|
By Eric Turner
Illustration: Mike Constable
New guidance helps Practitioners report consistently on general purpose and non-GAAP financial statements
After one of the Auditing and Assurance Standards Board's (AASB) longest-running projects, in September 2003 the board issued new guidance for reporting on financial statements prepared using a basis of accounting other than generally accepted accounting principles (non-GAAP financial statements). The new guidance has implications for practitioners in the private and public sectors; performing audits and reviews; and performing engagements on large and small entities.
In March 2002, the Accounting Standards Board (AcSB) issued the following new standards in the CICA Handbook -Accounting, Differential Reporting, Section 1300, and generally Accepted Accounting Principles, Section 1100, in July 2003. These new standards were the precursor to the following AASB guidance issued in September that is the subject of this article: new Handbook section Auditor's Report on Financial Statements prepared using a Basis of Accounting other than Generally Accepted Accounting Principles Section 5600; and conforming amendments to generally Accepted Auditing Standards, Section 5100.
Scope of the guidance
The guidance creates a reporting framework for practitioners depending on the purpose of the financial statements:
General purpose financial statements: GAAP is the basis of accounting used for general purpose financial statements, which are intended to meet the common information needs of external users. When engaged to report on general purpose financial statements, the auditor would refer to The Auditor's Standard Report, Section 5400. The AASB has made amendments to Section 5100 to clarify that in this situation the auditor would express an opinion on the fair presentation of the financial statements in accordance with GAAP. The only exceptions to this form of opinion are when the financial statements are prepared in the circumstances described in Section 5600, or are financial statements of a government and the auditor is required to express an opinion on the fair presentation of the financial statements in accordance with a disclosed basis of accounting, when the auditor would refer to Audit of Government Financial Statements, Section PS5200, for guidance.
Non-GAAP financial statements: Accounting Section 1100 indicates that an en-tity may be required to prepare financial statements in accordance with regulatory, legislative or contractual requirements. When these requirements are within the range of acceptable choices allowed by Section 1100, the basis of accounting can be described as being in accordance with GAAP. The AcSB seeks to minimize instances when GAAP and regulatory or legislative requirements conflict. However, in those circumstances in which conflict does exist, users of financial statements need to know that the statements are not prepared in accordance with GAAP. Therefore, if the basis of accounting used to prepare such financial statements conflicts with the requirements of Section 1100, that basis cannot be described as being in accordance with GAAP.
Accordingly, the AASB developed Section 5600 to address the circumstances when non-GAAP financial statements are prepared in accordance with regulatory, legislative or contractual requirements. When non-GAAP financial statements are prepared in accordance with the criteria of Section 5600, the auditor reports in accordance with that section. However, if non-GAAP financial statements are not prepared in accordance with the criteria in that section, the auditor reports in accordance with Reservations in the Auditor's Report, Section 5510. The AASB has also issued guidance for practitioners performing review engagements on non-GAAP financial statements that is consistent with Section 5600.
Criteria of Section 5600
The auditor should accept an engagement to report under Section 5600 only when the financial statements have been prepared:
• in accordance with regulatory or legislative requirements to meet the specific needs of a regulator or a legislator (such financial statements are considered to meet the specific needs of a regulator or a legislator notwithstanding that the financial statements may be required to be placed on the public record); or
• in accordance with written contractual requirements such as may be set out in trust indentures or buy/sell agreements.
In developing the criteria for Section 5600, the AASB addressed a number of issues, including non-consolidated financial statements and financial statements of entities subject to multiple pieces of incorporating or other governing legislation.
Non-consolidated financial statements: In 2002, the AASB deleted Auditor's Report on Non-Consolidated Financial Statements Prepared in Accordance with Long-Term Investments, CICA Handbook - Accounting, Paragraphs 3050.39-.49, Section 5520 as a result of the introduction of Accounting Section 1300 and the deletion of paragraphs 3050.39-.49. The deletion of Section 5520 meant that practitioners reporting on non-consolidated financial statements of entities that do not qualify for differential reporting had no specific guidance on the form of report in such circumstances. The AASB noted it is very common for such financial statements to be prepared for income tax purposes. It decided an audit report under Section 5600 would be appropriate for such statements. Accordingly, Section 5600 indicates that non-consolidated financial statements prepared for income tax purposes are considered to be financial statements prepared in accordance with regulatory or legislative requirements for the purposes of the section.
Financial statements of entities subject to multiple pieces of legislation: Some entities are subject to more than one piece of legislation that requires financial statements. Sometimes, the requirements of the pieces of legislation conflict. For example, many housing co-operatives are required to prepare GAAP financial statements for their shareholders under their incorporating legislation. Such entities may also be required under the operating agreement with their funder (Canada Mortgage and Housing Corp., for example) to prepare non-GAAP financial statements for the funder. In many cases such entities only produce one set of financial statements — the set required by the funder — and distribute the financial statements to other users. One of the objectives of Section 5600 is to clarify what should be the form of the auditor's report on such financial statements.
The AASB distinguished between the concepts of "general distribution" and "general purpose." It recognized that the auditor cannot control the entity's distribution of its financial statements. However, broader distribution of financial statements prepared for specified users does not render them general purpose financial statements. Accordingly, when an auditor is asked to report on non-GAAP financial statements prepared for a funder, the auditor can accept an engagement under Section 5600 even though, for example, the entity has not prepared general purpose financial statements in accordance with GAAP in order to meet its incorporating legislation. However, the auditor would advise the entity that:
• the non-GAAP financial statements do not comply with and will not satisfy the entity's incorporating legislation;
• those charged with governance should consider the financial and other implications of non-compliance with the incorporating legislation; and
• the auditor accepts no responsibility for any implications of potential non-compliance with the incorporating legislation.
In addition, the form of the auditor's report under Section 5600 has been designed so it is clear to readers that the financial statements are not general purpose financial statements but are intended for a specified user and specified purpose.
Form of auditor's report in Section 5600
The auditor's report in Section 5600 has the following features:
• the report discloses the addressee, which in most cases will be the person engaging the auditor;
• the introductory paragraph describes the purpose for which the financial statements have been prepared;
• the opinion paragraph contains the auditor's opinion whether the financial statements are presented fairly in accordance with the basis of accounting described in the notes to the financial statements; and
• a paragraph after the opinion paragraph states that the financial statements have not been, and were not intended to be, prepared in accordance with GAAP; are solely for the information and use of the specified user for the specified purpose; and are not intended to be, and should not be, used by anyone other than the specified users or for any other purpose.
The purpose of the paragraph after the opinion paragraph is to alert readers that the financial statements have not been prepared in accordance with GAAP. It also restricts the use of the financial statements to the specified users of the statements. The specified users of the financial statements will include the addressee and either the regulator, or legislator, or the parties to the contractual agreement, or both. The paragraph also restricts the use of the financial statements to the specified purposes of the statements.
Conclusion
Until now, guidance in the Assurance Handbook has dealt with reporting on non-GAAP financial statements on an ad hoc basis. Reporting by practitioners has also varied in practice. Concerns were expressed about the confusion these different reporting practices cause for readers of the practitioner's report. The AASB believes the new guidance addresses these concerns by creating a framework within which practitioners report consistently on general purpose and non-GAAP financial statements.
Eric Turner, CA, is a principal in the CICA's Assurance Standards department
Technical Editor: Robert T. Rutherford, FCA, vice-president, Standards, CICA | 
