed issues an adverse opinion. An adverse opinion is also issued when the accountant believes that a departure from the presentation guidelines not involving the assumptions is serious enough to warrant it. The following is an example of an adverse report issued by the accountant because an as- sumption was unreasonable: Independent Accountant’s Report We have examined the accompanying forecasted balance sheet, statements of income, retained earnings, and cash flows of XYZ Company as of December 31, 20XX, and for the year then ending. XYZ Company’s management is responsible for the forecast. Our responsibility is to express an opinion on the forecast based on our examination. Our examination was conducted in accordance with attestation standards established by the Ameri- can Institute of Certified Public Accountants and, accordingly, included such procedures as we con- sidered necessary to evaluate both the assumptions used by management and the preparation and presentation of the forecast. We believe our examination provides a reasonable basis for our opinion. As discussed under the caption “Sales” in the summary of significant forecast assumptions, the forecasted sales include, among other things, revenue from the Company’s federal defense con- tracts continuing at the current level. The Company’s present federal defense contracts will expire in March 20XX. No new contracts have been signed and no negotiations are under way for new federal defense contracts. Furthermore, the federal government has entered into contracts with an- other company to supply the items being manufactured under the Company’s present contracts. In our opinion, the accompanying forecast is not presented in conformity with guidelines for pre- sentation of a financial forecast established by the American Institute of Certified Public Accoun- tants because management’s assumptions, as discussed in the preceding paragraph, do not provide a reasonable basis for management’s forecast. We have no responsibility to update this report for events and circumstances occurring after the date of this report. [Signature] [Date] There is no caveat about actual results differing from those forecasted since the accountant be- lieves the forecast assumptions to be unreasonable. (iii) Disclaimer. The accountant who cannot apply all the procedures deemed necessary to support an opinion on the statements issues a disclaimer. An example of a disclaimer follows: Independent Accountant’s Report We were engaged to examine the accompanying forecasted balance sheet, statements of income, re- tained earnings, and cash flows of XYZ Company as of December 31, 20XX, and for the year then ending. XYZ Company’s management is responsible for the forecast. 38.7 EXAMINATION SERVICES 38 • 27 As discussed under the caption “Income from Investee” in the summary of significant forecast assumptions, the forecast includes income from an equity investee constituting 23% of fore- casted net income, which is management’s estimate of the Company’s share of the investee’s income to be accrued for 20XX. The investee has not prepared a forecast for the year ending December 31, 20XX, and we were therefore unable to obtain suitable support for this assumption. Because, as described in the preceding paragraph, we are unable to evaluate management’s as- sumption regarding income from an equity investee and other assumptions that depend thereon, the scope of our work was not sufficient to express, and we do not express, an opinion with re- spect to the presentation of, or the assumptions underlying, the accompanying forecast. We have no responsibility to update this report for events and circumstances occurring after the date of this report. [Signature] [Date] In a disclaimer there is no caveat about differences between actual and forecasted assumptions since the accountant is not satisfied about the reasonableness of the assumptions. Notwithstanding his scope limitation, if the accountant is aware of material deficiencies in the forecast, those deficiencies should be discussed in the disclaimer. (iv) Divided Responsibility. When another accountant is involved in the examination, the princi- pal accountant may refer to the work of the other accountant as a basis, in part, for the principal ac- countant’s own report. The reference is done in essentially the same way divided-responsibility reports are done for audits of historical financial statements. (d) INDEPENDENCE. The accountant who examines prospective financial statements is required to be independent. If not, the accountant generally issues a compilation report rather than disclaim an opinion after the examination. 38.8 AGREED-UPON PROCEDURES (a) SCOPE OF SERVICE. An engagement to apply agreed-upon procedures to prospective financial statements involves applying the procedures specified by the users of the statements and reporting the results of their application. The level of service is flexible; the accountant’s report may only be distributed to the users who specified the procedures. Thus, it is a limited- distribution service. (b) PROCEDURES. The procedures applied in an engagement may be limited or extensive, de- pending on the users’ needs. For example, the service may consist of procedures below the level done in a compilation (such as mere assembly) or may be similar to those done in an examination. Alternatively, the service may consist of different levels of procedures applied to different amounts in the statements, such as a high level of work done on forecasted sales and very limited procedures on forecasted expenses. An accountant may perform an agreed-upon procedures attest engagement on prospective fi- nancial statements provided that the following conditions are met: 1. The accountant is independent. 