SSARS 21 is Coming! SSARS 21 is Coming!
SSARS No. 21 is Coming!
(Part IV)
By: Joseph L. Santoro MBA/CPA/CVA/MAFF/ABA
This is the fourth and last in a series of articles intended to provide information about the AICPA’s Statement on Standards for Accounting and Review Services [SSARS] No. 21 which was released on October 23, 2014. The first article described a new level of engagement—The Preparation—which falls below the level of a Compilation as defined by the Accounting and Review Services Committee of the AICPA. The second article discussed the changes to the Compilation level of service and offered comparisons between the new Preparation and the new, revised Compilation. The third article described the changes to the new representation letter for the Review level of service. This, the fourth and final installment of the series, addresses the new Review Report.
Summary of Previous Articles Entitled: SSARS is Coming! Parts I, II, & III
On October 23, 2014, the Accounting and Review Services Committee of the AICPA released SSARS No. 21, which is the most significant change to the presentation of non-audited financial statements since SSARS was introduced in 1978. This standard—which is mandatory for reporting periods that end on or after December 15, 2015 effectively expands financial statement presentation and reporting options to five:
- The Audit
- The Review
- The Compilation with full disclosure
- The Compilation in which substantially all disclosure are omitted.
- The Preparation
In Part 1 of the series, the topic is The Preparation. The Preparation is a non-attest service which can be provided by an accountant when financial statements have not been subjected to procedures required by an Audit, a Review, or a Compilation. The Preparation standards permit the accountant to provide financial statements to the entity that have no significant visual differences from those other service levels. However, when The Preparation level of service is provided, two very important distinctions are required: (1) the accountant is prohibited from including an accountant’s report with those statements, and (2) each page of the financial statements must contain a legend clearly stating that “no assurance is provided” on the accuracy of those statements. Nevertheless, such preparation level statements may be forwarded to a third party for their use, as appropriate—even if the purpose is to obtain credit! And, since no report is issued, The Preparation level of service is expected to obviate the need for peer review.
In Part II of the series the content is the new Compilation standards. The Compilation, under SSARS No. 21, is also markedly different. While SSARS No. 1 [essentially in effect from 1979 to 2009] required the release of an accountant’s report with a minimum of two paragraphs of explanation, and while SSARS No. 19 [essentially in effect from 2010 through 2014] required an accountant’s report to have at least three paragraphs of information, the new SSARS No. 21 reduces the minimum number of Compilation level paragraphs to one. Further, SSARS No. 21 requires the accountant to include the following revised statement of the objective of a Compilation within the body of the accountant’s engagement letter:
“The accountant’s objective in a compilation engagement is to apply accounting and financial reporting expertise to assist management in the presentation of financial statements and report in accordance with this standard without undertaking to obtain or provide any assurance that there are no material modifications that should be made to the financial statements in order for them to be in accordance with the applicable financial reporting framework.”
Note that special phrase: “to apply accounting and financial reporting expertise.” For the first time an accountant who issues a Compilation report will state within the engagement contract that he or she is an “expert” in the field of accounting.
Part III of the series addressed the professional standards related to the Management Representation Letter for an accountant’s Review report. The focus was on its new content and tone. That is, the new “tone” implies that the accountant was motivated by management to perform certain tasks, and that management, in addition to making assertions about its own role in the reporting process, made specific, positive confirmation that it had fulfilled each of its responsibilities in the reporting process, e.g.:
“We acknowledge our responsibility and have fulfilled our responsibilities for the design, implementation, and maintenance of internal control relevant to the preparation of financial statements that are free from material misstatement, whether due to fraud or error.”
In other words, management claims responsibility for the institution of appropriate controls and asserts that those controls work!
For more information on The Preparation , The Compilation or the Review Engagement under SSARS No. 21, please refer to previous blog entries. Part 1 Part 2 Part 3
AR-C Section 90: The New Accountant’s Review Report under SSARS No. 21
The “new” standards for the Review level of service only apply to full operating cycle presentations. That is, when an accountant is engaged to provide a Review level of service for interim financial statements, the appropriate guidance is found at AU-C Section 930, Interim Financial Information.
