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Tuesday, February 16, 2016

Coming Soon: Guidance on SSARS 21


In a single exposure draft, the Accounting and Review Services Committee (ARSC) of the American Institute of Certified Public Accountants (AICPA) issued three proposed Statements on Standards for Accounting and Review Services (SSARS) for public comment. This project continues the work the AICPA started with its landmark “SSARS 21” in 2014.

Tying up loose ends
In October 2014, the ARSC issued SSARS 21, Statements on Standards for Accounting and Review Services: Clarification and Recodification, to clarify and revise the standards for reviews, compilations and engagements to prepare financial statements. Some accounting professionals nicknamed it “SSARS 21,” because SSARS 21 is the most significant change since the accounting and review standards were created in 1978.

SSARS 21 supersedes all existing AR sections with the exception of AR Section 120, Compilation of Pro Forma Financial Information. In 2014, the ARSC decided to postpone updating its guidance on compilation of pro forma and prospective financial information.

SSARS 21 is effective for periods ending on or after December 15, 2015. Now that accounting professionals have largely worked through the first phase of implementing these monumental changes to the accounting and review standards, the ARSC has decided it’s time to tie up the loose ends related to compiling forward-looking financial information.

Combining three in one
In December 2015, the ARSC issued three proposed SSARS in a single Exposure Draft, Proposed Statements on Standards for Accounting and Review Services: Compilation of Prospective Financial Information; Compilation of Pro Forma Financial Information; Omnibus Statement on Standards for Accounting and Review Services — 2016.

If the proposed statement Compilation of Prospective Financial Information is adopted as a final standard, it will move the guidance for compilations of prospective financial information to the SSARS and out of the Statements on Standards for Attestation Engagements. The proposal would also expand the guidance in AR-C Section 70, Preparation of Financial Statements — which was created under the SSARS 21 issued in 2014 — so that it can be adapted to apply to the preparation of prospective financial information.

In addition, the proposal wouldn’t require accountants to obtain written representations when compiling prospective financial information. Instead, the requirement to obtain an engagement letter or other suitable form of written agreement between the parties would serve as a substitute for a management representation letter, in terms of providing acknowledgment of management’s responsibility for the significant assumptions.

Part two of the exposure draft, the proposed guidance in Compilation of Pro Forma Financial Information, is intended to be a clarified version of AR-C Section 120, Compilation of Pro Forma Financial Information. The ARSC has been updating its guidance through a series of clarity projects that are intended to make the standards easier to understand and apply.

The proposed amendments in Omnibus Statement on Standards for Accounting and Review Services — 2016 include revisions to AR-C Section 60, General Principles for Engagements Performed in Accordance With Statements on Standards for Accounting and Review Services; AR-C Section 80, Compilation Engagements; AR-C Section 90, Review of Financial Statements; and the aforementioned AR-C Section 70. The Omnibus proposal is intended to incorporate the changes from the proposed amendments in Compilation of Prospective Financial Information and Compilation of Pro Forma Financial Information.

The proposal also instructs accountants to follow AR-C Section 70 when preparing prospective financial information without also performing compilation, examination or agreed-upon procedures services.

Looking ahead
If your accounting professional plans to issue prospective or pro forma financial information for your company, he or she may soon follow a new-and-improved set of guidelines. But nothing has been set in stone, including an effective date. The AICPA’s comment period ends on May 6. Then the AICPA will evaluate the feedback and decide whether to issue final guidance — or to go back to the drawing board.

Forecasts vs. projections vs. pro forma financial statements
Here are some key differences between forecasts, projections and pro forma financial statements:

1. Forecasts. These prospective financial statements present, to the best of the responsible party’s knowledge and belief, an entity’s expected financial position, results of operations and cash flows. A financial forecast is usually based on management’s assumptions reflecting conditions it expects to exist and the course of action it expects to take. A financial forecast may be expressed in specific monetary amounts as a single-point estimate of forecasted results or as a range.

2. Projections. These prospective financial statements typically present, to the best of the responsible party’s knowledge and belief, given one or more hypothetical assumptions, an entity’s expected financial position, results of operations and cash flows. A projection may present one or more hypothetical courses of action for evaluation — in other words, it asks, “What would happen if…?” Like a forecast, a projection may contain a range on monetary amounts.

3. Pro forma financial statements. These show what the significant effects on historical financial information might have been had a consummated or proposed transaction (or event) occurred at an earlier date. An accountant develops this type of financial statement by applying pro forma adjustments to historical financial information based on management’s representations.

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