2. The accountant and the specified parties agree upon the procedures performed or to be per- formed by the accountant. Generally, the accountant’s procedures may be as limited or as extensive as the specified parties desire, as long as the specified parties take responsibility for their sufficiency. However, mere reading of a financial forecast does not constitute a 38 • 28 PROSPECTIVE FINANCIAL STATEMENTS procedure sufficient to permit an accountant to report on the results of applying agreed- upon procedures. 3. The specified parties take responsibility for the sufficiency of the agreed-upon procedures for their purposes. 4. The prospective financial statements include a summary of significant assumptions. 5. The prospective financial statements to which the procedures are to be applied are subject to reasonably consistent evaluation against criteria that are suitable and available to the speci- fied parties. 6. Criteria to be used in the determination of findings are agreed upon between the accountant and the specified parties. 7. The procedures to be applied to the prospective financial statements are expected to result in reasonably consistent findings using the criteria. 8. Evidential matter related to the prospective financial statements to which the procedures are applied is expected to exist to provide a reasonable basis for expressing the findings in the ac- countant’s report. 9. Where applicable, the accountant and the specified users agree on any agreed-upon material- ity limits for reporting purposes. 10. Use of the report is to be restricted to the specified parties. (c) REPORTS. The accountant’s report on the results of applying agreed-upon procedures should contain the following elements: 1. A title that includes the word “independent” 2. Identification of the specified parties 3. Reference to the prospective financial statements covered by the accountant’s report and the character of the engagement 4. A statement that the procedures performed were those agreed to by the specified parties iden- tified in the report 5. Identification of the responsible party and a statement that the prospective financial state- ments are the responsibility of the responsible party 6. A statement that the agreed-upon procedures engagement was conducted in accordance with attestation standards established by the AICPA 7. A statement that the sufficiency of the procedures is solely the responsibility of the specified parties and a disclaimer of responsibility for the sufficiency of those procedures 8. A list of the procedures performed (or reference to them) and related findings 9. Where applicable, a description of any agreed-upon materiality limits 10. A statement that the accountant was not engaged to and did not conduct an examination of prospective financial statements; a disclaimer of opinion on whether the presentation of the prospective financial statements is in conformity with AICPA presentation guidelines and on whether the underlying assumptions provide a reasonable basis for the forecast, or a reason- able basis for the projection given the hypothetical assumptions; and a statement that if the accountant had performed additional procedures, other matters might have come to the ac- countant’s attention that would have been reported 11. A statement of restrictions on the use of the report because it is intended to be used solely by the specified parties 12. Where applicable, reservations or restrictions concerning procedures or findings 13. A caveat that the prospective results may not be achieved 14. A statement that the accountant assumes no responsibility to update the report for events and circumstances occurring after the date of the report 38.8 AGREED-UPON PROCEDURES 38 • 29 15. Where applicable, a description of the nature of the assistance provided by a specialist 16. The manual or printed signature of the accountant’s firm 17. The date of the report The following is an example of a report on the application of agreed-upon procedures: Independent Accountant’s Report on Applying Agreed-Upon Procedures Board of Directors—XYZ Corporation Board of Directors—ABC Company At your request, we have performed certain agreed-upon procedures, as enumerated below, with re- spect to the forecasted balance sheet, statements of income, retained earnings, and cash flows of DEF Company, a subsidiary of ABC Company, as of December 31, 20XX, and for the year then ending. These procedures, which were agreed to by the Boards of Directors of XYZ Corporation and ABC Company, were performed solely to assist you in evaluating the forecast in connection with the proposed sale of DEF Company to XYZ Corporation. DEF Company’s management is re- sponsible for the forecast. This agreed-upon procedures engagement