100 the accounting and review services - thomson reuters

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Accounting, Audit & Corporate Finance Library

Editorial Materials

Accounting Services

Compilation and Review Engagements

Chapter 1 Background Information

100 The Accounting and Review Services Committee

100 The Accounting and Review Services Committee

What Is Its Purpose?

100.1 The Accounting and Review Services Committee (ARSC) is a senior technical committee of the

American Institute of Certified Public Accountants (AICPA). The charge to the Committee by the Council (the

governing body of the AICPA) is—

to develop on a continuing basis procedures and standards of reporting by CPAs on the types of

accounting and review services a CPA may render in connection with unaudited financial

statements or other unaudited financial information of an entity that is not required to file financial

statements with a regulatory agency in connection with the sale or trading of its securities in a

public market. This charge shall not include any of the responsibilities of the Accounting

Standards Executive Committee. 1

What Is Its Scope?

100.2 The charge to the ARSC by the AICPA Council specifically limits the scope of the Committee's authority

to unaudited financial statements or other unaudited financial information of a nonissuer. The Statements on

Auditing Standards (SASs) issued by the ASB provide guidance to CPAs who perform services in connection

with audited financial statements of nonissuers. PCAOB Standards provide guidance to CPAs who perform

audit or review services for issuers. The charge also does not include responsibility to determine the content of

financial statements in accordance with accounting principles. Pronouncements of the ARSC are issued as

Statements on Standards for Accounting and Review Services (SSARS). These have been codified in the AR

Section of the AICPA Professional Standards.

100.3 SSARS No. 19, AR 60.04, includes the following definition of a nonissuer:

Nonissuer. All entities except for those defined in Section 3 of the Securities Exchange Act of

1934 (15 U.S.C. 78c), the securities of which are registered under Section 12 of that Act (15

U.S.C. 78l), or that is required to file reports under Section 15(d) [15 U.S.C. 780(d)], or that files

or has filed a registration statement that has not yet become effective under the Securities Act of

1933 (15 U.S.C. 77aet seq.), and that it has not withdrawn.

100.4 SSARS No. 19, AR 60.04, includes the following definition of a financial statement:

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Financial Statement. A structured representation of historical financial information, including

related notes, intended to communicate an entity's economic resources and obligations at a point

in time or the changes therein for a period of time in accordance with a financial reporting

framework. The related notes ordinarily comprise a summary of significant accounting policies

and other explanatory information. The term financial statements ordinarily refers to a complete

set of financial statements as determined by the requirements of the applicable financial

reporting framework, but can also refer to a single financial statement or financial statements

without notes.

100.5 Also, Interpretation No. 4 of AR Section 80 (AR 9080.10-.12) provides guidance on distinguishing

between a financial statement and a trial balance.

100.6 The term unaudited is used in practice when referring to the following financial statements:

a. Compiled financial statements of a nonissuer [SSARS No. 19 (AR 80)].

b. Reviewed annual financial statements of a nonissuer [SSARS No. 19 (AR 90)].

c. Reviewed interim financial statements 2 of a nonissuer [SSARS No. 19 (AR 90) or AU-C 930].

What Is Its Authority?

100.7 ARSC has been designated by the AICPA Council to promulgate standards under Rules 201 (ET 201)

and 202 (ET 202) of the AICPA's Code of Professional Conduct. The pronouncements of the ARSC represent

the authoritative literature for CPAs when providing accounting and review services to nonissuers. However, as

is made clear in Interpretation No. 8 of AR Section 80 (AR 9080.21-.24), SSARS do not apply to AICPA

members not in public practice.

How Is It Structured?

100.8 Currently ARSC has seven members. The Director of the AICPA Audit and Attest Standards nominates

the ARSC Chair and in consultation with the ARSC Chair, nominates the other six members of the ARSC.

These nominations are approved by the AICPA Board of Directors.

How Does It Speak?

100.9 As mentioned in paragraph 100.2, pronouncements by the ARSC primarily are issued as SSARS. As of

August 2012, the ARSC has issued the following pronouncements:

• SSARS No. 1 (AR 100), Compilation and Review of Financial Statements (December 1978) (Superseded

by SSARS No. 19).



• SSARS No. 2 (AR 200), Reporting on Comparative Financial Statements (October 1979).

• SSARS No. 3 (AR 300), Compilation Reports on Financial Statements Included in Certain Prescribed

Forms (December 1981).

• SSARS No. 4 (AR 400), Communications Between Predecessor and Successor Accountants

(December 1981).

• SSARS No. 5, Reporting on Compiled Financial Statements (July 1982) (Superseded November 1992 by

the issuance of SSARS No. 7).

• SSARS No. 6 (AR 600), Reporting on Personal Financial Statements Included in Written Personal

Financial Plans (September 1986).

• SSARS No. 7, Omnibus Statement on Standards for Accounting and Review Services—1992

(November 1992) (Not published as a stand-alone section).

• SSARS No. 8, Amendment to Statement on Standards for Accounting and Review Services No. 1,

Compilation and Review of Financial Statements (October 2000) (Not published as a stand-alone section).

• SSARS No. 9, Omnibus Statement on Standards for Accounting and Review Services—2002 (November

2002) (Not published as a stand-alone section).

• SSARS No. 10, Performance of Review Engagements (May 2004) (Not published as a stand-alone

section).

• SSARS No. 11 (AR 50), Standards for Accounting and Review Services (May 2004) (Superseded

December 2010 by the issuance of SSARS No. 19).



• SSARS No. 12, Omnibus Statement on Standards for Accounting and Review Services—2005 (July

2005) (Not published as a stand-alone section).

• SSARS No. 13 (AR 110), Compilation of Specified Elements, Accounts, or Items of a Financial

Statement (July 2005).

• SSARS No. 14 (AR 120), Compilation of Pro Forma Financial Information (July 2005).

• SSARS No. 15, Elimination of Certain References to Statements on Auditing Standards and

Incorporation of Appropriate Guidance Into Statements on Standards for Accounting and Review Services

(July 2007) (Not published as a stand-alone section).

• SSARS No. 16 (AR 20), Defining Professional Requirements in Statements on Standards for Accounting

and Review Services (December 2007) (Superseded December 2010 by the issuance of SSARS No. 19).

• SSARS No. 17, Omnibus Statement on Standards for Accounting and Review Services—2008 (February

2008) (not published as a stand-alone section).

• SSARS No. 18, Applicability of Statements on Standards for Accounting and Review Services (February

2009).

• SSARS No. 19, Compilation and Review Engagements (December 2009).

• SSARS No. 20, Revised Applicability of Statements on Standards for Accounting and Review Services

(February 2011) (not published as a stand-alone section).

100.10 The Statements on Standards for Accounting and Review Services (SSARS) are codified into AR

Sections. Exhibit 1-1 shows the cross referencing of the SSARS to their current AR Section.



