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 sonable b
Trang 1• Management has identified all key factors expected to affect the entity during the prospectiveperiod.
• 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 edge of the industry in which the entity will operate and the accounting principles and practices ofthat industry
knowl-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 statisticalmajority 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 reasonableassumptions 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 thehypothetical assumptions are consistent with the purpose of the projection and whether the otherassumptions 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 wereconsidered 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 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
in-The accountant determines whether the assumptions provide a reasonable basis for the statementsbut cannot conclude that any outcome is expected because (1) realization of prospective results maydepend on management’s intentions, which cannot be examined; (2) there is substantial uncertainty inthe 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
Trang 23 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 suchprocedures 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 sonable basis for the forecast or a reasonable basis for the projection given the hypotheticalassumptions
rea-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, retainedearnings, 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 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 andpresentation of the forecast We believe that our examination provides a reasonable basis for ouropinion
Ameri-In our opinion, the accompanying forecast is presented in conformity with guidelines for 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 willusually be differences between the forecasted and actual results, because events and circumstancesfrequently 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]
presenta-[Date]
* If the presentation is summarized, the opening sentence of the report would begin, “We have amined the accompanying summarized forecast of XYZ Company as of December 31, 20X1 .”
ex-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 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
earn-Our examination was conducted in accordance with attestation standards established by the ican Institute of Certified Public Accountants and, accordingly, included such procedures as we
Amer-38.7 EXAMINATION SERVICES 38 25
Trang 3considered necessary to evaluate both the assumptions used by management and the preparationand presentation of the projection We believe our examination provides a reasonable basis for ouropinion.
In our opinion, the accompanying projection is presented in conformity with guidelines for tation of a projection established by the American Institute of Certified Public Accountants, and theunderlying 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 ofexpanding 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 isexpanded”], there will usually be differences between the projected and actual results, becauseevents 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 thedate of this report
presen-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 amined the accompanying summarized projection of XYZ Company as of December 31,20X1 .”
ex-When the prospective financial statements are presented as a range, the report also includes a arate paragraph describing the range [see Subsection 38.6(d) for an example]
sep-(c) MODIFIED EXAMINATION REPORTS. There are four types of modified examinationreports:
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 assumppresenta-tions The following is an examinapresenta-tion report qualifiedbecause of a presentation deficiency:
Independent Accountant’s Report
We have examined the accompanying forecasted balance sheet, statements of income, retainedearnings, 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 anopinion on the forecast based on our examination
Our examination was conducted in accordance with attestation standards established by theAmerican Institute of Certified Public Accountants and, accordingly, included such procedures as
we considered necessary to evaluate both the assumptions used by management and the tion and presentation of the forecast We believe our examination provides a reasonable basis forour opinion
prepara-38 26 PROSPECTIVE FINANCIAL STATEMENTS
Trang 4The forecast does not disclose significant accounting policies Disclosure of such policies is quired by guidelines for presentation of a forecast established by the American Institute of CertifiedPublic Accountants.
re-In our opinion, except for the omission of the disclosure of the significant accounting policies asdiscussed in the preceding paragraph, the accompanying forecast is presented in conformity withguidelines for presentation of a forecast established by the American Institute of Certified PublicAccountants, 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, becauseevents 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 thedate 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 believesthat a departure from the presentation guidelines not involving the assumptions is serious enough towarrant 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, retainedearnings, 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 anopinion on the forecast based on our examination
Our examination was conducted in accordance with attestation standards established by the 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 andpresentation of the forecast We believe our examination provides a reasonable basis for our opinion
Ameri-As discussed under the caption “Sales” in the summary of significant forecast assumptions, theforecasted 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 newfederal 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 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
pre-a repre-asonpre-able bpre-asis for mpre-anpre-agement’s forecpre-ast We hpre-ave no responsibility to updpre-ate this report forevents 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 lieves the forecast assumptions to be unreasonable
be-(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, tained earnings, and cash flows of XYZ Company as of December 31, 20XX, and for the year thenending XYZ Company’s management is responsible for the forecast
re-38.7 EXAMINATION SERVICES 38 27
Trang 5As discussed under the caption “Income from Investee” in the summary of significant forecastassumptions, 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 forthis assumption.
