Small Businesses: IMPORTANT Changes to your Financial Statements
Effective December 2021 there are significant changes to financial statements for small businesses in Canada. These changes come from a new technical standard called Canadian Standard on Related Services 4200 or CSRS 4200.
The gist - effective December 14, 2021 there will no longer be Notice To Reader financial statements prepared by CPAs, these will now be referred to as Compilation Engagement financial statements.
Here are some additional resources about the standards:
- Business Owner's Guide to CSRS 4200 - a CPA Canada's guide for business owners on the upcoming changes
- Third Party Guide to CSRS 4200 - CPA Canada's CSRS 4200 guide for third party financial statement users (banks, lenders, investors, etc.)
Want more details, see below for a summary of the who what, where, when, why and how.
Effective for fiscal years after December 14, 2021.
Relevant to small businesses who hire an accountant to prepare their year end financial statements. Typically these are referred to as, "Notice to Reader", "NTR", "year end financial statements".
There are several reasons, the key ones:
1. Standardize the extent of work performed by accountants
In compiling the financial statements there has been a spectrum in the amount and extent of work that accountants perform when preparing Notice to Reader financial statements. The previous standard only required accountants to take your financial information and compile it, typically most accountants have performed work to verify the balances alllowing them to understand what is happening in the business. This aids in ensuring the financial statements are accurate and not misleading.
The new standard increases the amount of minimum work required by accountants.
2. Clarify who can use the financial statements
The current “Notice to Reader” standard assumes that the financial statements are only going to be used internally by the business. The reality is that these financial statements are commonly shared with third parties such as banks and investors to obtain loans or external investment.
3. Emphasize to 3rd parties meaning of "Compiled Financials"
Due to the spectrum of work performed by accountants, third parties (banks, investors, etc) may not understand what they are looking at. The new standard clarifies what work the accountant is required to do. This gives 3rd parties confidence that the minimum standard of work completed by the accountant will produce financial statements that are not misleading.
I.e. a bank loan officer might assume that the accountant who prepared the NTR financial statements reconciled the bank accountant and asked questions about the business operations. Under the old standards, neither of these may have been done which increases the likelihood the financial statements are misleading. Under the new standards items such as these will be required.
4. Clarify the basis of accounting used by the company
The old standards did not require the basis of accounting to be disclosed, making it difficult to compare business financial statements because methods may differ. The new standard requires the basis of accounting to be specified in the financial statements.
So now you may be wondering, if I am a small business owner... what does this mean to me?
- Your CPA will ask more questions
- Financial Statements/Engagement letter will look different
- Management responsibility for financial information
- Accounting costs will likely increase
1. What kinds of questions?
Basis of accounting - what basis of accounting was used? Don't worry your accountant can help you answer this question.
Intended users - who is going to use your financial statements?
3rd party users - will any 3rd party users request further information? Do they agree to the basis of accounting?
2. What will look different?
A few changes you will note are:
- "Compilation Report" will be used instead of "Notice to Reader"
- Note disclosure - the basis of accounting note will be included
- Engagement letter includes details about objective, scope and intended users
3. Management will need to acknowledge that they take responsibility for the final version of the financial statements
4. Accounting costs may increase ... there is additional work required as accountants. The good news is that financial statements will be prepared to a higher standard.
What if I don't want these changes?
Your accountant is required to implement these changes when preparing “Compiled Financial Statements” starting with periods ending after December 14, 2021.
If you are pleased by the financial statements generated by your bookkeeping software, you don’t need to ask your accountant to prepare “Compiled Financial Statements” for your business.
This means that your accountant can still prepare a tax return for your business without also preparing “Compiled Financial Statements.” (sometimes this is referred to as a T2 only)
We won’t be proceeding or recommending this course of action.
This isn’t because we want to increase our fees. This is because the typical requirement for businesses is to provide financial statements to banks, potential lenders and investors.
If a business owner engages an accountant to prepare a tax return only (no financial statements), they won’t have the financial documents that a bank needs. I.e. to approve a loan
New engagement letters for December 2021 year-ends are being updated and will be sent out to clients and planning for the additional work already taking place.