Exhibit 1-1

Cross-Referencing of SSARS to AR Sections

SSARS

No. Title AR Section

1 Compilation and Review of Financial Statements Superseded

2 Reporting on Comparative Financial Statements 200

3 Compilation Reports on Financial Statements Included in Certain Prescribed

Forms

300

4 Communications Between Predecessor and Successor Accountants 400

5 Reporting on Compiled Financial Statements Deleted

6 Reporting on Personal Financial Statements Included in Written Personal

Financial Plans

600

7 Omnibus Statement on Standards for Accounting and Review Services—1992 Not published

as a stand-alone

section

8 Amendment to Statement on Standards for Accounting and Review Services No.

1, Compilation and Review of Financial Statements

Not published

as a stand-alone

section


as a stand-alone

section

10 Performance of Review Engagements Not published

as a stand-alone

section

11 Standards for Accounting and Review Services Superseded


as a stand-alone

section

13 Compilation of Specified Elements, Accounts, or Items of a Financial Statement 110

14 Compilation of Pro Forma Financial Information 120

15 Elimination of Certain References to Statements on Auditing Standards and

Incorporation of Appropriate Guidance Into Statements on Standards for

Accounting and Review Services

Not published

as a stand-alone

section

16 Defining Professional Requirements in Statements on Standards for Accounting

and Review Services

Superseded


as a stand-alone

section



SSARS

No. Title AR Section

18 Applicability of Statements on Standards for Accounting and Review Services Not published

as a stand-alone

section

19 Compilation and Review Engagements 60, 80, and 90

20 Revised Applicability of Statements on Standards for Accounting and Review

Services

Not published

as a stand-alone

section

____________________

SSARS Interpretations

100.11 The staff of the ARSC has been authorized to issue interpretations to provide timely guidance on the

application of SSARS. According to AR 60.18, SSARS Interpretations are interpretative publications. They are

not as authoritative as a SSARS, but CPAs should be aware that they may have to justify a departure from an

interpretation if the quality of their work is questioned. See the discussion of the SSARS hierarchy beginning at

paragraph 101.4. The following interpretations have been released by the staff. These interpretations are

currently found in the 9000 series of the AR Sections of the AICPA Professional Standards.

Issue

Date

Revision

Date(s)

Guide

Discussiona

Interpretations of Section 80 (AR 9080)

1. Reporting When There Are Significant Departures From the Applicable

Financial Reporting Framework

8/81 11/02, 5/04,

7/05, 12/10

610.1

2. Reporting on Tax Returns 11/82 2/08,12/10 201.14,

623.50

3. Additional Procedures Performed in a Compilation Engagement 3/83 10/00,

11/02, 5/04,

12/10

603.1

4. Differentiating a Financial Statement Presentation From a Trial Balance 9/90 10/00, 2/08,

12/10

201.8

5. Submitting Draft Financial Statements 9/90 10/00, 12/10 623.54

6. Reporting When Financial Statements Contain a Departure From

Promulgated Accounting Principles That Prevents the Financial

Statements from Being Misleading

2/91 10/00,

11/02, 5/04,

7/05, 12/10

609.12

7. Applicability of Statements on Standards for Accounting and Review

Services to Litigation Services

5/91 10/00, 2/08,

12/10

623.67



Issue

Date

Revision

Date(s)

Guide

Discussiona

8. Applicability of Statements on Standards for Accounting and Review

Services When Performing Controllership or Other Management Services

7/02 12/10 201.32

9. Use of the Label “Selected Information—Substantially All Disclosures

Required by [the applicable financial reporting framework] Are Not

Included” in Compiled Financial Statements

12/02 12/10 607.5

10. Omission of the Display of Comprehensive Income in Compiled

Financial Statements

9/03 5/04, 7/05,

6/09, 12/10

608.7

11. Special-Purpose Financial Statements to Comply With Contractual

Agreements or Regulatory Provisions

12/06 12/10 623.7

12. Reporting on an Uncertainty, Including an Uncertainty About an

Entity's Ability to Continue as a Going Concern

2/07 2/08, 12/08,

6/09, 12/10

623.28

13. Compilations of Financial Statements Prepared in Accordance With

International Financial Reporting Standards

5/08 6/10, 8/10,

12/10

112.4,

600.5

14. Compilations of Financial Statements Prepared in Accordance With A

Financial Reporting Framework Generally Accepted in Another Country

5/08 6/10, 8/10,

12/10

112.4,

600.7

15. Considerations Related to Compilations Performed in Accordance with

International Standard on Related Services 4410, Engagements to

Compile Financial Statements, Issued by the International Audit and

Assurance Standards Board

5/08 6/10, 8/10,

12/10

112.3,

600.8

16. Preparation of Financial Statements for Use by an Entity's Auditors 12/08 12/10 201.43

17. Required Supplementary Information That Accompanies Compiled


10/11 616.3


1. Reporting When There Are Significant Departures From the Applicable

Financial Reporting Framework

8/81 11/02, 5/04,

7/05, 12/10

610.1

2. Reporting on Tax Returns 11/82 2/08, 12/10 201.14,

623.50

3. Additional Procedures Performed in a Review Engagement 3/83 5/04, 12/10 603.1

4. Submitting Draft Financial Statements 9/90 10/00, 12/10 623.54

5. Reporting When Financial Statements Contain a Departure From

Promulgated Accounting Principles That Prevents the Financial

Statements from Being Misleading

2/91 10/00,

11/02, 5/04,

7/05, 12/10

609.12

6. Special-Purpose Financial Statements to Comply With Contractual

Agreements or Regulatory Provisions

12/06 12/10 623.7



Issue

Date

Revision

Date(s)

Guide

Discussiona

7. Reporting on an Uncertainty, Including an Uncertainty About an Entity's

Ability to Continue as a Going Concern

2/07 2/08, 12/08,

6/09, 12/10

623.28

8. Reviews of Financial Statements Prepared in Accordance With

International Financial Reporting Standards

5/08 6/10, 8/10,

12/10

112.4,

600.5

9. Reviews of Financial Statements Prepared in Accordance With a

Financial Reporting Framework Generally Accepted in Another Country

5/08 6/10, 8/10,

12/10

112.4,

600.7

10. Considerations Related to Reviews Performed in Accordance With

International Standard on Review Engagements 2400, Engagements to

Review Financial Statements, Issued by the International Audit and

Assurance Standards Board

5/08 6/10, 8/10,

12/10

112.3,

600.8

11. Required Supplementary Information That Accompanies Reviewed


10/11 616.3


1. Reporting on Financial Statements That Previously Did Not Omit

Substantially All Disclosures

11/80 11/02, 5/04,

7/05

618.19

Interpretations Section 300 (AR 9300)

1. Omission of Disclosures in Financial Statements Included in Certain

Prescribed Forms

5/82 2/08 1303.3


1. Reports on the Application of Accounting Principles 8/87 11/02 623.74

Interpretations of SSARS Section 600(AR 9600)

1. Submitting a Personal Financial Plan to a Client's Advisers 5/91 1501.6

Notes:

aLocation in this Guide where the interpretation is discussed.

AICPA Compilation and Review Guide

100.12 The AICPA Guide: Compilation and Review Engagements (AICPA CAR Guide) was updated in March

2012. It was developed under the supervision and authority of ARSC, and is considered an interpretive

publication pursuant to AR 60.18. The purpose of the AICPA CAR Guide is to assist accountants in compiling

or reviewing financial statements in accordance with the SSARSs.



SSARS Exhibits

100.13 The AICPA has issued the following exhibits to the SSARS codification to provide nonauthoritative

guidance to assist practitioners performing compilation and review engagements.

• Exhibit A, Analytical Procedures in a Review Engagement. This exhibit illustrates how an accountant

might document expectations in a review engagement. (The information in this exhibit is also included in

the AICPA CAR Guide at paragraphs 4.118-.126.)

• Exhibit B, Going Concern Considerations. This exhibit provides accounting guidance with respect to an

entity's ability to continue as a going concern.