Because, as described in the preceding paragraph, we are unable to evaluate management’s 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
as-no responsibility to update this report for events and circumstances occurring after the date ofthis report
(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 principrinci-pal countant’s own report The reference is done in essentially the same way divided-responsibilityreports are done for audits of historical financial statements
ac-(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 anopinion after the examination
38.8 AGREED-UPON PROCEDURES
(a) SCOPE OF SERVICE. An engagement to apply agreed-upon procedures to prospectivefinancial statements involves applying the procedures specified by the users of the statementsand reporting the results of their application The level of service is flexible; the accountant’sreport 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 leveldone 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 nancial statements provided that the following conditions are met:
fi-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 asextensive as the specified parties desire, as long as the specified parties take responsibilityfor their sufficiency However, mere reading of a financial forecast does not constitute a
38 28 PROSPECTIVE FINANCIAL STATEMENTS
Trang 6procedure sufficient to permit an accountant to report on the results of applying upon procedures.
agreed-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 fied parties
speci-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 countant’s report
ac-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 proceduresshould 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 theprospective financial statements is in conformity with AICPA presentation guidelines and onwhether 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 theaccountant 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
Trang 715 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 spect to the forecasted balance sheet, statements of income, retained earnings, and cash flows ofDEF Company, a subsidiary of ABC Company, as of December 31, 20XX, and for the year thenending These procedures, which were agreed to by the Boards of Directors of XYZ Corporationand ABC Company, were performed solely to assist you in evaluating the forecast in connectionwith the proposed sale of DEF Company to XYZ Corporation DEF Company’s management is re-sponsible for the forecast
re-This agreed-upon procedures engagement was conducted in accordance with attestation standardsestablished 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 forwhich this report has been requested or for any other purpose
a With respect to forecasted rental income, we compared the occupancy statistics about pected demand for rental of housing units used in the forecast to occupancy statistics for thefollowing comparable properties Comparable properties for this purpose are defined as [de-scribe characteristics of comparability, e.g., those located in Sample City with between xxxand yyy rental units, rental prices within z% of those used in the forecast.]
ex-[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 andtested 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 bethe 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 underlyingassumptions 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 ring after the date of this report
occur-This report is intended solely for the information and use of the Boards of Directors of ABC pany and XYZ Corporation and is not intended to be and should not be used by anyone other thanthese specified parties
Com-[Signature]
[Date]
38 30 PROSPECTIVE FINANCIAL STATEMENTS
Trang 838.9 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-calledcontrollership 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 tant to structure the engagement and report to fit the circumstances
accoun-The accountant may provide compilation, examination, or agreed-upon procedures for internaluse 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 thisbelief, 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 siders are considered third parties:
out-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 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 aboutwhich 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 athird party In some cases, this determination will require the exercise of considerable profes-sional judgment
in-(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 onimproving 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 ommended courses of action
rec-The standard compilation, examination, or agreed-upon procedures reports may be issued for ternal use, but often they are not used
in-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, therewould 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 tant include (1) a caveat that prospective results may not be achieved and (2) a statement that theprospective financial statements are for internal use only Many accountants choose to present this as
accoun-a legend on the staccoun-atement itself.
38.9 INTERNAL USE SERVICES 38 31
Trang 9(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 close the significant assumptions
dis-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
* 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 balancesheet, 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 surance of any kind on it Further, even if [description of the hypothetical assumption, e.g., “the thirdoperating 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 arerestricted to internal use and may not be shown to any third party for any purpose
as-* 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 ternal use would:
in-38 32 PROSPECTIVE FINANCIAL STATEMENTS
Trang 101 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 financialforecast
38.10 SOURCES AND SUGGESTED REFERENCES
American Institute of Certified Public Accountants, Accounting and Review Services Committee, “Compilationand 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 dards for Attestation Engagements No 10, AICPA, New York, 2001
Stan-, Guide for Prospective Financial Information AICPAStan-, New YorkStan-, 1999.
Commerce Clearing House, SEC Accounting Rules CCH, Chicago, 1990.