was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants. The sufficiency of these pro- cedures is solely the responsibility of the specified parties. Consequently, we make no representa- tion regarding the sufficiency of the procedures described below either for the purpose for which this report has been requested or for any other purpose. a. With respect to forecasted rental income, we compared the occupancy statistics about ex- pected demand for rental of housing units used in the forecast to occupancy statistics for the following comparable properties. Comparable properties for this purpose are defined as [de- scribe characteristics of comparability, e.g., those located in Sample City with between xxx and yyy rental units, rental prices within z% of those used in the forecast.] [List comparable properties] As a result of performing this procedure, we found occupancy statistics used in the forecast were [describe findings]. b. We traced each amount in the forecast to underlying schedules prepared by management and tested the arithmetical accuracy of management’s calculations of rental income, operating in- come, and income tax expense contained thereon. We found no differences as a result of these procedures. We were not engaged to, and did not, conduct an examination, the objective of which would be the expression of an opinion on the accompanying prospective financial statements. Accord- ingly, we do not express an opinion on whether the prospective financial statements are pre- sented in conformity with AICPA presentation guidelines or on whether the underlying assumptions provide a reasonable basis for the presentation. Had we performed additional pro- cedures, other matters might have come to our attention that would have been reported to you. Furthermore, there will usually be differences between the forecasted and actual results, be- cause events and circumstances frequently do not occur as expected, and those differences may be material. We have no responsibility to update this report for events and circumstances occur- ring after the date of this report. This report is intended solely for the information and use of the Boards of Directors of ABC Com- pany and XYZ Corporation and is not intended to be and should not be used by anyone other than these specified parties. [Signature] [Date] 38 • 30 PROSPECTIVE FINANCIAL STATEMENTS 38.9 INTERNAL USE SERVICES (a) SCOPE OF SERVICES. The accountant who assembles and submits or reports on prospective financial statements for third-party use, must compile, examine, or apply agreed-upon procedures to them. However, for internal use the accountant’s services and reports can be more flexible. Internal use services generally are provided in the form of consulting, tax planning, or so-called controllership services. In these types of service, the objective of the service is not to lend credibility to the statements and there is no third-party reliance on them, so AICPA guidelines allow the accoun- tant to structure the engagement and report to fit the circumstances. The accountant may provide compilation, examination, or agreed-upon procedures for internal use prospective financial statements but is not required to do so. (b) DETERMINING WHETHER USE IS INTERNAL. The accountant may provide internal use services if the accountant believes that third-party use is not reasonably expected. In arriving at this belief, the accountant may rely on the oral or written representation of management, unless some- thing comes to the accountant’s attention to contradict management’s representation. The AICPA Guide (Section 10.02) provides the following guidelines for determining whether out- siders are considered third parties: In deciding whether a party that is or reasonably might be expected to use an accountant’s report is considered to be a third party, the accountant should consider the degree of consistency of in- terest between [management] and the user regarding the forecast. If their interests are substan- tially consistent (for example both the [preparer] and the user are employees of the entity about which the forecast is made), the user would not be deemed to be a third party. On the other hand, where the interests of the [preparer] and user are potentially inconsistent (for example, the [pre- parer] is a nonowner manager and the user is an absentee owner), the user would be deemed a third party. In some cases, this determination will require the exercise of considerable profes- sional judgment. (c) PROCEDURES. The procedures applied in an internal use engagement are usually based on the nature of the engagement. They may focus on developing prospective data, or they may focus on improving operations or financial planning with prospective data being only a by-product of the en- gagement. (d) REPORTS. The accountant’s report for internal use services is flexible. Such reports some- times speak solely to the prospective financial statements, but often they focus on alternative or rec- ommended courses of action. The standard compilation, examination, or agreed-upon procedures reports may be issued for in- ternal use, but often they are not used. Reports on prospective financial statements for internal use generally take three broad forms: plain paper, legend, and formal. Where there is a report