Technical Practice Aids (TIS 9150)

100.14 Selected inquiries and replies by the staff of the Technical Information Service of the AICPA are

published in the AICPA Technical Practice Aids. Section TIS 9150 of Technical Practice Aids pertains to

compilation and review engagements. Views expressed in the Technical Practice Aids (TPAs) are not official

opinions of the AICPA or any of its committees, including the ARSC—they must be accepted as the personal

views of the individuals who offer them. Many of the TPAs were revised in December 2010 for conforming

changes due to the issuance of SSARS No. 19. As of July 2012, the following nonauthoritative aids pertaining

to SSARS have been issued.

.01 Compiled Financial Statements Not Adjusted

.02 (Withdrawn)

.03 (Withdrawn)

.04 Financial Statements Marked as “Unaudited”

.05 (Withdrawn)

.06 (Withdrawn)

.07 (Withdrawn)

.08 Supplementary Information

.09 Application of AR Section 300 to Certain Companies Required To File with Regulatory Bodies

.10 Review of Financial Statements Included in a Prescribed Form

.11 Computer Generated Financial Statements

.12 (Withdrawn)

.13 (Withdrawn)

.14 (Withdrawn)



.15 (Withdrawn)

.16 Reference to Accountant's Report in Notes to Financial Statements

.17 (Withdrawn)

.18 Bank Engaged a CPA Firm To Compile a Financial Statement of Another Entity

.19 (Withdrawn)

.20 Reissuance When Not Independent

.21 (Withdrawn)

.22 (Withdrawn)

.23 (Withdrawn)

.24 Issuing a Compilation Report With Substantially All Disclosures Omitted After Issuing a Report on

Financial Statements Containing Full Disclosure

.25 Determining Whether Financial Statements Have Been Prepared by the Accountant

.26 The Accountant's Responsibilities for Subsequent Events in Compilation and Review

Engagements

.27 The Accountant's Reporting Responsibility With Respect to Subsequent Discovery of Facts

Existing at the Date of the Report

.28 Compilation Engagement When the Accountant Is Performing Management Functions

.29 Effects on Compilation and Review Engagements When Management Does Not Assess Whether

the Reporting Entity Is the Primary Beneficiary of a Variable Interest Entity and Instructs the

Accountant to Not Perform the Assessment

.30 Disclosure of Independence Impairment in the Accountant's Compilation Report on Comparative

Financial Statements When the Accountant's Independence Is Impaired in Only One Period

1The AICPA has renamed the Accounting Standards Executive Committee (AcSEC) as the Financial

Reporting Executive Committee (FinREC).

2See discussion of when SSARS applies to reviewed interim financial statements at paragraph 201.3.

© 2012 Thomson Reuters/PPC. All rights reserved.

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101 AR Section 60—Framework for Reporting on Compilation and Review Engagements

101 AR Section 60—Framework for Reporting on Compilation

and Review Engagements

101.1 AR 60 provides a framework and defines and describes the objectives, limitations, and elements of

compilation and review engagements. It also defines certain terms used in the SSARS to describe the

professional requirements imposed on accountants performing compilation and review engagements and

defines the terminology that ARSC uses to describe the degrees of responsibility that the requirements impose

on the accountant.

101.2 Unconditional requirements are defined as requirements with which accountants are required to comply

in all cases in which the circumstances exist to which the requirement applies. Such requirements are

introduced by the words must or is required.

101.3 Presumptively mandatory requirements are requirements with which accountants are required to comply

in all cases in which the circumstances exist to which the requirement applies. However, accountants may

depart from such a requirement if they justify the departure and how alternative procedure(s) performed in the

circumstances were sufficient to achieve the objectives of the requirement. Such requirements are introduced

by the word should.

101.4 AR 60 also sets forth the hierarchy of compilation and review standards and guidance. The SSARS

hierarchy includes three levels—

• Statement on Standards for Accounting and Review Services (SSARS). The SSARS are issued by the

AICPA Accounting and Review Services Committee and provide performance and reporting standards for

compilations and reviews.

• Interpretative Publications. Interpretative publications include Interpretations of the SSARS, appendixes

to the SSARS, compilation and review guidance included in AICPA Audit and Accounting Guides, and

AICPA Statements of Position to the extent that those Statements are applicable to compilation and review

engagements. The AICPA CAR Guide falls into this category.



• Other Compilation and Review Publications. Other compilation and review publications consist of AICPA

accounting and review publications not previously listed; the AICPA's annual Compilation and Review

Alert; compilation and review articles in the Journal of Accountancy and other professional journals;

compilation and review articles in the AICPA CPA Letter, and other compilation and review materials

published by state CPA societies or other organizations or individuals.


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102 AR Section 80—Compilation of Financial Statements

102 AR Section 80—Compilation of Financial Statements

102.1 AR 80 establishes the standards and provides guidance on compilations of financial statements. The

accountant is required to comply with the provisions of AR 80 whenever he or she is engaged to report on

compiled financial statements or submits financial statements to a client or to a third party. The understanding

with the entity in such engagements is discussed in Chapter 2. The performance requirements are discussed in

Chapter 3, and the reporting requirements are discussed in Chapter 6.


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103 AR Section 90—Review of Financial Statements

103 AR Section 90—Review of Financial Statements

103.1 AR 90 establishes the standards and provides guidance on reviews of financial statements. The

accountant is required to comply with the provisions of AR 90 whenever he or she is engaged to review

financial statements, except for the reviews of interim financial information when AU-C 930 applies. (See the

discussion of the applicability of SSARS to interim reviews at paragraph 201.3.) The understanding with the

entity in such engagements is discussed in Chapter 2. The performance requirements are discussed in

Chapter 4, and the reporting requirements are discussed in Chapter 6.


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104 AR Section 110—Compilation of Specified Elements, Accounts, or Items of a Financial Statement

104 AR Section 110—Compilation of Specified Elements,

Accounts, or Items of a Financial Statement

104.1 AR 110 addresses the compilation of specified elements, accounts, or items of a financial statement.

The understanding with the entity in such engagements is discussed in Chapter 2. The performance

requirements are discussed in Chapter 3, and the reporting requirements are discussed in Chapter 6.


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105 AR Section 120—Compilation of Pro Forma Financial Information

105 AR Section 120—Compilation of Pro Forma Financial

Information

105.1 AR 120 addresses the compilation of pro forma financial information. The understanding with the entity

in such engagements is discussed in Chapter 2. The performance requirements are discussed in Chapter 3,

and the reporting requirements are discussed in Chapter 6.


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106 AR Section 200—Reporting on Comparative Financial Statements

106 AR Section 200—Reporting on Comparative Financial

Statements

106.1 AR 200 established standards for reporting on comparative financial statements of a nonissuer when

financial statements of one or more periods presented have been compiled or reviewed.

106.2 AR 200 applies to reports on any comparative financial statements that include current period compiled

or reviewed financial statements of an entity that is a nonissuer as of the current period balance sheet date. If

the current period financial statement is audited or if the entity is an issuer as of the current period balance

sheet date, SASs apply rather than AR 200.

106.3 When comparative statements are presented, the accountant must select the appropriate reporting

option for the prior period financial statements from the following list of alternatives:

a. Reissue the previous report on the prior period financial statements.

b. Make reference to the previously issued report and describe the degree of responsibility assumed for

the financial statements of the prior period.

c. Update the previous report on the prior period financial statements.

d. Compile or review the prior period financial statements and issue the appropriate report.