Financial Accounting Standards Board, “Statement of Cash Flows,” Statement of Financial Accounting dards No 95 FASB, Stamford, CT, 1987
Stan-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
Trang 12CHAPTER 39
PERSONAL FINANCIAL STATEMENTS
Dennis S Neier, CPA
Goldstein Golub Kessler LLP
Joel O Steinberg, CPA
Goldstein Golub Kessler LLP
(a) Applicable Professional Standards 2
(b) Acceptance of Clients 2
(c) Establishing an Understanding
with the Client 3
(d) Client Representation Letters 3
39.2 GENERAL DESCRIPTION AND
(d) Limited Partnership Interests 9
(e) Precious Metals 10
(f) Options on Assets Other than
Marketable Securities 10
(g) Life Insurance 10
(h) Closely Held Businesses 10
(i) Real Estate 11
(d) Income Taxes Payable 12
39.5 PROVISION FOR INCOME
(a) Definition 12(b) Computing the Provision for
Income Taxes 13(c) Tax Basis 13(d) Disclaimer 13
Trang 1339.1 GUIDANCE
(a) APPLICABLE PROFESSIONAL STANDARDS. The authoritative guide on the tion of personal finance statements is Statement of Position (SOP) 82-1, “Accounting and Fi-nancial Reporting for Personal Financial Statements,” issued by the American Institute ofCertified Public Accountants (AICPA)
prepara-Accountants are often engaged to compile, review, or audit personal financial statements.Standards for compilation of financial statements prescribed by Statement on Standards for Ac-counting and Review Services (SSARS) No 1, “Compilation and Review of Financial State-ments,” as amended by SSARS 8, “Amendment to Statement on Standards for Accounting andReview Services No 1,” are applicable to the compilation of personal financial statements in thesame manner as to the compilation of other financial statements
However, a subsequent AICPA release, SSARS No 6, “Reporting on Personal FinancialStatements Included in Written Personal Financial Plans,” allows accountants to prepare per-sonal financial statements that omit disclosures required by generally accepted accounting prin-ciples (GAAP) so long as the statement will be used solely in the development of the client’spersonal financial plan and not to obtain credit or to meet other disclosure requirements If anaccountant prepares a personal financial statement under this exemption, he should issue a writ-ten report stating the restricted purpose of the statement and noting that it has not been audited,reviewed, or compiled Nonetheless, SSARS No 6 does not preclude an accountant from com-plying with SSARS No 1, as amended, in such engagements (Also see Section 39.8, “Compi-lation and Review”)
Standards for review of financial statements prescribed by SSARS No 1, as amended, apply
to the review of personal financial statements in the same manner as to the review of other nancial statements (also see Section 39.8) and generally accepted auditing standards (GAAS)apply to the audit of personal financial statements in the same manner as to the audit of other fi-nancial statements
fi-Accountants may also be asked to report on specified elements, accounts, or items of a sonal financial statement In those circumstances, the guidance provided by Statement on Audit-ing Standards (SAS) No 62, “Special Reports,” or Accounting and Review ServicesInterpretation No 8 of SSARS No 1, “Reports on Specified Elements, Accounts, or Items of aFinancial Statement,” should be followed as applicable
per-(b) ACCEPTANCE OF CLIENTS. Before accepting an engagement involving personal cial statements, the accountant ordinarily would evaluate certain aspects of the potential clientrelationship
finan-The accountant may wish to consider facts that might bear on the integrity of the prospectiveclient Consideration of the character and reputation of the individual helps to minimize the pos-sibility of association with a client who lacks integrity The extent of the accountant’s inquiriesbefore acceptance might depend on his or her previous knowledge of the client and the nature ofthe client’s financial activities The accountant may want to consult predecessor accountants orauditors, attorneys, bankers, and others having business relationships with the individual re-garding facts that might bear on the integrity of the prospective client This does not suggestthat, in accepting an engagement, the accountant vouches for the integrity or reliability of aclient However, prudence suggests that an accountant be selective in determining his or herprofessional relationships
The accountant may also wish to consider circumstances that present unusual business risk,such as considering whether an individual is in serious financial difficulty
In addition, the accountant may want to consider the effect of the lack of independence onthe type of report he may issue in compliance with professional standards SSARS No 1 permitsthe accountant to issue a compilation report on personal financial statements of an individualwith respect to whom he is not independent However, the accountant should be independent toissue a review report or an audit opinion
39 2 PERSONAL FINANCIAL STATEMENTS
Trang 14Before accepting an engagement involving personal financial statements, the accountant maywant to ask the potential client about the availability of records and consider whether availablerecords provide a basis sufficient for providing the services requested Incomplete or inadequateaccounting records are likely to give rise to problems in compiling, reviewing, or auditing per-sonal financial statements Because of the informal nature of most personal financial records,the accountant should evaluate the need to perform other accounting services in conjunctionwith personal financial records.
