AICPA Statement of Position (SOP) 82-1, Personal Financial Statements, addresses the preparation and presentation of personal financial statements, or, more specifically, financial statements of individuals or groups of related individuals (i.e., families). 

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Personal financial statements are generally prepared to organize and plan an individual’s financial affairs on a more formal basis.  Specific purposes that might require the preparation of personal financial statements include the obtaining of credit, income tax planning, retirement planning, gift and estate planning, or the public disclosure of financial affairs.

This post provides a light overview of the personal financial statements. Follow on…

 

Third-party recipients of personal financial statements use them in deciding whether to grant credit, in evaluating the financial condition of individuals, in assessing the financial affairs of public officials and candidates for public office, and for other purposes.  “Estimated current values of assets and liabilities” are almost always specified for use in the preparation of personal financial statements as this information is more relevant to users than historical cost.

Personal financial statements can be prepared for an individual, jointly for a husband and wife, or collectively for a family.

 

Personal financial statements consist of:

  • Statement of financial condition—The only required financial statement, the statement of financial condition presents the estimated current values of assets and the estimated current amounts of liabilities. A liability is recognized for estimated income taxes on the difference between the asset and liability amounts set forth in the statement of financial condition and their respective income tax bases. Naturally, the residual amount after deducting the liabilities (including the estimated income tax liability) from the assets is presented as net worth at that date.
  • Statement of changes in net worth—An optional statement that presents the primary sources of increases and decreases in net worth over a period of time.
  • Comparative financial statements—The inclusion of a comparison of the current period’s financial statements with one or more previous period’s financial statements is optional.

 

Basis Of [Personal Financial Statement] Presentation

The accrual basis, rather than the cash basis of accounting, is used in preparing personal financial statements.  The presentation of personal financial statements does not require the classification of assets and liabilities as current and noncurrent.  Instead, assets and liabilities are presented in order of liquidity and maturity.

 

Measurements Used on Personal Financial Statements

In personal financial statements, assets are presented at their estimated current values.  This is defined by SOP 82-1 as the amount at which the item could be exchanged between a buyer and a seller, assuming both parties are well informed, and neither party is compelled to buy or sell.  Disposal costs, if material, are deducted to arrive at current values.  It is important to note that this definition has not been amended to conform to the definition of fair value as set forth in ASC 820.

The definition of estimated current value in SOP 82-1 more closely resembles the definition of fair value less cost to sell that is used in FAS ASC 360, Property, Plant, and Equipment.  Furthermore, SOP 82-1 specifically provides for adjustment of the current value of securities for the effects of transferability restrictions or the effects of the investor holding a large block of securities (blockage factor). Adjustments for blockage factors are specifically prohibited by ASC 820.

A specialist may need to be consulted in the determination of the current value of certain types of assets (e.g., works of art, jewelry, restricted securities, investments in closely held businesses, and real estate).  If property is held in joint tenancy, as community property, or through a similar joint ownership arrangement, the financial statement preparer may require the advice of an attorney to determine, under applicable state law, the portion of the property interest that should be included in the indiviual’s assets.

Liabilities are presented at the lesser of the discounted amount of cash to be paid or the current cash settlement amount.  The discount rate should be the rate implicit in the transaction that gave rise to the liability.  As a practical matter, the preparer may decide to use the individual’s incremental borrowing rate at the inception of the transaction to discount the remaining cash flows.

The use of information about recent transactions involving  similar types of assets and liabilities, in similar circumstances, constitutes a satisfactory means of determining the estimated current value of an asset and the estimated current amount of a liability.  If recent transactional information cannot be obtained, it is permissible to use other methods (e.g., capitalization of past or prospective earnings, the use of liquidation values, the adjustment of historical cost based on changes in a specific price index, the use of appraisals, and the use of the discounted amounts of projected cash receipts and payments).  The methods used should be followed consistently from period to period unless the facts and circumstances dictate a change to different methods.

Income taxes payable are to include unpaid income taxes for completed tax years and the estimated amount for the elapsed portion of the current tax yearAdditionally, personal financial statements are required to include estimated income tax on the difference between the current value (amount) of assets (liabilities) and their respective income tax bases as if they had been realized or liquidated.

 

Business Interest Presentation on a Personal Financial Statement

Business interests that comprise a large portion of a person’s total assets should be presented separately from other investments.  An investment in a separate entity that is marketable as a going concern (e.g., a closely held corporation) should be presented as one amount.  If the investment is a limited business activity, not conducted in a separate legal entity, separate asset and liability amounts should be shown (e.g., investment in real estate and related mortgage; only the person’s beneficial interest in the investment is included in his/her personal financial statements).

 

Valuation Method Used in Personal Financial Statements

The preparer must decide whether to value the net investment him/herself or to engage a qualified specialistThe possible valuation methods available are:

  • discounted cash flow; and/or
  • appraised value; and/or
  • liquidation value; and/or
  • multiple of earnings; and/or
  • reproduction value; and/or
  • adjustment of book value (e.g., equity method); or
  • cost method.

 

Note: In some cases it is appropriate to use a combination of approaches to reasonably estimate the current value.

 

Personal Financial Statement Disclosure [Source:  SOP 82-1]

The following disclosures are typically made in either the body of the financial statements or in the accompanying notes [This list is not all-inclusive]:

[1]. A clear identification of the individuals covered by the financial statements.

[2]. That assets are presented at their estimated current values and liabilities are presented at their estimated current amounts.

[3]. The methods used in determining the estimated current values of major assets and the estimated current amounts of major liabilities or major categories of assets and liabilities, and changes in methods from one period to the next.

[4]. If assets held jointly by the person and by others included in the statements, the nature of the joint ownership.

[5]. If the person’s investment portfolio is material in relation to his or her other assets and is concentrated in one or a few companies or industries, the names of the companies or industries and the estimated current values of the securities.

[6]. If the person has a material investment in a closely held business,

  • The name of the company
  • The person’s percentage of ownership
  • The nature of the business
  • Summarized financial information about assets, liabilities, and results of operations for the most recent year based on the businesse’s own financial statements as well as the basis of presentation (e.g. GAAP, cash basis, income tax basis, etc.), and any significant loss contingencies

[7]. Description of intangible assets and their estimated useful lives.

[8]. The face amount of life insurance the individual owns.

[9]. Certain non-forfeitable rights, such as pensions based on life expectancy.

[10]. The methods and assumptions used to  calculate estimated income taxes on the differences between the estimated current values of assets and the estimated current amounts of liabilities and their tax bases as well as a statement that the provision will probably differ from the amounts eventually paid as the timing and method of disposal as well as changes in the tax laws and regulations will affect the actual taxes to be paid.

[11]. Unused operating loss and capital loss carryforwards and any other unused deductions or credits and, if applicable, the tax year in which they expire (under the current income tax code, there will frequently be unused alternative minimum tax credit carryfowards).

[12]. The differences between the estimated current values of major assets and the estimated current amounts of major liabilities or categories of assets and liabilities and their tax bases.

[13]. Maturities, interest rates, collateral, and other pertinent details relating to receivables and debt.

[14]. Certain non-cancellable commitments such as operating leases