106.4 Section 618 of this Guide discusses in detail the many reporting alternatives the accountant faces when

issuing comparative statements. Section 618 and AR 200 should be read before accepting an engagement to

report on compiled or reviewed financial statements to be presented in comparative form.




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107 AR Section 300—Compilation Reports on Financial Statements Included in Certain Prescribed

Forms

107 AR Section 300—Compilation Reports on Financial

Statements Included in Certain Prescribed Forms

107.1 AR 300 provides for an alternative form of standard compilation report on prescribed forms that call for

departures from generally accepted accounting principles (GAAP).

107.2 According to AR 300, a prescribed form is any standard preprinted form designed or adopted by the

body to which it is to be submitted, e.g., a bank. Under AR 300, the accountant may use a standard

compilation report identifying all GAAP measurement or disclosure departures, or he or she may use the AR

300 report, which is especially designed for prescribed forms. Prescribed forms are discussed in detail in

Chapter 13.


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108 AR Section 400—Communications between Predecessor and Successor Accountants

108 AR Section 400—Communications between Predecessor

and Successor Accountants

108.1 AR 400 provides guidance to a successor accountant who decides to communicate with a predecessor

in connection with acceptance of a compilation or review engagement. AR 400does not require a successor

accountant to communicate with a predecessor. However, a successor accountant may decide to

communicate when certain circumstances exist.

108.2 AR 400requires a predecessor accountant, if authorized by a former client, to respond promptly and fully

when a successor makes inquiries. However, the predecessor may decide to limit his or her response because

of unusual circumstances, such as impending litigation. AR 400 is discussed in detail in section 209 of this

Guide.

108.3 AR 400 requires a successor accountant to require the client to notify the predecessor accountant when

the successor believes that the financial statements reported on by the predecessor need to be revised.


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109 AR Section 600—Reporting on Personal Financial Statements Included in Written Personal

Financial Plans

109 AR Section 600—Reporting on Personal Financial

Statements Included in Written Personal Financial Plans

109.1 AR 600 provides an exemption from SSARS No. 19 for personal financial statements included in written

personal financial plans. However, the statement does not preclude an accountant from complying with SSARS

No. 19 in such engagements.

109.2 Chapter 15 further discusses personal financial statements included in financial plans.


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110 Recent SSARS Developments

110 Recent SSARS Developments

ARSC Developments

110.1 New Compilation and Review Interpretations on Required Supplementary Information

In October 2011, The AICPA, under the authority of ARSC, issued Interpretation No. 17 of AR 80, “Required

Supplementary Information That Accompanies Compiled Financial Statements,” (AR 9080.63-.68), and

Interpretation No. 11 of AR 90, “Required Supplementary Information That Accompanies Reviewed Financial

Statements” (AR 9090.41-.44). Both Interpretations make it clear that SSARS do not require the accountant to

apply procedures to any information presented for supplementary analysis purposes, including required

supplementary information. However, as required by AR 80.53 and AR 90.60, the accountant should indicate

the degree of responsibility, if any, he or she is taking with respect to the supplementary information that

accompanies the basic financial statements.

110.2 In addition, the accountant may modify his or her report by including a separate paragraph that refers to

the required supplementary information and explains the circumstances regarding its presentation. That

separate paragraph would be presented after the paragraph that reports the results of the engagement. These

Interpretations are discussed in more detail beginning at paragraph 616.3.

110.3 Technical Practice Aid TIS 9150.29, “Effects on Compilation and Review Engagements When

Management Does Not Assess Whether the Reporting Entity Is the Primary Beneficiary of a Variable

Interest Entity and Instructs the Accountant to Not Perform the Assessment.”

TIS 9150.29 addresses the accountant's responsibility when management does not perform, and instructs the

accountant to not perform, the assessment to determine whether the reporting entity has a controlling financial

interest in a VIE. Failure to perform such an assessment is a departure from GAAP. In these instances, if the

accountant concludes that modification of the standard report is appropriate, the accountant may modify the

accountant's compilation or review report by disclosing the departure in a separate paragraph of the report. If

the accountant believes that modification of the standard report is not adequate to indicate the deficiencies in

the financial statements, the accountant should withdraw from the engagement. This TIS is discussed further

beginning at paragraph 623.122.



110.4 Technical Practice Aid TIS 9150.30, “Disclosure of Independence Impairment in the Accountant's

Compilation Report on Comparative Financial Statements When the Accountant's Independence Is

Impaired In Only One Period.”

TIS 9150.30 addresses comparative reporting in a compilation engagement when the accountant was not

independent and such impairment was subsequently cured. The accountant may indicate the independence

impairment as of and for the earlier period ended that was subsequently cured by including language such as

the following as the final paragraph of the accountant's report:

As of and for the year ended December 31, 20X1, I was not independent with respect to ABC

Company.

OR

As of and for the year ended December 31, 20X1, I was not independent with respect to ABC

Company. I am currently independent with respect to ABC Company.

The accountant is not precluded from disclosing a description about the reason(s) that the accountant's

independence was impaired.

110.5 Proposed Clarified SSARS, Association With Unaudited Financial Statements

There is currently a hole in the SSARS literature, as the guidance in AR 100.03 was not carried forward by

SSARS No. 19. Once the clarified auditing standards become effective for audits of periods ending on or after

December 15, 2012, there will also be a hole in the auditing literature. Since May 2010, ARSC has been

working on a standard that will address “association.” After many significant rewrites, a proposed SSARS was

finally exposed in November 2010. Comment letters were considered at the May 2011 meeting. After much

discussion, ARSC decided they needed to revisit the issue and did not vote the document for issuance. ARSC

withdrew the November 2010 Association ED at its May 2012 meeting, and a new proposed SSARS,

Association With Unaudited Financial Statements, was discussed. The new SSARS Association ED was voted

for exposure and exposed in June 2012. Comments are requested by August 31, 2012.

110.6 The new proposed SSARS addresses the accountant's responsibility when the accountant is associated

with financial statements that have not been compiled, reviewed, or audited (i.e., unaudited financial

statements). The accountant is considered to be associated with the unaudited financial statements when:

• The accountant permits the use of the accountant's name in a report, document, or written

communication containing unaudited financial statements that have not been prepared in whole or part by

the accountant (see paragraph 110.7), or

• The accountant prepares, in whole or in part, unaudited financial statements for the entity, even though

the accountant does not append his or her name to the unaudited financial statements. (See paragraph

110.8.)



110.7 When the accountant's name is associated with unaudited financial statements the accountant did not

prepare, the accountant should:

a. Read the unaudited financial statements.

b. Consider whether the statements appear free from material inconsistencies with other knowledge or

information of which the accountant may be aware.

c. After performing a. and b., if the accountant decides to allow the use of the accountant's name, the

accountant should request that the entity clearly indicate that the financial statements were not compiled,

reviewed, or audited.

110.8 When the accountant's name is associated with unaudited financial statements the accountant prepared

and the client did not engage the accountant to perform a compilation or review, the accountant should request

that the entity clearly indicate that the financial statements were not compiled, reviewed, or audited.

110.9 This proposed SSARS is effective for unaudited financial statements with which the accountant is

associated on or after December 15, 2014. Early implementation is required if the accountant early implements

the proposed revised Interpretation No. 101-3, “Nonattest Services.” (See the discussion of the proposed

changes to ET 101-3 in section 214.) Otherwise, early implementation would be permitted. At the date of this

Guide, ARSC plans to vote this SSARS final in January 2013. Accountants can monitor the status of this

project at www.aicpa.org.

