An accountant whose client’s stock is not publicly traded is often requested to compile or review financial statements. When an accountant is involved in the compilation or review of a client’s financial statements, he or she is generally required to issue a report at the conclusion of the engagement. While compilation and review services represent two types of engagements that practitioners face daily, engagements also involving prospective financial statements and attestation services, which should be viewed by the accountant as an important area for practice expansion. This post explains reports on prospective financial statements, it comes with extensive standard report examples used on prospective financial statement engagements. Enjoy!

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What Are Prospective Financial Statements?

Prospective financial statements encompass financial forecasts and financial projections. Pro forma financial statements and partial presentations are specifically excluded from this category.

Financial forecasts are prospective financial statements that present, to the best of the responsible party’s knowledge and belief, an entity’s expected financial position, results of operations, and cash flows. They are based on assumptions about conditions actually expected to exist and the course of action expected to be taken.

Financial projections are also prospective financial statements that present, to the best of the responsible party’s knowledge and belief, an entity’s expected financial position, results of operations, and cash flows. They are based on assumptions about conditions expected to exist and the course of action expected to be taken, given one or more hypothetical (i.e., “what-if”) assumptions.

Responsible parties are those who are responsible for the underlying assumptions. While the responsible party is usually management, it may be a third party. For example: If a client is negotiating with a bank for a large loan, the bank may stipulate the assumptions to be used. Accordingly, in this case, the bank would represent the responsible party.

 

What Are Accountant’s Reporting Responsibilities Regarding Prospective Financial Statements?

Statement on Standards for Attestation Engagements #10 specifically precludes an accountant from compiling, examining, or applying agreed-upon procedures to prospective financial statements that fail to include a summary of significant assumptions.

The practice standards in the Statement are not applicable:

  • To engagements involving prospective financial statements that are restricted to internal use.
  • To those used solely in litigation support services (e.g., in circumstances where the practitioner is serving as an expert witness)

 

How Are Prospective Financial Statements Used?

The intended use of an entity’s prospective financial statements governs the type of prospective financial statements to be presented:

  • When an entity’s prospective financial statements are for general use, only a financial forecast is to be presented. “General use” means that the statements will be used by persons not negotiating directly with the responsible party. For example: In a public offering of a tax shelter interest.
  • When an entity’s prospective financial statements are for limited use, either a financial forecast or a financial projection may be presented. “Limited use” refers to situations where the statements are to be used by the responsible party alone or by the responsible party and those parties negotiating directly with the responsible party. For example: If a client is negotiating directly with a bank, either a forecast or a projection is appropriate.

 

 

How do Accountants Compile Prospective Financial Statements?

Compilation procedures applicable to prospective financial statements are not designed to provide any form of assurance on the presentation of the statements or the underlying assumptions.

They are essentially the same as those applicable to historical financial statements. Additional procedures are:

  • Inquire of the responsible party as to the underlying assumptions developed.
  • Compile or obtain a list of the underlying assumptions and consider the possibility of obvious omissions or inconsistencies.
  • Verify the mathematical accuracy of the assumptions.
  • Read the prospective financial statements in order to identify departures from AICPA presentation guidelines.
  • Obtain a client representation letter in order to confirm that the responsible party acknowledges its responsibility for the prospective statements (including the underlying assumptions).

Caution: An accountant is precluded from compiling forecasts and projections that do not present the summary of significant assumptions. Furthermore, the practitioner should not compile a projection that fails to identify the underlying hypothetical assumptions or describe the limitations on the utility of the projection.

 

What Is Involved In An Examination Of Prospective Financial Statements?

An examination of prospective financial statements evaluates:

  • The preparation of the statements
  • The support of the related underlying assumptions
  • The conformity of the statements with AICPA presentation guidelines.

The practitioner’s report should contain an opinion as to whether:

  • The statements are presented in conformity with the AICPA guidelines
  • The underlying assumptions provide a reasonable basis for the forecast
  • The underlying assumptions provide a reasonable basis for the projection in light of the hypothetical assumptions.

 

How Do Accountants Conduct An Examination Of Prospective Financial Statements?

In performing an examination of prospective financial statements, the practitioner should:

Step 1. Assess inherent and control risk as well as limit his or her detection risk.

Step 2. Consider the sufficiency of external sources (such as government and industry publications) and internal sources (such as management-prepared budgets) of information supporting the underlying assumptions.

Step 3. Determine the consistency of the assumptions and the sources from which they are predicated.

Step 4. Determine the consistency of the assumptions themselves.

Step 5. Determine the reliability and consistency of the historical financial information used.

Step 6. Evaluate the preparation and presentation of the prospective financial statements:

  • Does the presentation reflect the underlying assumptions?
  • Are the assumptions mathematically accurate?
  • Do the assumptions reflect an internally consistent pattern?
  • Do the accounting principles in use reflect those expected to be in effect in the prospective period?
  • Are the AICPA presentation guidelines followed?
  • Is there adequate disclosure of the assumptions?

Step 7. Obtain a client representation letter to confirm that the responsible party acknowledges its responsibility for the presentation of the prospective financial statements and the underlying assumptions.

 

What Is Included In Examination Reports On Prospective Statements?

The accountant’s report on examined prospective financial statements should include:

  • A title that includes the word independent
  • Identification of the prospective financial statements presented
  • Identification of the responsible party and a statement that the prospective financial statements are the responsibility of the responsible party
  • A statement that the practitioner’s responsibility is to express an opinion on the prospective financial statements based on his or her examination
  • A statement that the examination was performed in accordance with attestation standards established by the AICPA and, accordingly, included such procedures as the practitioner considered necessary in the circumstances
  • A statement that the practitioner believes that the examination provides a reasonable basis for his or her opinion
  • An opinion on the presentation of the prospective financial statements in terms of their conformity with AICPA presentation guidelines
  • An opinion as to whether the underlying assumptions provide a reasonable basis for the prospective financial statements
  • A warning that the prospective results may not materialize
  • A statement that the accountant is under no responsibility to update his or her report for conditions occurring after the examination report is issued
  • The accountant’s signature, which may be manual or printed
  • The date of the report, which should coincide with the completion of the examination procedures.