Professional standards require the accountant to attain a certain level of knowledge of hisclient’s financial activities Before accepting an engagement, the accountant should considerwhether he can obtain an appropriate understanding of the nature of the prospective client’s fi-nancial activities and the specialized accounting principles and practices related to any of theclient’s financial activities
(c) ESTABLISHING AN UNDERSTANDING WITH THE CLIENT. Once the accountant hasdecided to accept an engagement involving personal financial statements, he should establish anunderstanding with the client, preferably in writing, regarding the services to be performed andthe terms and objectives of the engagement
(d) CLIENT REPRESENTATION LETTERS. During an engagement, the client makes manyrepresentations to the accountant Generally accepted auditing standards require that an inde-pendent auditor performing an audit in accordance with GAAS obtain written representationsfrom management for all financial statements and periods covered by the auditor’s reports Therepresentation should be addressed to the auditor and should be made as of a date no earlier thanthe date of the auditor’s report
SAARS No 1 requires that the accountant obtain a representation letter from the client aspart of every review engagement as well Compilation engagements do not contemplate tests ofaccounting records and of responses to inquiries by obtaining corroborating evidential matter.However, because of the informal nature of most personal financial records, it is advisable toobtain written representation from the client to confirm the oral representation made in all per-sonal financial statement engagements
39.2 GENERAL DESCRIPTION AND REQUIREMENTS
(a) DEFINITION. A personal financial statement presents the personal assets and liabilities of
an individual, a husband and wife, or a family It is not a financial statement on a business owned
by the person; in fact, it differs from a business financial statement in several important ways (seeExhibit 39.1)
The essential purpose of a personal financial statement is to measure wealth at a specified date—
to take a snapshot of the person’s financial condition It does this by presenting:
• Estimated current values of assets
• Estimated current amounts of liabilities
• A provision for income taxes based on the taxes that would be owed if all the assets were dated and all the liabilities paid on the date of the statement
liqui-• Net worth
The basic personal financial statement containing this information is called a statement of cial condition, not a balance sheet Values and amounts for one or more prior periods may be in-cluded for comparison with the current values and amounts, but this is optional The statement ofchanges in net worth is also optional (also, see Section 39.8) It presents the major sources of in-crease or decrease in net worth (see Exhibit 39.2)
finan-39.2 GENERAL DESCRIPTION AND REQUIREMENTS 39 3
Trang 15(b) OWNERSHIP. A personal financial statement covering a whole family usually presents theassets and liabilities of the family members in combination, as a single economic unit However,the members may have different ownership interests in these assets or liabilities For example, thewife may have a remainder interest in a testamentary trust, whereas the husband may own life in-surance with a net cash surrender value It may be useful, especially when the statement is to beused in a divorce case, to disclose each individual’s interests separately This may be done in sep-arate columns within the statement, in the notes to the statement, or in additional statements foreach individual.
Often an individual covered by the statement is one of a group of joint owners of assets, as withcommunity property or property held in joint tenancy In this case, the statement should includeonly the individual’s interest as a beneficial owner under the laws of the state If the parties’ shares
in the assets are not clear, the advice of an attorney may be needed to determine whether the son should regard any interest in the assets as his or her own, and if so, how much The statementshould make full disclosure of the joint ownership of the assets and the grounds for the allocation
per-of shares
(c) USES Many individuals or families use personal financial statements for investment, tax,
re-tirement, gift and estate planning, and obtaining credit A personal financial statement may also berequired for disclosure to the court in a divorce case or to the public when the individual is a candi-date or an incumbent of public office
(d) ACCOUNTING BASIS SOP 82-1 establishes the use of estimated current values and
amounts and the accrual basis of accounting as GAAP for personal financial statements The AICPA
Personal Financial Statements Guide (the “Guide”) allows accountants to prepare, compile, review,
or audit personal financial statements on other comprehensive bases of accounting, such as cal cost, tax, or cash
histori-(e) ORDER OF PRESENTATION Assets are presented in order of liquidity and liabilities in
order of maturity No distinction is made between current and long-term assets and liabilities becausethere is no operating cycle in a person’s financial affairs
39 4 PERSONAL FINANCIAL STATEMENTS
Objective Measurement of wealth Reporting of earnings, evaluation of
performanceUses Facilitation of financial planning;
procural of credit; provision ofdisclosures to the public or thecourt
Procural of credit, information forshareholders, regulatoryrequirements
Valuation Current value Historical cost
Method of
accounting
Classification None: assets presented in order of
liquidity, liabilities in order ofmaturity
Assets and liabilities classified current
or long termExcess of assets
over liabilities
Net worth Equity earnings
Exhibit 39.1 Personal and business financial statements compared.