on the statements, it may stand alone or may be incorporated into another report, such as a consultant’s report. (i) Plain Paper. “Plain paper” means that the accountant provides neither a report on the state- ments nor any other written communication that accompanies them. In a plain-paper situation, there would be nothing apparent to the reader to associate the accountant with the statements. (ii) Legend. When an accountant’s written communication (such as a transmittal letter) accompa- nies the prospective financial statements, the AICPA Guide (Section 22.09) requires that the accoun- tant include (1) a caveat that prospective results may not be achieved and (2) a statement that the prospective financial statements are for internal use only. Many accountants choose to present this as a legend on the statement itself. 38.9 INTERNAL USE SERVICES 38 • 31 (iii) Formal Report. The accountant may decide to issue a report on a service. However, the ac- countant is not permitted to report on a forecast or projection, even for internal use, if it does not dis- close the significant assumptions. According to the AICPA Guide (Section 22.06), a report for internal use preferably: • Is addressed to management • Identifies the statements being reported on • Describes the character of work performed and the degree of responsibility taken with respect to the statements • Includes a caveat that the prospective results may not be achieved • Indicates the restrictions as to the distribution of the statements and report • Is dated as of the date of the completion of the accountant’s procedures • For a projection, describes the limitations on the usefulness of the presentation The following is an example of a report on an internal use service consisting of assembly of a forecast: To Mr. John Doe, President XYZ Company We have assembled, from information provided by management, the accompanying forecasted balance sheet, statements of income, retained earnings, and cash flows of XYZ Company as of December 31, 20XX,* and for the year then ending. We have not compiled or examined the financial forecast and ex- press no assurance of any kind on it. Further, there will usually be differences between the forecasted and actual results, because events and circumstances frequently do not occur as expected, and those dif- ferences may be material. In accordance with the terms of our engagement, this report and the accom- panying forecast are restricted to internal use and may not be shown to any third party for any purpose. * If the presentation is summarized as discussed in Subsection 38.4(b), the first sentence would read, in part, “We have assembled . . . the accompanying summarized forecast of XYZ Company ” An example of a report on the assembly of a projection is as follows: To Mr. John Doe, President XYZ Company We have assembled, from information provided by management, the accompanying projected balance sheet, statements of income, retained earnings, and cash flows, and summaries of significant assump- tions and accounting policies of XYZ Company as of December 31, 20XX,* and for the year then end- ing. The accompanying projection and this report were prepared for [description of the special purpose, e.g., “presentation to the Board of Directors of XYZ Company for its consideration as to whether to add a third operating shift”]. We have not compiled or examined the financial projection and express no as- surance of any kind on it. Further, even if [description of the hypothetical assumption, e.g., “the third operating shift is added”], there will usually be differences between the projected and actual results, be- cause events and circumstances frequently do not occur as expected, and those differences may be ma- terial. In accordance with the terms of our engagement, this report and the accompanying projection are restricted to internal use and may not be shown to any third party for any purpose. * If the presentation is summarized as discussed in Subsection 38.4(b), the first sentence would read, in part, “We have assembled . . . the accompanying summarized forecast of XYZ Company ” In addition to the above, the accountant’s report on prospective financial statements for in- ternal use would: 38 • 32 PROSPECTIVE FINANCIAL STATEMENTS 1. Indicate if the accountant is not independent with respect to the client (the report would not express any assurance on the statements if there is a lack of independence) and 2. Note any disclosures required under the presentation guidelines (see Subsection 34.4(a)) whose omission comes to the accountant’s attention (other than omitted assumptions). The report might either describe the omitted disclosures or merely note the omission of dis- closures in a manner such as: This financial forecast was prepared to help you develop your personal financial plan. Accordingly, it does not include all disclosures required by the guidelines established by the American Institute of Certified Public Accountants for presentation of a financial forecast. 