Revenue Recognition

Revenue Recognition

SSARS 21-Revised Standards for Reviews, Compilations and Engagements to Prepare Financial Statements Developed and presented by Samuel A. Monastra, CPA SSARS 21 SAMUEL A. MONASTRA, CPA Mr. Monastra has extensive experience with publicly held companies

and large privately held companies. Industry focus: manufacturing, life sciences & technology, financial services, and public sector. Mr. Monastra served in executive roles with National CPA firms, and as a member of the Editorial Board of the Pennsylvania CPA Journal. He has also been a frequent speaker for numerous State CPA Societies, the Institute of Internal Auditors, and the Institute of Management Accountants on financial reporting topics. Mr. Monastra has a focus on financial reporting with a particular emphasis on Revenue Recognition, IASB/FASB Convergence, Business Combinations, Asset Impairments, and Fair Value. SSARS 21

SSARS No. 21, which represents one of the most significant revisions to non audit standards for CPAs in the last 35 years, affects: Engagements in which CPAs prepare financial statements for clients. Compilation engagements, in which CPAs assist management in presenting information in the form of financial statements without obtaining or providing assurance on that information. Review engagements, in which CPAs obtain limited assurance as a basis for reporting whether the accountant is aware of any material modifications that should be made to the financial statements for them to be in accordance with the applicable financial reporting framework, primarily through the performance of inquiry and analytical procedures.

SSARS 21 The new standards are designed to be a better fit for the current electronic and cloud-based practice environment. ARSC Chairman Michael Brand, CPA, CGMA, said in a news release that when accountants prepared and mailed or handed paper financial statements to their clients, it made sense for CPAs, at a minimum, to issue compilation reports on those financial statements. Brand said that in todays electronic environment, its impossible to determine who prepared financial statements because clients and CPAs often work together on the accounting,

sometimes in real time using cloud applications. SSARS 21 In recent years, the question of who has prepared financial statements has become more difficult to answer due to the expanded use of technology such as cloud computing. By eliminating the submission requirement, SSARS No. 21 eliminates the need for accountants to use professional judgment to determine whether they have prepared financial statements. The potential for diversity in practice also is eliminated.

SSARS 21 SSARS No. 21 makes the compilation rules apply when the accountant is engaged to perform a compilation service. The new standard eliminates a requirement from previous standards dating to 1978 that required accountants in public practice who prepared financial statements to, at a minimum, perform a compilation engagement with respect to any financial statements they presented to management or to third parties. In recent years, the question of who has prepared financial statements has become more difficult to answer due to the expanded use of technology such as cloud computing. By eliminating the submission requirement, SSARS No. 21 eliminates

the need for accountants to use professional judgment to determine whether they have prepared financial statements. The potential for diversity in practice also is eliminated. SSARS 21 SSARS No. 21 includes: Section 60, General Principles for Engagements Performed in Accordance With Statements on Standards for Accounting and Review Services, which includes the general principles for engagements performed in accordance with SSARSs. It replaces AR Section 60, Framework for Performing and Reporting on Compilation and Review Engagements.

SSARS 21 Section 70, Preparation of Financial Statements, which applies when the accountant is engaged to prepare financial statements but is not engaged to perform an audit, review, or compilation on those financial statements. The accountant is required to include a legend on each page of the financial statements stating that no assurance is being provided. The accountant is required to obtain an engagement letter signed by both the accountant and the clients management. Like all other nonattest bookkeeping/accounting services engagements, the accountant is not required to consider whether he or she is

independent. The standard can be applied to financial statements with or without disclosures. SSARS 21 Section 80, Compilation Engagements, which provides requirements and guidance when an accountant is engaged to perform a compilation on historical financial statements. Previously, AR Section 80, Compilation of Financial Statements, applied when an accountant was engaged to issue a compilation report on financial statements or submitted financial statements to the client or to third parties. The performance requirements for compilation engagements are largely unchanged. A report is always required (non-reporting managementuse-only engagements would be covered by the preparation standard).

To differentiate the non-assurance compilation report from assurance (review and audit) reports, the report is streamlined so that the standard report is just one paragraph with no headings. The requirement that the accountant modify the accountants compilation report whenever the accountants independence is impaired is retained. The accountant is required to obtain an engagement letter signed by both the accountant and the clients management. The standard can be applied to financial statements with or without disclosures. SSARS 21 Section 90, Review of Financial Statements. The standards for review engagements are basically a clarity redraft of the

review literature with few changes to SSARS No. 19. All existing AR sections with the exception of AR Section 120, Compilation of Pro Forma Financial Information, are superseded by SSARS No. 21. AR Section 120 is expected to be clarified and exposed for public comment in 2015, along with proposed requirements and guidance related to the compilation of prospective financial information. SSARS 21 SSARS No. 21 takes effect for engagements on financial