Trang 16Assets and liabilities of a closely held business that is conducted as a separate entity are notcombined with similar personal items in a personal financial statement Instead, the estimatedcurrent net value of the person’s investment in the entity is shown as one amount But if theperson owns a business activity that is not conducted as a separate entity, such as a real estateinvestment with a related mortgage, the assets and liabilities of the activity are shown as sepa-rate amounts.
39.2 GENERAL DESCRIPTION AND REQUIREMENTS 39 5
JAMES AND JANE PERSON Statements of Financial Condition December 31, 20X3 and 20X2
payable to insurance companies ($38,100 and $37,700)
Income taxes—current year balance $00,08,800 $0,000,400Demand 10.5% note payable to bank 25,000 26,000Mortgage payable (Note 10) 98,200 99,000Contingent liabilities (Note 11) $0,000,000 $0,000,000
132,000 125,400Estimated income taxes on the differences between the estimated
current values of assets and the estimated current amounts of
liabilities and their tax bases (Note 12) 239,000 160,000
$1,384,000 $1,206,700
The notes are an integral part of these statements
(Continued)
Exhibit 39.2 Illustrative financial statements (Source: Reproduced with permission from AICPA,
Per-sonal Financial Statements Guide, Appendix E: Statement of Position No 82-1, ing and Financial Reporting for Personal Financial Statements,” 1992, pp 53–58.)
Trang 17“Account-39 6 PERSONAL FINANCIAL STATEMENTS
JAMES AND JANE PERSON Statements of Changes in Net Worth For the Years Ended December 31, 20X3 and 20X2
Year ended December 31
Realized increases in net worth
Salary and bonus $0,095,000 $ 85,000Dividends and interest income 2,300 1,800Distribution from limited partnership 5,000 4,000Gains on sales of marketable securities $0,001,000 $000,500
$0,103,300 $091,300Realized decreases in net worth
Marketable securities (net of realized gains on securities sold) 3,000 500
Estimated income taxes on the differences between the
estimated current values of assets and the estimated current
amounts of liabilities and their tax bases $0,079,000 $022,000Net unrealized increase in net worth $0,068,100 $038,500Net increase in net worth 91,700 58,300Net worth at the beginning of year $0,921,300 $863,000Net worth at the end of year $1,013,000 $921,300
The notes are an integral part of these statements
Exhibit 39.2 Continued.
Trang 1839.2 GENERAL DESCRIPTION AND REQUIREMENTS 39 7
JAMES AND JANE PERSON Notes to Financial Statements Note 1 The accompanying financial statements include the assets and liabilities of James and Jane
Person Assets are stated at their estimated current values and liabilities at their estimated currentamounts
Note 2 The estimated current values of marketable securities are either (a) their quoted closing prices
or (b) for securities not traded on the financial statement date, amounts that fall within the range of quoted
bid and asked prices
Marketable securities consist of the following:
December 31, 20X3 December 31, 20X2 Number of Estimated Number of Estimated Shares or Current Shares or Current
Stocks
Jaiven Jewels, Inc 1,500 $ 98,813
McRae Motors, Ltd 800 11,000 600 $004,750Parker Sisters, Inc 400 13,875 200 5,200
Rubin Paint Company 300 9,750 100 2,875Weiss Potato Chips, Inc 200 $020,337 300 $025,075
Note 3 Jane Person owns options to acquire 4,000 shares of stock of Winner Corp at an option price
of $5 per share The option expires on June 30, 20X5 The estimated current value is its published sellingprice
Note 4 The investment in Kenbruce Associates is an 8% interest in a real estate limited partnership.