110.10 Clarified SSARS, Compilation of Financial Statements, Exposure Draft

ARSC has exposed clarified compilation standards which, if approved, would be effective for compilations of

financial statements of periods ending on or after December 15, 2014. Early implementation is required if the

accountant early implements the proposed revised Interpretation No. 101-3, “Nonattest Services.” (See the

discussion of the proposed changes to ET 101-3 in section 214.) Otherwise, early implementation would not be

permitted. The exposure draft would supersede AR 60, AR 80, AR 110, AR 300, and AR 600.

110.11 The most significant changes from current compilation standards include the following—

• Changing the Standard to be engagement driven versus submission driven. The proposed SSARS would

only require a compilation if the accountant is engaged to perform that service. This means an accountant

can prepare financial statements, submit them to his or her clients, and if they are not engaged to compile,

they do not have to follow the compilation standard. This change is consistent with the proposed changes

to ET 101-3 discussed in section 214 that would clarify that preparing financial statements is a nonattest

service.



• Moving out of country and IASB guidance and the guidance related to predecessor accountants to the

AICPA's CAR Guide. Also, ARSC will consider whether the requirements of current AR 300, Compilation

Reports on Financial Statements Included in Certain Prescribed Forms, will be included in a future edition

of the AICPA CAR Guide.

• Separating the normal recurring compilation guidance and the more specialized compilation guidance

into separate sections. The proposed SSARS would result in AR 70, Association with Unaudited Financial

Statements, AR 80, Compilation of Financial Statements (Revised); and AR 85, Compilation of Financial

Statements—Special Considerations.

• Separating requirements from application and other explanatory material. This is consistent with the

format used for the recent clarified auditing standards.

• Adding more definitions.

• Changing the term illegal acts to noncompliance with laws or regulations.

• Determining when the terms should and must should be used.

• Distinguishing between emphasis of matter and other matter paragraphs.

• Requiring an emphasis of matter paragraph when—

•• Financial statements have been prepared in accordance with a special purpose framework.

•• Reporting on prior period financial statements and the accountant's compilation report includes

a changed reference to a departure from the applicable financial reporting framework.



•• Reporting when management revises financial statements for a subsequently discovered fact

that became known to the accountant after the report release date and the accountant's

compilation report on the revised financial statements differs from the accountant's compilation

report on the original financial statements.

•• The accountant considers it necessary to alert users to an important matter presented or

disclosed in the financial statements.

• An other matter paragraph should be used if—

•• The accountant considers it necessary to alert users to an important matter not presented or

disclosed in the financial statements.

• Changing the term OCBOA to special purpose framework to be consistent with the auditing standards.

• Adding a Table of Contents to the illustrative reports exhibit and numbering the illustrations.

• Changing all reports. In addition to using sections with headings, the accountant's compilation report

should name the city and state of the issuing office.

• If the financial statements are prepared in accordance with an OCBOA (or a contractual basis of

accounting) and omit substantially all disclosures, the report must highlight in a separate paragraph that

the OCBOA (or the contractual basis of accounting) is different than GAAP. If such financial statements

include disclosures, the report should reference the note to the financial statements that describes the

OCBOA (or contractual basis of accounting). Also, there are additional reporting requirements if

management of the entity has a choice of financial reporting frameworks or when the financial statements

are prepared in accordance with a regulatory or contractual basis of accounting.



• Engagement letters must be signed by the accountant or accounting firm and management or those

charged with governance.

110.12 Future editions of this Guide will update the status of this exposure draft. Accountants may also monitor

the SSARS Clarity Project at www.aicpa.org.

110.13 Proposed clarified SSARS, Review of Financial Statements

ARSC is also currently working on a proposed clarified review standard. An exposure draft is expected in 2013.

The clarified review SSARS is expected to be effective for reviews of financial statements for periods ending on

or after December 15, 2014.

AICPA's Compilation and Review Alert

110.14 The AICPA staff prepares a compilation and review alert each year, which is a nonauthorative practice

aid designed to help accountants plan and perform their compilation and review engagements. The AICPA's

2011/12 Compilation and Review Alert clarifies existing SSARS, suggests ways of implementing SSARS in

special circumstances, points out various pitfalls that frequently occur in compilation and review engagements,

and addresses emerging issues and practice problems. Although guidance in the AICPA's alert is not

authoritative, it is designed to help accountants plan and perform their compilation and review engagements.

Copies of the alert are available on Checkpoint or can be ordered from the AICPA at www.cpa2biz.com.

(Note that PPC's Guide to Compilation and Review Engagements covers all relevant topics included in the

AICPA's alert.)

SSARS 19 Toolkit

110.15 The AICPA offers a SSARS 19 Toolkit that helps accountants with their understanding and

implementation of SSARS No. 19. The toolkit includes an implementation checklist covering the items

necessary to put the standard into practice and helpful tools for communicating the changes to staff and

clients. Private Companies Practice Section members receive the Toolkit free with their membership. The

toolkit can be ordered from the AICPA at www.cpa2biz.com.


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111 Recent Accounting Developments

111 Recent Accounting Developments

111.1 Generally accepted accounting principles (or an OCBOA) are the same for any financial statements

regardless of whether they are compiled, reviewed, or audited. To perform a compilation or review

engagement successfully, the CPA should have an adequate understanding of the accounting principles and

practices that may be pertinent to the particular client and their circumstances. The disclosure checklist at

Appendix 5C-2 list the primary disclosure requirements for financial statements of nonissuers as required by

GAAP. However, the checklist is not a GAAP application checklist; accordingly, GAAP application and

measurement questions are not included. Consequently, to further assist accountants in insuring that they

comply with GAAP, a listing of significant accounting pronouncements that have been issued or took effect

between July 1, 2011, and June 30, 2012, or will become effective subsequent to June 30, 2012, is included at

Appendix 1B of this Guide. Further information regarding accounting and GAAP can be found in PPC's Guide

to Preparing Financial Statements and PPC's Guide to GAAP.


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112 International Compilation and Review Standards

112 International Compilation and Review Standards

112.1 The International Auditing and Assurance Standards Board (IAASB) of the International Federation of

Accountants (IFAC) has issued International Standard on Related Services (ISRS) 4410, Engagements to

Compile Financial Statements, and International Standard on Review Engagements (ISRE) 2400,

Engagements to Review Financial Statements. The purpose of this ISRS and ISRE is to—

• Establish international standards and provide guidance on the accountant's professional responsibilities

when engaged to compile or review financial statements.

• Provide guidance on the form and content of the report the accountant issues for that compilation or

review.

ISRS 4410 and ISRE 2400 can be found in IFAC's Handbook of International Auditing, Assurance, and Ethics

Pronouncements, which is available online at www.ifac.org.

112.2 The IAASB has completed a project on its agenda to consider alternatives to the audit for smaller

entities. This project included the reconsideration of ISRS 4410 and ISRE 2400. Revised ISRS 4410 was

issued in March 2012. The revised standard is effective for compilation engagement reports dated on or after

July 1, 2013. At its June 2012 meeting, the IAASB approved a revised draft of ISRE 2400. The ISRE will be

effective for reviews of financial statements for periods ending on or after December 31, 2013.