That being said, the “new” standards for the Review level of service under SSARS No. 21 remain relatively unchanged. The accountant’s objective continues to be obtaining limited assurance as to whether the accountant is aware of any material modifications that should be made to the financial statements for them to be in accordance with the applicable financial reporting framework.
The accountant must still apply analytical procedures to evaluate the plausible relationships among both financial and nonfinancial data to render the opinion about material modifications. The accountant can provide Review level services under generally accepted accounting principles [GAAP] or through the use of a special purpose framework such as cash basis, tax basis, or other acceptable alternatives to GAAP.
However, some of the more striking differences with respect to Review level services compared with prior “review level” SSARS standards involve (1) the tone and style of the management representation letter and (2) the formatting and appearance of the accountant’s review report. This change in tone from the equivalent of passive to active voice is similar to the change in tone found in the new Compilation; therefore, refer to the previous article in this series for commentary.
Note: Sample engagement letters for both the Preparation and the new Compilation were provided in the first two articles in this series. The SSARS No. 21 engagement letter for a Review is similar in approach and content to that of the Compilation. Consult AR-C Section 90 for an illustration.
The remainder of this article provides observations with respect to the new Review report under SSARS No. 21.
As noted in the prior articles related to SSARS No. 21, the Preparation level of service prohibits the issuance of a report. The new Compilation standards require a report, but the format of the report is to be so markedly different in presentation from either the Review or, for that matter, an Audit, that no reader should be misled into thinking that a Compilation provides any form of assurance.
The new Review Report has two major components:
- It is more similar in appearance to an Audit than the prior version
- The Report explicitly draws the reader’s attention to each distinctive premise of thought embraced by the report itself. Major propositions are to be highlighted through the use of captions or titles that are emboldened. In this way the intent of the accountant to help focus the reader’s attention on certain limitations or reporting issues of importance is dramatized.
Illustrative Review Report Under SSARS No. 21: An Accountant’s Review Report on Single Year Financial Statements Prepared in Accordance with the Tax Basis of Accounting.
(Caveats: (1) The Review is for a single year; (2) The entity is a partnership that uses the income tax basis of accounting for presentation purposes; (3) Management understands that it had choices when it selected the appropriate financial framework.)
Independent Accountant’s Review Report
(Appropriate Entity Address)
I (We) have reviewed the accompanying financial statements of NSA Partnership, which comprise the statements of assets, liabilities, and partners’ capital—tax basis as of December 31, 2015, and the related statements of revenue and expense—tax basis, and partners’ capital—tax basis for the year then ended, and the related notes to the financial statements. A review includes primarily applying analytical procedures to managements’ (the partners’) financial data and making inquiries of partnership management (the owners). A review is substantially less in scope than an audit, the objective of which is the expression of an opinion regarding the financial statements as a whole. Accordingly, I (we) do not express such an opinion.
Management’s Responsibility for the Financial Statements
Management (The partners) is (are) responsible for the preparation and fair presentation of these financial statements in accordance with the basis of accounting the Partnership uses for income tax purposes; this includes determining the basis of accounting the Partnership uses for income tax purposes is an acceptable basis for the preparation of financial statements in the circumstances. Management (The Partners) is (are) also responsible for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Accountant’s Responsibility
My (Our) responsibility is to conduct the review engagement in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the American Institute of Certified Public Accountants. Those standards require me (us) to perform procedures to obtain limited assurance as a basis for reporting whether I am (we are) aware of any material modifications that should be made to the financial statements for them to be in accordance with the basis of accounting the Partnership uses for income tax purposes. I (We) believe that the results of my (our) procedures provide a reasonable basis for our report.
Accountant’s Conclusion
Based upon my (our) review, I am (we are) not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in accordance with the basis of accounting the Partnership uses for income tax purposes.
Basis of Accounting
I (We) draw attention to Note X of the financial statements which describes the basis of accounting. The financial statements are prepared in accordance with the basis of accounting the Partnership uses for income tax purposes, which is a basis of accounting other than accounting principles generally accepted in the United States of America. Our conclusion is not modified with respect to this matter.