The estimated current value is determined by the projected annual cash receipts and payments ized at a 12% rate
capital-Note 5 James Person owns 50% of the common stock of Davekar Company, Inc., a retail mail order
business The estimated current value of the investment is determined by the provisions of a shareholders’agreement, which restricts the sale of the stock and, under certain conditions, requires the company to re-purchase the stock based on a price equal to the book value of the net assets plus an agreed amount forgoodwill At December 31, 20X3, the agreed amount for goodwill was $112,500, and at December 31,20X2, it was $100,000
A condensed balance sheet of Davekar Company, Inc., prepared in conformity with generally cepted accounting principles, is summarized below:
ac-(Continued)
Exhibit 39.2 Continued.
Trang 1939 8 PERSONAL FINANCIAL STATEMENTS
The sales and net income for 20X3 were $10,500,000 and $125,000 and for 20X2 were $9,700,000and $80,000
Note 6 Jane Person is the beneficiary of a remainder interest in a testamentary trust under the will of
the late Joseph Jones The amount included in the accompanying statements is her remainder interest inthe estimated current value of the trust assets, discounted at 10%
Note 7 At December 31, 20X3 and 20X2, James Person owned a $300,000 whole life insurance
pol-icy
Note 8 The estimated current value of the residence is its purchase price plus the cost of
improve-ments The residence was purchased in December 20X1, and improvements were made in 20X2 and20X3
Note 9 The estimated current values of personal effects and jewelry are the appraised values of those
assets, determined by an independent appraiser for insurance purposes
Note 10 The mortgage (collateralized by the residence) is payable in monthly installments of $815 a
month, including interest at 10% a year through 20Y8
Note 11 James Person has guaranteed the payment of loans of Davekar Company, Inc., under a
$500,000 line of credit The loan balance was $300,000 at December 31, 20X3, and $400,000 at cember 31, 20X2
De-Note 12 The estimated current amounts of liabilities at December 31, 20X3, and December 31,
20X2, equaled their tax bases Estimated income taxes have been provided on the excess of the estimatedcurrent values of assets over their tax bases as if the estimated current values of the assets had been real-ized on the statement date, using applicable tax laws and regulations The provision will probably differfrom the amounts of income taxes that eventually might be paid because those amounts are determined
by the timing and the method of disposal or realization and the tax laws and regulations in effect at thetime of disposal or realization
The estimated current values of assets exceeded their tax bases by $850,000 at December 31, 20X3,and by $770,300 at December 31, 20X2 The excess of estimated current values of major assets over theirtax bases are—
December 31
Investment in Davekar Company, Inc $430,500 $355,500Vested interest in deferred profit-sharing plan 111,400 98,900Investment in marketable securities 104,100 100,000Remainder interest in testamentary trust 97,000 53,900
Exhibit 39.2 Continued.
Trang 2039.3 ASSETS
(a) ESTIMATED CURRENT VALUE Assets are presented at their estimated current value This
is defined by SOP 82-1 as “the amount at which the item could be exchanged between a buyer and
a seller, each of whom is well informed and willing, and neither of whom is compelled to buy orsell.” Sales commissions and other costs of disposal should be considered if they are expected to bematerial
SOP 82-1 recognizes that determining the estimated current value of some assets may be difficult,and if the costs of doing so would appear to exceed the benefits, it recommends that the person usehis judgment
In general, the best way to determine estimated current value is by reference to recent marketprices of similar assets in similar circumstances If recent market prices are not available, other meth-ods may be used, including the use of appraisals, the adjustment of historical cost by reference to aspecific price index, the capitalization of past or prospective earnings, the use of liquidation values,
or the use of discounted amounts of projected cash receipts
Whatever method is used, it should be consistently applied from period to period for the sameasset
(b) RECEIVABLES Receivables are presented at the discounted amounts of cash expected to be
collected, using the prevailing interest rate at the date of the statement
(c) MARKETABLE SECURITIES. Marketable securities are stocks, bonds, unfulfilled futurescontracts, options on traded securities, certificates of deposit, and money market accounts forwhich market quotations are publicly available The estimated current value of a marketable secu-rity is its closing price on the date of the statement, less the expected sales commission IndividualRetirement Accounts and Keogh accounts should be presented net of the penalty charge for earlywithdrawal
If the security was not traded on that date, but published bid and asked prices are available, SOP82-1 states that the estimated current value should be within the range of those prices Some accoun-tants, however, believe that only the bid price should be used, because “people can ask all they wantfor an asset, but what matters is what others will pay for it.”1
If bid and asked prices are not available for the date of the statement, the estimated current value
is the closing price on the last day that the security was traded, unless the trade occurred so far back
in the past as to be meaningless by the date of the statement
On over-the-counter securities, unfortunately, the market does not speak with a single voice ferent quotations may be given by the financial press, quotation publications, financial reporting ser-vices, and various brokers In such a case, the mean of the bid prices, of the bid and asked prices, or ofthe prices quoted by a representative sample of brokers may be used as the estimated current value.Large blocks of stock may also pose a problem If a large block of stock were dumped on the mar-ket, the price might not hold up On the other hand, a controlling interest might be worth more, sharefor share, than a minority interest Market prices may need to be adjusted for these factors to deter-mine estimated current value Preparers should consult a qualified stockbroker for an opinion on thisproblem
Dif-Restrictions on the transfer of a stock are yet another factor that might call for an adjustment ofmarket prices to determine estimated current value
(d) LIMITED PARTNERSHIP INTERESTS. If interests in a limited partnership are activelytraded, the estimated current value of such an interest should be based on the prices of recent
39.3 ASSETS 39 9
1M D Kinsman and B Samuelson, “Personal Financial Statements: Valuation Challenges and Solutions,”
Jour-nal of Accountancy, September 1987, p 139.
