Can a non-certified accountant prepare a Notice to Reader set of financial statements?
Yes. Notice to Reader (NTR) or Compilation financial statements do not require an audit review or audit opinion. Therefore an uncertified accountant / professional bookkeeper can be engaged for a compilation engagement.
A compilation engagement is limited in scope as it involves compiling data from management into a set of financial statements that may or may not conform to generally accepted accounting principles (GAAP). Many businesses only need their financial statement presentation to conform to the Canadian Income Tax Act.
The NTR report that accompanies the financial statements states:
- The nature of the assignment - to compile data received from the sole proprietor or management into a set of financial statements.
- The scope and limitations - clearly states that a review or audit was not performed nor accuracy of data verified.
- A caution to readers - that the statements may not be appropriate for their use.
- Who prepared the report - lets the reader know the competence / professional status of the person / firm preparing the report.
This leads to the question: do you need to have GAAP and/or ASPE financial statements prepared annually for your business?
Do You Need GAAP or ASPE Financial Statements?
Do you, as a home-based business owner or small business owner, need to spend money having an accountant prepare a set of financial statements that conform to generally accepted accounting principles (GAAP)?
To answer that, you need to know that GAAP was initially developed for public companies that had to report to third parties. These third parties were usually investors and they needed access to financial information to make good investing decisions, The third party could also be bankers (or other creditors) who loaned money to the companies.
So if you are a small business owner with little to no debt and are active in your business ... do you really need to have financial statements prepared to meet third party reporting requirements? Your main concern is paying your taxes and having information to run your business.
The answer, then, is no. You can have your financial statements prepared on an income tax basis instead of GAAP. This is an acceptable practice if your financial statements are not widely distributed and mainly for internal use, particularly if you do not require review or audited statements for the banker or insurance agent.
Before I discuss what this means to you, I'll bring you up-to-date on this ongoing battle in the accounting world.
On April 29, 2009, the Canadian Accounting Standards Board (AcSB) released a proposal to have a "Made in Canada" GAAP for private companies that would take effect January 2011. This is when Canada switched from GAAP to international financial reporting standards (IFRS) for publicly traded companies or companies who want to raise equity or debt financing on the world stage.
This new standard was approved and released in December 2009, is called Accounting Standards for Private Enterprises (ASPE). It did in fact go into effect on January 1, 2011.
ASPE accounting is generally seen as good bookkeeping practices. If you book your entries properly every day throughout the year, it is fairly easy to prepare your financial statements ... but tax does treat some items differently than ASPE. As long as your financial statements clearly indicate the standard used for preparation, it is an acceptable practice for small business owners. The differences between tax basis and ASPE basis is usually related to measurement issues. So what differences are we talking about here. Here are three of the most common that probably affect you.
- Amortization is reported at CCA (Capital Cost Allowance) tax rates instead of economic or useful life.
- Bad debt is reported using the specific write-off method. Doubtful accounts reserves are also done on a specific set of accounts not as a general allowance.
- No deferred taxes requirement.
Depending on your situation, there may be more differences. A Notice to Reader and Notes to the Financial Statements, which are an integral part of your statements, can be prepared to explain any accounting policies that differ from ASPE reporting ... if you are going to be presenting the financial statements to a third party.
Tax basis statements may include non-taxable revenue and non-deductible expenses.
Tax basis financials do not require a cash flow statement.
The main benefit to you, besides reduced costs to prepare this type of statement, is that it is easier for you to understand what it is saying and therefore use the information to make better business decisions.
