Statements in the form the person reading them expects.

Start with who is going to read them

Financial statements are not produced for their own sake. Somebody is going to read them, and who that is determines almost everything else: the level of engagement, the basis of accounting, what has to be disclosed, and what it costs.

So the first question is never "what statements do I need". It is "who is asking, and what did they actually say". A bank renewing an operating line, a landlord assessing a lease, a buyer doing diligence, a funder attaching conditions to a grant, and the CRA all want different things. Bring the letter or the covenant to the first conversation and most of the decision makes itself.

The three levels

Canada has three, and they are not grades of quality. They are different amounts of work, producing different levels of assurance, for different readers.

	What it is	Typical reader
Compilation CSRS 4200	Financial information assembled from what you provide, with a note describing the basis on which it was prepared. No assurance	Management, the CRA, and lenders who are satisfied with it. The great majority of small business year ends
Review CSRE 2400	Enquiry, analysis and discussion, ending in a conclusion that nothing has come to my attention suggesting material misstatement. Limited assurance	Banks with covenant reporting, some shareholder agreements
Audit Canadian Auditing Standards	Testing of evidence, confirmations and substantive procedures, ending in an opinion. Reasonable assurance	Government funders, many charities' bylaws, larger lenders

Paying for more than the reader asked for is money spent for nothing. Providing less than a funding agreement requires is a problem discovered at the worst moment. Reading the clause first avoids both. More on the assurance levels on the audits and reviews page.

The Notice to Reader is gone

If you have been in business a while you will know the term. It no longer exists. Compilations are now governed by CSRS 4200, which replaced the old standard entirely, and it changed the product in ways worth understanding.

There is now a compilation engagement report rather than the old notice, setting out what I did, what management is responsible for, and what the statements are and are not.

The statements carry a note describing the basis of accounting. This is the substantive change. Compiled statements are not automatically prepared under any particular framework, so the note tells the reader how these ones were put together. Two sets of compiled statements can be built on quite different bases, and previously the reader had no way of telling.

A practitioner cannot be associated with financial information that is false or misleading. Where something comes to my attention suggesting that it is, it has to be addressed before a compilation engagement report can be issued.

The practical effect for most owners is a more formalized set of statements, with a note at the front setting out the basis on which they were prepared. If your bank has started asking questions it did not ask before, this is usually why.

Whether a compilation report is required

CSRS 4200 has scope exclusions. Financial information prepared purely to support a tax filing, or purely for internal use where no third party is expected to rely on it, may fall outside the requirement for a compilation engagement report. Preparing a corporate return and the schedules behind it is not automatically a compilation engagement.

Where a third party is going to use the information, the question becomes whether that party is in a position to request further information from you, or has agreed the basis of accounting with management. That is what determines how the engagement has to be handled.

One user is easy to overlook. A corporation is required to place financial statements before its shareholders each year, whether or not anyone else ever asks for them. Where the sole shareholder is also the director, the statements are going to management and the analysis is straightforward. Where there are shareholders outside the business, a passive investor or a family member holding shares from an earlier reorganization, those people are receiving statements they had no part in preparing and may not be in a position to question. That changes the picture, and it is worth thinking about before concluding that nobody external is going to read them.

This is worth settling deliberately at the start of the year rather than assumed in either direction, because the two errors are not symmetrical. Assuming a report is required when it is not means paying for something nobody asked for. Assuming it is not required when it is means discovering the gap when a lender asks for statements you do not have, by which point the year is closed and the timing is against you. The second is the more common and the more expensive.

What your bank is looking at

Lenders read statements in a fairly predictable order, and it helps to know what they are looking for before you hand anything over.

• Whether the covenants are met, if there are any. Debt service coverage and working capital ratios are the usual ones, and they are calculated from the statements rather than from your bank balance
• The trend, which is why comparative figures matter. One good year after two poor ones reads differently from three steady ones
• Shareholder loans and related party balances, because money moving between you and the company affects how they see the risk
• The note on the basis of accounting, which under the current standard tells them how much weight to give the rest

If a covenant is going to be tight, it is far better to know in October than to find out when the statements land in April.

The basis of accounting

Most Ontario private companies use ASPE, the accounting standards for private enterprises. Not-for-profits generally use ASNPO, the accounting standards for not-for-profit organizations, which draws on ASPE where it does not deal with a matter itself. A compilation may be prepared on another basis where that is appropriate and disclosed.

Which framework applies is occasionally a genuine question, particularly for a growing company or a not-for-profit board that has never been told which set it is following. It is worth settling deliberately rather than inheriting it.

What the process looks like

A request list in one go rather than a stream of emails, working from the trial balance, the bank reconciliations and the supporting records. Adjusting entries discussed rather than simply posted. Draft statements to you before anything is finalized, and a conversation about what they say.

Where the bookkeeping is current and clean, this is quick. Where it is not, the year end absorbs the cleanup, which is the expensive way to do bookkeeping. See bookkeeping.

Statements go out with the corporate return, since the same numbers feed both. See corporate tax.

Questions