Trang 21trades If interests in the partnership are not actively traded, the current value of the nership’s underlying assets may be used to measure the value of the interest [see Subsec-tions 39.3(a) and (h)] When this method is used, the person should consider discounting thevalue of the interest for lack of marketability and lack of control over the general partner.
part-If it is not feasible to estimate the current value of the partnership’s underlying assets (and the terests are not actively traded), the estimated current value of the interest may be shown as theamount of cash that the person has invested If the underlying assets of the partnership are considered
in-to be virtually worthless, however, the interest should be valued at zero
The person’s share of the partnership’s negative tax basis, if any, should be included in the putation of the provision for income taxes (see Section 39.5)
com-The statement should disclose the person’s share of any recourse debts of the partnershipand any commitments for future funding If the person’s interest in the partnership repre-sents a substantial proportion of ownership, it may be useful to disclose summarized finan-cial information about the partnership as an investment in a closely held business [see Subsection 39.3(h)]
(e) PRECIOUS METALS. The estimated current value of precious metals, like that of ketable securities, is their closing price on the date of the statement, less the expected salescommission
mar-(f) OPTIONS ON ASSETS OTHER THAN MARKETABLE SECURITIES Options to buy assets
other than marketable securities should first be valued at the difference between the exercise priceand the asset’s current value Then this difference should be discounted at the person’s borrowingrate over the option period, if this is material The borrowing rate should reflect the cost of a loan se-cured by the asset
(g) LIFE INSURANCE. The estimated current value of a life insurance policy is its cash render value, less any loans against it This information may be obtained from the insurancecompany
sur-Disclosure of the face value of the policy is required by SOP 82-1 It may also be useful to close the death benefits that would accrue to family members covered by the statement
dis-(h) CLOSELY HELD BUSINESSES If the person has a material investment in a closely held
busi-ness that is conducted as a separate entity, the statement should disclose the name of the company,the person’s percentage of ownership, and the nature of the business It should also disclose summa-rized financial information on the company’s assets, liabilities, and results of operations, based onthe company’s financial statements for the most recent year The basis of presentation of these state-ments, such as GAAP, tax, or cash, should also be disclosed, and so should any significant loss con-tingencies
Determining the estimated current value of an investment in a closely held business, whether aproprietorship, partnership, joint venture, or corporation, is notoriously difficult The objective is toapproximate the amount at which the investment could be exchanged, on the date of the statement,between a well-informed and willing buyer and seller, neither of whom is compelled to buy or sell.This value is presented as a single item in the statement of financial condition, and a condensed bal-ance sheet of the company should be presented in the notes
SOP 82-1 recognizes several methods, or combinations of methods, for determining the timated current value of a closely held business: appraisals, multiple of earnings, liquidationvalue, reproduction value, discounted amounts of projected cash receipts, adjustments of bookvalue, and cost of the person’s share of the equity of the business If a buyout agreement existsspecifying the amount that the person will receive when he withdraws, retires, or sells out,SOP 82-1 says that it should be considered but that it does not necessarily determine estimatedcurrent value
es-39 10 PERSONAL FINANCIAL STATEMENTS