statements for periods ending on or after Dec. 15, 2015. Early implementation is permitted. Smaller firms may find it productive to adopt early and benefit from some of the efficiencies that may be realized by performing an engagement to prepare financial statements in accordance with Section 70. SSARS 21 Prepare and present Prepare and present is the trigger for issuing a compilation report. SSARS 21 clarifies the trigger: the decision to issue a compilation report is based solely upon

whether the CPA is engaged to do so and not upon whether the accountant prepares and presents the financial statements to the client. SSARS 21 Preparation of Financial Statements (Section 70) Preparation of the financial statements is a non-attest, non-assurance service. A signed engagement letter is required; the letter must be signed by the client and the CPA.

SSARS 21 Preparation of Financial Statements (Section 70) Section 70 applies when the CPA is engaged to prepare financial statements (not engaged to issue a compilation, review or audit report). You are not required to be independent to prepare financial statements. You may omit disclosures if the client does not need them.

SSARS 21 Preparation of Financial Statements (Section 70) When preparing financial statements in accordance with special purpose framework/ OCBOA, it is required to include a description of the financial reporting framework on the face of the financial statements or in a note to the financial statements. SSARS 21

Preparation of Financial Statements (Section 70) The use of a legend is required on each page of the financial statements stating no assurance is provided. If a legend is not provided, issue a disclaimer report that is signed by the CPA, stating: The accompanying financial statements of XYZ Company as of and for the year ended December 31, 20XX, were not subjected to an audit, review, or compilation engagement by me (us) and, accordingly, I (we) do not express an opinion, a conclusion, nor provide any assurance on them.

SSARS 21 Preparation of Financial Statements (Section 70) AICPA Code of Conduct Considerations The AICPA Code of Conduct prohibits the CPA from being associated with financial statements that are misleading. While this requirement is not a part of SSARS 21, it is still relevant to accountants subject to the AICPA Code of Conduct (the ethical rules for CPAs). If a client desires for the CPA to issue financial statements that are clearly misleading, then the CPA

may not do soeven under the Preparation standard. SSARS 21 Compilation Engagements (Section 80) Independence is not required to issue a compilation report; lack of independence, however, must be noted in the compilation report. An engagement letter must be signed by the client and the CPA.

SSARS 21 Compilation Engagements (Section 80) The following sample compilation report must be signed by the CPA: Management is responsible for the accompanying financial statements of XYZ Company, which comprise the balance sheets as of December 31, 20X2 and 20X1 and the related statements of income, changes in stockholders equity, and cash flows for the years then ended, and the related notes to the financial statements in accordance with accounting principles generally accepted in the United States of America. I (We) have performed a compilation engagement in

accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA. I (we) did not audit or review the financial statements nor was (were) I (we) required to perform any procedures to verify the accuracy or completeness of the information provided by management. Accordingly, I (we) do not express an opinion, a conclusion, nor provide any form of assurance on these financial statements. SSARS 21 Compilation Engagements (Section 80) Accountants will still add additional paragraphs to the

compilation report when applicable: 1)When financial statements are prepared in accordance with a Special Purpose Framework/OCBOA 2) Disclosures omitted 3) Lack of independence 4) Known Departure From the Applicable Financial Reporting Framework 5) Supplementary Information Accompanies Financial Statements and the Accountants Compilation Report Thereon SSARS 21 Key differences between compilation and

preparation services: 1) When does the standard apply? Compilation: when enagaged to compile Preparation: when engaged to prepare 2) Engagement letter required? Compilation : yes Preparation: yes SSARS 21 Key differences between compilation and preparation services: 3) Independence required?

Compilation: yes Preparation: no 4) Lack of independence disclosure required? Compilation : yes Preparation: N/A SSARS 21 Key differences between compilation and preparation services: 5) Does the engagement require a report? Compilation: yes Preparation: no

6) May the financial statements go to users outside of management? Compilation : yes Preparation: yes SSARS 21 Key differences between compilation and preparation services: 7) May the financial statements omit notes? Compilation: yes Preparation: yes

SSARS 21 Review engagements (Section 90) The CPA needs to determine that the client has sufficient skill, knowledge and experience to assume the responsibility for the statements; if the client does not possess sufficient skill, knowledge, and experience, the CPA is not independent. Independence is required to perform a review. SSARS 21

Effective date and transition: SSARS No. 21 takes effect for engagements on financial statements for periods ending on or after Dec. 15, 2015. Early implementation is permitted. Smaller firms may find it productive to adopt early and benefit from some of the efficiencies that may be realized by performing an engagement to prepare financial statements in accordance with Section 70. SSARS 21

Summary and Final Thoughts

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