[Signature of Accountant or the Accounting Firm]
[Accountant’s city and state]
[Date of the Accountant’s review report]
Note in the above illustration that the use of a special purpose reporting framework (the income tax basis), which under SSARS No. 21 becomes the terminology to reference another comprehensive basis of accounting (OCBOA), is highlighted in an isolated paragraph with its own caption. The use of “isolated” paragraphs to grab the reader’s attention is a significant feature of financial reporting at both the Review and the Audit levels.
For example, the following additional paragraph would be added to a report that contained a departure from the basis of accounting being used:
Known Departure from the Tax Basis of Accounting
As disclosed in Note X to the financial statements, the Partnership depreciates its long term assets based upon their estimated useful lives rather than using the method of depreciation consistent with the Modified Accelerated Recovery System as prescribed by the United States Internal Revenue Service when tax returns are prepared and filed. The net effect upon these financial statements is to increase the carrying value of long-term assets. The use of estimated useful lives for depreciation purposes rather than the use of tax depreciation increases the net carrying amount of these assets by $850,000 over the amount of the net carrying value of these assets had the tax method of depreciation, with its pre-determined accelerated and optional expensing methods, been applied.
Final Thoughts
There is no avoiding the fact that SSARS No. 21 represents a significant change in the way accountants will perform non-audit engagements and report on the related financial statements. If an accountant has been avoiding accounting CPE because it is “boring,” or because it is “same-old, same-old,” that attitude must change—at least in 2015.
The alterations in accounting preparation and reporting procedures imparted through the application of SSARS No. 21 are enormous in their impact. This new standard is the most significant change in accounting and review services in 35 years. With major changes to the Review Reporting format, with the drastic overhaul of Compilation procedures, and with the addition of a new level of reporting—The Preparation—below the Compilation level that is absent the requirement to issue an accountant’s report, none of us can afford to be passive with respect to training in Compilation and Review Procedures this year, and probably for the next few years as we all learn more about what these changes mean to us, to our clients, and the third parties who rely upon our work product.
Watch for an impact on Peer Review, as well. Since there is no report to be evaluated during the Preparation level engagement, to what extent will peer review standards have to be changed to address this new anomaly? Is it possible that a large percentage of the accounting population will no longer be subject to the peer review regimen by avoiding the issuance of a report?
Be prepared for more changes. Be prepared for more accounting education.
And, be prepared for this: SSARS No. 21 is not merely “coming.” SSARS No. 21 has arrived!
SSARS 21: Part 1: Major Changes to the Compilation – The Preparation
SSARS 21: Part 3: Major Changes to the Compilation – The Review Engagement
About the author
Joseph L. Santoro is a certified public accountant, an AICPA member, and, since 1981, a member of the National Society of Public Accountants. In addition to an MBA degree, Mr. Santoro holds certificates as a Certified Valuation Analyst, Accredited Business Advisor, and Master Analyst in Financial Statement Forensics. A former two-term NSA District 1 Governor, he has chaired numerous NSA committees, including Budget, Education, National Affairs, and Peer Review. Currently he is chair of NSA Accounting Standards Committee and serves also as a member of the Board of Directors for the Accreditation Council for Accounting and Taxation [ACAT], for whom he has for many years worked as a subject matter expert for its credentialing examinations. Although retired from the CPA practice he founded more than 30 years ago, Mr. Santoro, who is known nationwide as an author and lecturer for Gear Up with which he has been associated for more than 20 years, continues to provide lectures on Accounting and Taxation at more than 80 seminars each year.
Mr. Santoro is also the recipient of the National Society of Accountants (NSA) 2015 Accountant of the Year award and the NSA Golden Quill award for his work on this important series of articles.
Editor’s Note: These articles were written September 14, 2014 based upon the revised proposed SSARS No. 21 as of August 21, 2014. Subsequently, the ARSC Committee met twice more to make additional revisions that culminated in the release of SSARS No. 21 in December 2014. Readers are advised to check for themselves the final approved text of SSARS No. 21 for any differences between the proposal and the final standard. NSA will update these articles for those differences in the near future.