 

What Do Accountants Include In A Compilation Report On Prospective Financial Statements?

The accountant’s report on compiled prospective financial statements should include:

  • An identification of the prospective financial statements presented.
  • A statement as to the level of service provided and the fact that the prospective financial statements were compiled in accordance with attestation standards established by the AICPA.
  • A statement describing the limited scope of a compilation and the fact that no opinion or any other form of assurance is being expressed.
  • A warning that the prospective results may not materialize.
  • A statement that the accountant is under no responsibility to update his or her report for conditions occurring after the compilation report is issued.
  • The date of the report, which should coincide with the completion of the compilation procedures
  • The accountant’s signature
  • In the case of a projection, a separate middle paragraph describing the limitations on the utility of the statements.
  • A separate paragraph when the statements present the expected results in the form of a range of values
  • If the accountant is not independent, a statement as to this fact (No disclosure should be made as to the reasons why the accountant feels that he or she is not independent).
  • A separate explanatory paragraph when the prospective statements contain a departure from AICPA presentation guidelines or omit disclosures unrelated to the significant assumptions.

 

Standard Report On Compiled Forecasts Example

I (We) have compiled the accompanying forecasted balance sheet, statement of income, retained earnings, and cash flows of Future Corporation as of (at) December 31, 20XX and for the year then ending, in accordance with attestation standards established by the American Institute of Certified Public Accountants.

A compilation is limited to presenting in the form of a forecast information that is the representation of management (or other responsible party) and does not include evaluation of the support for the assumptions underlying the forecast. I (We) have not examined the forecast and, accordingly, do not express an opinion or any other form of assurance on the accompanying statements or assumptions. Furthermore, there will usually be differences between the forecasted and actual results, because events and circumstances frequently do not occur as expected, and those differences may be material.

I (We) have no responsibility to update this report for events and circumstances occurring after the date of this report.

 

 
Standard Report On Compiled Projections Example

I (We) have compiled the accompanying projected balance sheet, statements of income, retained earnings, and cash flows of Future Corporation as of December 31, 20XX, and for the year then ending, in accordance with attestation standards established by the American Institute of Certified Public Accountants.

The accompanying projection, and this report, were prepared for [state special purpose, for example, “the Takeover Corporation for the purpose of negotiating a buyout of the Company,”] and should not be used for any other purpose.

A compilation is limited to presenting in the form of a projection information that is the representation of management (or other responsible party) and does not include evaluation of the support for the assumptions underlying the projection. I (We) have not examined the projection and, accordingly, do not express an opinion or any other form of assurance on the accompanying statements or assumptions. Furthermore, even if [describe hypothetical assumption, for example, “the buyout is consummated”] there will usually be differences between the projected and actual results, because events and circumstances frequently do not occur as expected, and those differences may be material. I (We) have no responsibility to update this report for events and circumstances occurring after the date of this report.

Paragraph Included When Statements Contain A Range Of Values Example

As described in the summary of significant assumptions, management of Future Corporation (or another responsible party) has elected to portray forecasted (or projected) [describe financial statement element(s) for which expected results of one or more assumptions fall within a range, and identify the assumptions expected to fall within a range, for example, “revenue at the amounts of $XXX, XXX and $YYY, YYY, which is based on a buyout purchase price of X% of 20XX net income and Y% of 20XX net income,”] rather than as a single point estimate. Accordingly, the accompanying forecast (projection) presents forecasted (projected) financial position, results of operations, and cash flows [describe assumption(s) expected to fall within a range, for example, “at such buyout rates”]. However, there is no assurance that the actual results will fall within the range of [describe assumption(s) expected to fall within a range, for example, “buyout rates”] presented.

 

 

Standard Report On Examined Forecasts Independent Accountant’s Report Example

(I) We have examined the accompanying forecasted balance sheet, statements of income, retained earnings, and cash flows of Travis Company as of December 31, 20XX, and for the year then ending. Travis Company’s management is responsible for the forecast. (My) Our responsibility is to express an opinion on the forecast based on (my) our examination.

(My) Our examination was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants and, accordingly, included such procedures as (I) we considered necessary to evaluate both the assumptions used by management and the preparation and presentation of the forecast. (I) We believe that (my) our examination provides a reasonable basis for (my) our opinion.

In (my) our opinion, the accompanying forecast is presented in conformity with guidelines for presentation of a forecast established by the American Institute of Certified Public Accountants, and the underlying assumptions provide a reasonable basis for management’s forecast. However, there will usually be differences between the forecasted and actual results, because events and circumstances frequently do not occur as expected, and those differences may be material. (I) We have no responsibility to update this report for events and circumstances occurring after the date of this report.

[Signature]
[Date]

Sample Paragraph Included When Prospective Financial Statements Depart From Aicpa Presentation Guidelines

Management (or another responsible party) has elected to omit the summary of significant accounting policies required by the guidelines for presentation of a financial forecast (or projection) established by the American Institute of Certified Public Accountants. If the omitted disclosures were included in the forecast (projection), they might influence the user’s conclusions about the Company’s financial position, results of operations, and cash flows for the forecasted (projected) period. Accordingly, this forecast (projection) is not designed for those who are not informed about such matters.