The Canadian Standard on Related Services, or otherwise known as CSRS 4200, replaces Section 9200, Compilation Engagements, effective December 14, 2021.
Top 4 reasons why the CSRS 4200 replaced the old standard
Below are the top 4 reasons why CPA Canada brought out CSRS 4200. This new standard replaces Section 9200 as it specifically resolves these issues:
- It’s outdated
- Section 9200, the old standard, hasn’t been significantly revised since its original issue in 1987!
- Naturally, since then, there has been some inconsistencies among practitioners as to what services fall within the scope of Section 9200 as services have changed over the years along with the industries they serve.
- The purpose it served, versus it intended to serve
- The premise of Section 9200 is that it was meant for management, when in reality the compiled financial information is often used by third parties, such as lenders.
- Variation in work
- Variation in the extent of work and level of documentation performed by practitioners
- Lender’s perception of the extent of work by practitioners required by Section 9200 was not accurate.
- Basis of accounting
- Lack of clarity as to the basis of accounting applied in the preparation of compiled financial information.
- Ultimately this boils down to a discussion on HOW the notice to reader financial statements are compiled.
Are you a business owner who hires an external accountant? Here’s what the new standard will do for you!
Do I need to follow this new standard or not, as people are telling that I need to!
CSRS 4200 redefines the role and responsibilities of management and your practitioner, among other important terms of understanding, as well as significant changes in the consistency of services provided and documentation thereof. These are significant changes in scope that would typically require you to have a discussion with your practitioner.
But the question still stands, must I have this thing?
Simply put NO, but the reality is it’s not a simple question. You’ll need to assess your individual case facts with your practitioner in a one-on-one meeting to confirm whether you’ll be required or simply just desire a CSRS 4200 Compilation Engagement.
One of the points you will be assessing during this meeting will be whether there are any third parties who may request financial information or set the accounting basis. If the answer is yes to either of those, the guidelines are pretty simple – YES to CSRS 4200.
But what if I don’t have any current third parties, except for my bank, who has given me a CEBA line of credit?
Now that CSRS 4200 has a redefined set of services, some services have fallen out of the scope of a compilation engagement. As previously mentioned, a compilation engagement is mandatory in cases where there are third parties who can request financial information. However, a compilation is also available at the request of the business owner for their own business purposes.
But why would I want to pay for something I don’t need today?
Well maybe you plan an expansion in the US in a year and are looking for capital; you may need one in the future, and that’s a sufficient enough reason. The future financing may require you provide historical financial information at the time you are asking for the loan, and you may want to have this ready in advance.
So if I don’t need a compilation, but I want financial statements, what do I do?
Keep in mind whenever we as accountants say “compilation”, we mean that there’s a “notice-to-reader” (“NTR”) attached to the financial statements. If there are no third-party users AND you as the business owner do not request that we issue our NTR communication, then a compilation engagement may not be required. For bookkeeping, tax services, or financial statement preparation services that fall outside the scope of CSRS 4200, you may discuss these alternatives with your R&A practitioner.
Significant work-related changes brought about by CSRS 4200
Performance requirements for compilation engagements have changed drastically, here’s how:
Engagement acceptance or continuance – REVISED
Some of the changes in scope mentioned earlier included the new responsibilities for both parties involved. However, there are other important terms to be confirmed. This is all done during acceptance and continuance prior to commencing the engagement. The business owner also needs to acknowledge whether the compiled financial information will be used by a third party and what the basis of accounting is.
Description of the basis of accounting – NEW
The new standard introduces the disclosure of the basis of accounting in order to assist readers in understanding how the compiled financial information was prepared. You may have certain financial statement line items that deviate slightly from your basis, in which case you will want to note such details in your financial statement disclosure.
In “Understanding your basis of accounting” below, we will dive in detail about the different basis you can set and what you may want to take into consideration.
Performing the engagement and documentation – REVISED
There is a clear expectation for the minimum work required to provide compiled financial statements at a certain standard. Establishing a standard with defined work practices for the engagement’s performance will give comfort to lenders knowing a common practice is being adhered to. This gives creditors a certain level of comfort when assessing the financial statements for the purposes of providing a loan.
Minimum standards set for documentation – NEW
In addition to the added work imposed, there are also strict documentation guidelines to be followed where before most knowledge of the client was informally kept. Further discussions may need to be required to fully document your practitioners understanding of all third parties who may require financial information, investments, how the small business processes major transaction streams, key advisors, significant changes, among others. Significant judgements that management applied in the preparation of the compiled financial information must also be discussed and documented.
Reporting – REVISED
The new standard also introduces a new form of communication the practitioner issues to management. This communication has a clear description of the responsibilities of management and the practitioner, as well as the nature and scope of the engagement. Similarly, as before, a compilation engagement does not provide any form of assurance. If you, or any third parties, require a any level of assurance written in the communication, then you may consider other types of engagements such as a review or an audit.
Understand your basis of accounting
Principally your CSRS 4200 Compilation Engagement would be performed under an agreed upon basis of accounting which can take the form of, either one of the following:
- Cash basis
- Cash basis of accounting with selected estimates and accruals
- A basis prescribed by a contract with a third party
- A basis of accounting can also be set by your creditors / landlords with whom you’ve entered into an agreement or contract with
Consider financial statement note disclosure of financial statement line items not carried on a cash basis, if that is your set basis, for example: Revenues are recognized at the time of invoicing.
Questions you can ask yourself in determining the details to your basis of accounting
- What are my terms of major contracts with third parties and do they contain an agreed upon accounting basis?
- What method are you valuing your operating costs and capital assets by: cash or accrual method?
- How are you recording financial assets or liabilities: fair value or amortized cost?
- How do you value your inventory?
- How do you amortize your capital assets?
- How do you track accounts receivable and payable, prepaid and accrued expenses?
- When do you recognize revenue?
Let’s get the discussion started! Click HERE for our questionnaire to the CSRS 4200 requirements.
When can you take action and what are the deadlines
The new standard is effective for corporations with years ending on or after Dec 14, 2021
If you are uncertain if you are required to provide financial information to a lender or other third party, let’s set a date and we can help you determine if the new standard is the level of service you need.