38.10 SOURCES AND SUGGESTED REFERENCES American Institute of Certified Public Accountants, Accounting and Review Services Committee, “Compilation and Review of Financial Statements,” Statement on Standards for Accounting and Review Services No. 1. AICPA, New York, 1978. , Auditing Standards Board, “Attestation Standards: Revision and Recodification,” Statement on Stan- dards for Attestation Engagements No. 10, AICPA, New York, 2001. , Guide for Prospective Financial Information. AICPA, New York, 1999. Commerce Clearing House, SEC Accounting Rules. CCH, Chicago, 1990. Financial Accounting Standards Board, “Statement of Cash Flows,” Statement of Financial Accounting Stan- dards No. 95. FASB, Stamford, CT, 1987. Pallais, Don, and Holton, Stephen D., Guide to Forecasts and Projections, 3rd ed. Practitioners Publishing, Fort Worth, TX, 1998. 38.10 SOURCES AND SUGGESTED REFERENCES 38 • 33 [...]... Receivables and Payables.” AICPA, New York, 1971 American Institute of Certified Public Accountants, Accounting and Review Services Committee, “Compilation and Review of Financial Statements,” Statement on Standards for Accounting and Review Services No 1 AICPA, New York, 1979 , “Reporting on Personal Financial Statements Included in Written Personal Financial Plans,” Statement on Standards for Accounting and. .. assets and the proper determination of their fair values and the amount of liabilities and the appropriateness of the underlying estimates Following is the auditor’s standard report appropriate for personal financial statements (Guide, Chapter 5, paragraph 13): INDEPENDENT AUDITOR’S REPORT I [We] have audited the accompanying statement of financial condition of [James and Jane Person] as of [date], and. .. describe the financial statements and how that wording varies from the GAAP format: I [We] have compiled the accompanying statement of assets and liabilities—income tax basis of [James and Jane Person] as of [date], and the related statement of changes in net assets—income tax basis for the [period] then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the... understanding with the client has not been established, he should decline to accept or perform the engagement; and (3) include a reference on each page of the financial statements restricting their use such as “Restricted for Client’s Use Only” or “Solely for the information and use by the client [name of individual] and not intended to be and should not be used by any other party.” 39.13 SOURCES AND SUGGESTED... to be presented, and the form and content of the statements For example, the statements may be on a GAAP, cash, or tax basis A compilation requires an understanding of the individual’s business and personal records necessary to compile personal financial statements in appropriate format Similarly, an understanding is necessary in a review engagement to determine the appropriate inquiry and analytical... Statement of Financial Accounting Standards No 5 FASB, Stamford, CT, 1975 Kinsman, M D., and Samuelson, B., “Personal Financial Statements: Valuation Challenges and Solutions.” Journal of Accountancy, September 1987, p 139 Siegel, J G., and Lederfich, L., “Accounting and Disclosures for Personal Financial Statements.” CPA Journal, February 1988, p 67 CHAPTER 40 PARTNERSHIPS AND JOINT VENTURES Gerard L Yarnall,... were sold, and all of his or her liabilities paid, on the date of the statement This provision should be shown under its full title as given in SOP 82-1: “Estimated income taxes on the differences between the estimated current values of assets and the estimated current amounts of liabilities and their tax bases.” It is presented in the statement as one amount and is shown between liabilities and net worth... the estimated current values of assets and the estimated current amounts of liabilities and their tax bases • A statement that this provision will probably differ from the amounts of income taxes that might eventually be paid, because these amounts will be determined by the actual timing and method of disposal, realization, or liquidation, and by the tax laws and regulations in effect at the time of... estimated current amounts of major liabilities, or categories of assets and liabilities, and their tax bases Maturities, interest rates, collateral, and other pertinent details on receivables and debt Related-party transactions such as notes receivable or notes payable to other family members Contingencies such as pending lawsuits and loan guarantees Noncancelable commitments, such as operating leases,... determining the estimated values The standards applicable to compilations of financial statements in SSARS No 1 are applicable to personal financial statements The SSARS No 1 performance standards require an accountant, in both a compilation and a review, to reach an understanding with the client as to the services to be performed—compilation, review, or audit The understanding may be oral or written However, . Held Businesses 10 (i) Real Estate 11 (j) Personal Property 11 (k) Intangible Assets 11 (l) Future Interests 11 39.4 LIABILITIES 11 (a) Estimated Current Amount 11 (b) Noncancelable Commitments. earnings, and cash flows, and summaries of significant assump- tions and accounting policies of XYZ Company as of December 31, 20XX,* and for the year then end- ing. The accompanying projection and this. report is intended solely for the information and use of the Boards of Directors of ABC Com- pany and XYZ Corporation and is not intended to be and should not be used by anyone other than these