Interaction with SSARS

112.3 ISRS 4410 and ISRE 2400 do not override the SSARS. However, Interpretation No. 15 of AR Section 80

(AR 9080.58-.60), Considerations Related to Compilations Performed in Accordance with International

Standard on Related Services 4410, “Engagements to Compile Financial Statements,” Issued by the

International Audit and Assurance Standards Board and Interpretation No. 10 of AR Section 90 (AR 9090.38-

.40), Considerations Related to Reviews Performed in Accordance with International Standard on Related



Services 4410, “Engagements to Review Financial Statements,” Issued by the International Audit and

Assurance Standards Board allow an accountant who performs a compilation or review of historical financial

statements of a U.S. entity to follow the compilation or review standards of another set of compilation or review

standards (such as ISRS 4410 or ISRE 2400), in addition to the required SSARS standards.

112.4 Interpretation Nos. 13-14 of AR Section 80 (AR 9080.49-.57), Compilations of Financial Statements

Prepared in Accordance with International Financial Reporting Standards and Compilations of Financial

Statements Prepared in Accordance with a Financial Reporting Framework Generally Accepted in Another

Country, and Interpretation Nos. 8-9 of AR Section 90 (AR 9090.29-.37), Reviews of Financial Statements

Prepared in Accordance with International Financial Reporting Standards and Reviews of Financial Statements

Prepared in Accordance With a Financial Reporting Framework Generally Accepted in Another Country,

respectively, provide guidance regarding accountant's reports issued in connection with compilations and

reviews of historical financial statements prepared in accordance with International Financial Reporting

Standards or in accordance with a financial reporting framework generally accepted in another country. See

the discussion beginning at paragraph 600.5.


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113 The Impact of the Current Economic Environment on Compilations and Reviews

113 The Impact of the Current Economic Environment on

Compilations and Reviews

113.1 The economic contraction has caused many companies to face declining business conditions. Generally

accepted accounting principles require considering the effects of declining business conditions on

measurements and disclosures in the financial statements, such as by reducing the carrying amounts of

receivables or inventories for impairment or disclosing subsequent events and contingent liabilities. In addition,

the effects of the declining business conditions may be severe enough to require consideration of disclosures

and report modifications for uncertainty about the ability of the company to continue as a going concern, or to

require preparing the company's financial statements on the liquidation basis accounting.

113.2 The discussion in the remainder of this section addresses the likely effects of the economic contraction

on the preparation of financial statements in four areas: (More detailed discussions can be found in PPC's

Guide to Preparing Financial Statements.)

a. Fair Value Measurements and Disclosures. Since the economic contraction is likely to cause many

companies to consider the need for fair value measurements, the general guidance in FASB ASC 820 is

discussed. The discussion begins at paragraph 113.3.

b. Accounting Considerations. The economic contraction is likely to affect the measurement, presentation,

and related disclosures for certain assets, liabilities, and expenses of small and midsize nonpublic

companies in preparing their financial statements in conformity with generally accepted accounting

principles. The discussion begins at paragraph 113.6.

c. Liquidation of the Company. If the impact of the recession is so severe that a company cannot survive,

liquidation may occur. Liquidation is discussed beginning at paragraph 113.47.



d. Disclosure Considerations. Certain disclosures that are not necessarily related to measurements and

presentation in the financial statements: the ability of the company to continue as a going concern (see

paragraph 113.50); disclosure of subsequent events (see paragraph 113.55); and disclosure of

commitments, contingencies, risks, and uncertainties (see paragraph 113.60) may also be needed.

Illustrative disclosures are provided in Appendix 5B.

Fair Value Measurements and Disclosures

113.3 Authoritative Literature

FASB ASC 820 does not change generally accepted accounting principles for when fair value measurements

are required. However, when generally accepted accounting principles require either a recurring or

nonrecurring adjustment of the carrying amount of an asset or liability to fair value, it provides guidance on how

to determine the fair value. The guidance also applies to determining fair value information that generally

accepted accounting principles require disclosing, such as the disclosure of fair value information about

financial instruments. Fair value measurements are discussed in more detail in section 522.

113.4 FASB ASC 820 requires certain disclosures whenever fair value information is presented. Those

disclosures are generally designed to provide information about the subjectivity of the fair value measurements

and are required in addition to any other disclosures required about fair value measurements. As an example,

the FASB ASC 820-10-50 disclosures are required in addition to the disclosures about the fair value of

investments in debt and equity securities required by FASB ASC 320-10-50 or fair value of financial

instruments required by FASB ASC 825-10-50. ASU 2010-06, Fair Value Measurements and Disclosures:

Improving Disclosures about Fair Value Measurements, was issued in January 2010 to amend the disclosure

requirements in FASB ASC 820-10. The required fair value disclosures are included at Appendix 5C-2.

113.5 For small and midsize nonpublic companies, FASB ASC 820 generally became effective in two stages,

one for financial assets and liabilities and any recurring fair value measurements and one for nonrecurring fair

value measurements of nonfinancial assets and liabilities, and is now fully effective. A summary of how the

guidance affects most small and midsize nonpublic companies follows.

a. FASB ASC 820 applies to consideration of the need to recognize a loss for the impairment of long-term

receivables, which are financial assets.

b. It applies to consideration of the determination of the fair value of securities in inactive markets, which

are financial assets.

c. It applies to consideration of the need to recognize a loss for the impairment of long-lived assets, which

are nonfinancial assets measured or disclosed at fair value on a nonrecurring basis.



d. It applies to the measurement of obligations for costs incurred to exit activities, which are nonfinancial

liabilities (unless they are evidenced by contracts) measured or disclosed at fair value on a nonrecurring

basis.

e. The measurement guidance in FASB ASC 820 does not apply to consideration of the need to recognize

a loss for the impairment of inventories. Instead, FASB ASC 330-10-30 provides the relevant

measurement guidance, and its guidance was not affected by FASB ASC 820. However, the disclosure

requirements in FASB ASC 820 for nonfinancial assets and liabilities would apply since inventories are

nonfinancial assets.

f. Its measurement guidance does not apply to consideration of the need to recognize a valuation

allowance for deferred tax assets. Instead, FASB ASC 740 provides the relevant measurement and

disclosure guidance.

Accounting Considerations

113.6 Companies are used to making adjustments to fair value in a number of situations. For example, they

routinely provide valuation allowances to reduce the amount outstanding under current and long-term

receivables to their net realizable value. Companies also routinely provide valuation allowances to reduce the

carrying amounts of inventories to reflect impairment losses from declines in their market value, and

companies that have portfolios of marketable securities routinely adjust the carrying amounts of the portfolios

to fair value. However, the economic contraction has typically introduced more subjectivity into a company's

routine considerations of the need to provide for unrealized impairment losses on receivables, inventories, and

deferred tax assets.

113.7 The economic contraction has also typically required nonroutine considerations for many companies. For

example, for many, there has been a need to—

a. Determine whether the fair values of intangible assets and long-lived assets have declined below their

carrying amounts and to consider whether adjustments are needed. The economic contraction has also

increased the subjectivity in determining fair value of the assets and the judgment required to consider

whether adjustments are necessary.

b. Determine whether declines in the fair value of marketable securities are other-than-temporary. These

resulting losses should be recognized in earnings rather than other comprehensive income.



c. Consider disclosing changes in the fair value of securities that occurred subsequent to year-end.

d. Enter into troubled debt restructurings, which require special accounting considerations.

e. Consider the appropriate recognition of costs incurred in response to the economic contraction, such as

costs to exit certain activities or to terminate employees or contracts.

f. Present results of certain discontinued operations separately.

113.8 This section discusses the effects of the economic contraction on routine and nonroutine considerations.

However, it is designed only to alert companies to special measurement, presentation, and related disclosure

considerations caused by the economic contraction. This section is not designed to provide detailed

discussions of generally accepted accounting principles. Those discussions can be found in PPC's Guide to

Preparing Financial Statements.

113.9 Receivables

FASB ASC 450-20-25 requires accrual of losses from uncollectible receivables if a loss is probable and the

amount of the loss can be reasonably estimated. The accrual must be made even though the particular

receivables that are uncollectible may not be identifiable.

113.10 While most of the receivables of small and midsize nonpublic companies are due within one year, some

companies provide long-term financing. FASB ASC 310-10-35 requires a reduction in the carrying amount of

long-term receivables if they are determined to be impaired.

113.11 FASB ASC 310-10-35 establishes the presumption that the carrying amount of the impaired receivable

should be reduced to the present value of expected future cash flows discounted at the loan's effective rate.

Use of the effective rate, rather than the current rate, means that the new carrying amount differs from the fair

value of the receivable. However, there are two practical alternatives to that general presumption:

a. the carrying amount of the receivable can be reduced to the loan's observable market price (fair value),

or

b. if the receivable is collateral-dependent, the carrying amount can be reduced to the fair value of the

underlying collateral.



113.12 FASB ASC 310-10-35 does not prescribe how fair value should be determined and FASB ASC 820-10

does not revise the general presumption of present value measurement. Accordingly, impairment should be

recognized at either—

a. the present value of expected future cash flows discounted at the effective rate of the receivable or

b. the fair value of the receivable or the fair value of the secured vehicle, with fair value determined

following the guidance in FASB ASC 820-10.

Loan impairment is discussed in more detail in section 302 of PPC's Guide to Preparing Financial Statements.

113.13 Inventories

FASB ASC 330-10-35 generally requires reporting inventory at the lower of its cost or market. For that

purpose, market generally means current replacement cost. However, if current replacement cost declines

below cost, the new carrying amount—

a. should not be greater than the net realizable value of the inventory and

b. should not be less than the net realizable value of the inventory reduced for an approximately normal

profit margin.

113.14 FASB ASC 820-10 does not change the description of the new carrying amount from market to fair

value and does not change how market is determined. As a practical matter, depending on the facts and

circumstances, a carrying amount at market determined under FASB ASC 330-10-35 may be the same as the

inventory's fair value.

113.15 Declines in market value of the carrying amounts of inventories determined using the last-in, first-out

(LIFO) method are usually not great enough to require a reduction in the carrying amount. In the current

economic environment, however, additional consideration should be given to return policies and write-off

policies.

113.16 Goodwill and Other Intangible Assets

FASB ASC 350 generally requires considering whether goodwill and intangible assets are impaired and, if they

are, reducing their carrying amounts to the fair value of the assets. FASB ASC 350 looks at the impairment of

intangible assets in two major categories: goodwill and other intangible assets, and it looks at impairment of

other intangible assets with indefinite useful lives differently from those with finite useful lives.



113.17 FASB ASC 350-20-35 introduced the term implied fair value in considering the need to adjust the

carrying amount of goodwill for impairment. An adjustment is needed if the implied fair value of goodwill is less

than its carrying amount.

113.18 Goodwill is generally determined as the excess of the consideration paid in a business combination

over the fair values of identifiable assets and liabilities acquired, and the implied fair value of goodwill is

determined following the process used for determining goodwill in a business combination. The determination

requires first identifying the reporting unit that has the goodwill. A reporting unit is defined as an operating

segment or one level below an operating segment. A product line is not an operating segment.

113.19 GAAP's fair value guidance applies to the determination of the fair value of the reporting unit. For

example, if the reporting unit is the company as a whole, its fair value may be determined using the techniques

that would be used in valuing the company. That may result in using a combination of an income approach that

looks at the stream of cash flows from operations and a market approach that uses multiples from transactions

involving similar companies. The implied fair value of the goodwill would be the difference between the fair

value of the company and the fair values of its assets and liabilities. The economic contraction may have

reduced the fair value of the company, and it may have increased the subjectivity of the determination of fair

value of its assets and liabilities.

113.20 FASB ASC 350-30-35 also provides guidance on considering the need for an impairment adjustment of

the carrying amount of an intangible asset that has an indefinite useful life. 3 However, the guidance in FASB

ASC 360-10-35 applies to considering the need for an impairment adjustment of the carrying amount of an

intangible asset that has a finite useful life.

113.21 Long-lived Assets

FASB ASC 360-10 generally looks at impairment of long-lived assets in two categories: those to be held and

used in the company and those to be disposed of by sale.

a. The carrying amount of a long-lived asset to be held and used in the company's activities should be

written down to its fair value if the carrying amount of the asset is not recoverable and fair value is less

than the carrying amount. The carrying amount is considered to be not recoverable if it is more than the

undiscounted cash flows expected to result from the use and eventual disposition of the asset.

b. The carrying amount of a long-lived asset to be disposed of by sale should be written down to its fair

value less cost to sell. FASB ASC 360-10-45 prescribes the conditions that must be met in order for a long

-lived asset to be considered held for sale. FASB ASC 360-10-45 also requires presenting the asset

separately in the statement of financial position.

113.22 Long-lived assets of a company may include operating real estate or leasehold improvements if the

operating facilities are leased, for example from an owner or an entity controlled by the owner. They also may

include equipment used in providing mechanical services, computer and other office equipment, signage, and



other operating equipment. The economic contraction may cause the carrying amounts of those assets not to

be recoverable and the fair values of the assets to decline below their carrying amounts. However, the

contraction may also increase the subjectivity of the determination of fair value. For example, the fair value of

long-lived assets such as special mechanical equipment or signage that are related to a discontinued product

line may be their scrap value, but depending on the facts and circumstances, it may be practical to convert the

equipment for other uses. There may also be no active market for equipment.

113.23 Determining undiscounted cash flows for determining whether the carrying amount of a long-lived asset

is recoverable requires considerable judgment. Most of a company's long-lived assets do not produce their

own stream of cash flows. Accordingly, determining recoverability of the carrying amount for assets held and

used requires identifying the lowest level of grouping of assets for which cash flows can be identified. For

example, consider the following assets that may be held and used:

a. For operating real estate, the lowest level of identifiable cash flows is likely the company itself.

b. For signage and other equipment directly related to a discontinued product line, there are likely no

identifiable cash flows other than the cash flows from ultimate disposal of the assets.

c. For mechanical service equipment, the group is likely to consist of all the service equipment and related

facilities.

d. For computer and other office equipment, the group is likely to consist of the company itself.

113.24 The economic contraction may increase the subjectivity of estimating cash flows related to the grouped

assets. As a practical matter, however, depending on the facts and circumstances, it may be sufficient for the

company to determine the fair value of the asset, then assess the likelihood that undiscounted cash flows from

use and disposal of the asset are less than the asset's carrying amount. For example, management may

reasonably believe that the company will continue using its present operating facilities for at least 10 years and

that, even though its fair value is currently less than it carrying amount, over 10 years, the fair value of the

property (and, thus, the cash flows from its ultimate disposal) will likely recover to the present carrying amount.

In addition, management may reasonably conclude that cash flows from the company's activities during that

period will at least equal the difference between the property's current carrying amount and its current fair

value (disposal value).

113.25 Declines in the Fair Value of Marketable Securities

FASB ASC 320-10 requires the carrying amount of debt and equity securities whose fair value is readily

determinable, and that are either trading securities or available for sale, to be adjusted to their fair value. The



underlying presumption is that because fair value is readily determinable, it is an objective measurement and

could readily be realized.

113.26 The accounting for unrealized appreciation and depreciation in the fair value of the securities generally

depends on their use, with the change in the fair value of trading securities recognized in earnings and the

change in the fair value of securities available for sale recognized in other comprehensive income. The

guidance in FASB ASC 320-10 on determining fair value generally is not changed by FASB ASC 820-10.

113.27 When the fair value of an available-for-sale or held-to-maturity security declines below its cost basis

and the decline is determined to be other-than-temporary, the security's fair value at the measurement date

becomes its new cost basis. Generally, the decline in value below cost should be accounted for the same as a

realized loss with the amount of the write-down included in earnings.

113.28 FASB ASC 320-10-35 provides guidance regarding the meaning of other-than-temporary impairment

and its application to equity securities. It provides guidance for (a) determining when an investment is

considered impaired, (b) determining whether the impairment is other-than-temporary, and (c) measuring and

recognizing an impairment loss if the impairment is deemed other-than-temporary.

113.29 An investment in equity securities is deemed impaired if its fair value is less than its carrying amount. A

security's carrying amount includes adjustments made to its cost basis for accretion, amortization, previous

other-than-temporary impairments, foreign exchange, and hedging. If an investment is deemed impaired, the

impairment should be analyzed to determine if it is other-than-temporary.

113.30 FASB ASC 320-10-35 states that other-than-temporary does not mean permanent, but it does not

provide specific guidance on determining whether the decline in fair value below cost is temporary or other-

than-temporary. Instead, it says to follow guidance that would be pertinent and gives examples such as FASB

ASC 325-40-35. However, if the company intends to sell the security before recovery of its cost, the security is

considered other-than-temporarily impaired in the period in which the decision to sell is made.

113.31 Under FASB ASC 320-10-35, if the company has invested in a debt security and—

a. intends to sell the security, a decline in the fair value of the security is considered to be other-than-

temporary and the impairment loss should be charged to earnings.

b. does not intend to sell the security, the company must assess whether it more likely than not will be

required to sell the security before the carrying amount of the security can be recovered, for example, to

meet cash or working capital requirements or to satisfy contractual or regulatory obligations. If it is more

likely than not that the company will be required to sell the security before its carrying amount can be

recovered, the impairment loss should be charged to earnings.

c. does not intend to sell the security and it is not more likely than not that the company will be required to

sell the security before the amortized cost basis of the security can be recovered, an assessment should



be made as to whether the decline is other-than-temporary after considering all the relevant facts and

circumstances related to collectibility of the security and other factors. If analysis of the present value of

cash flows expected to be collected from the security indicates the company will not recover its amortized

cost basis, an other-than-temporary impairment has occurred. If the loss is considered to be other-than-

temporary, the company should most likely charge the impairment loss to earnings. However, a portion of

the loss may be charged to other comprehensive income in certain circumstances.

Accounting for investments in debt and equity securities is discussed further in section 302 of PPC's Guide to

Preparing Financial Statements.

113.32 While FASB ASC 320-10 is clear that securities within its scope should be measured at fair value at the

end of the reporting period, it does not address whether subsequent changes in their fair value prior to

issuance of the financial statements should be disclosed. FASB ASC 820 also does not address the need to

disclose subsequent changes in fair value for fair value measurements.

113.33 As discussed beginning in paragraph 113.55, FASB ASC 855-10 applies to the accounting for and

disclosure of subsequent events not addressed in other applicable generally accepted accounting principles.

FASB ASC 855-10 generally provides guidance on two types of subsequent events: those recognized at the

end of the reporting period and those not recognized at the end of the reporting period.

113.34 A subsequent change in the fair value of assets or liabilities is given as an example of a nonrecognized

subsequent event. FASB ASC 855-10-50 requires disclosure of nonrecognized subsequent events if they are

“of such a nature that they must be disclosed to keep the financial statements from being misleading.” For

nonrecognized subsequent events that meet that criterion, FASB ASC 855-10-50 requires disclosure of the

nature of the event and an estimate of its financial effect or a statement that such an estimate cannot be made.

113.35 The fair value measurement required by FASB ASC 320-10 is intended to be a snapshot, generally

computed by multiplying the fair value per share by the number of shares. Factors that could affect the amount

realized are not considered. For example, the measurement does not consider control premiums, blockage

factors, or selling costs. Similarly, changes in fair value before the securities are sold are not considered. There

is no implication that the carrying amount of the securities will be realized, and therefore the measurement

does not require disclosure of subsequent changes in the fair value of the securities.

113.36 Therefore, disclosure is only required if it would be necessary to keep the financial statements from

being misleading. The authors believe that may be the case if the subsequent changes, either increases or

decreases, lead to a condition that should be disclosed so the financial statements will not be misleading. It is

therefore the condition caused by the subsequent change in fair value that requires disclosure. If the change

does not cause a condition that requires disclosure, disclosure of the subsequent change is not required. As a

practical matter, if the company plans to use cash from selling the securities to subsidize losses caused by the

economic contraction and the fair value of the securities declines materially subsequent to year-end, the

company should likely disclose the decline and its amount. Otherwise, a subsequent decline in the fair value of

the securities is not likely to require disclosure as a subsequent event.

113.37 Troubled Debt Restructurings



FASB ASC 470-60 applies if a creditor grants a concession to the company for economic or legal reasons

related to the company's financial difficulties that it would not otherwise consider. Normally, a modification of

terms should be accounted for prospectively and does not affect the company's earnings in the year of

modification. If the carrying amount of the debt exceeds the total future cash payments specified by the new

terms; however, the company should reduce the debt's carrying amount to the total future cash payments

specified by the new terms and recognize a gain on debt restructuring for the amount of the reduction.

Subsequently, all cash payments under the terms of the debt should be accounted for as principal reductions,

and no interest expense should be recognized on the debt.

113.38 FASB ASC 470-60 only applies to changes in debt terms associated with a troubled debt restructuring.

A substantial modification in terms of existing debt other than in a troubled debt restructuring or an exchange of

existing debt for new debt with substantially different terms should be accounted for in accordance with FASB

ASC 470-50. To clarify whether a modification or exchange is within the scope of FASB ASC 470-60, the EITF

provided guidance in FASB ASC 470-60-55.

a. If a company is experiencing financial difficulty and the creditor grants the company a concession, the

guidance for troubled debt restructurings in FASB ASC 470-60 applies.

b. However, if the company is not experiencing financial difficulty or the creditor has not extended any

concession in response to the debtor's financial difficulty, the guidance for modification or exchange of

debt instruments in FASB ASC 470-50 applies.

113.39 FASB ASC 470-60-55 provides guidance for determining whether a company is experiencing financial

difficulty and whether a creditor has granted a concession. Accounting for troubled debt restructurings and

other debt modifications is discussed further in section 309 of PPC's Guide to Preparing Financial Statements.

113.40 Exit or Disposal Activities and Discontinued Operations

The company may incur a variety of costs in response to the economic contraction. For example, it may incur

costs in terminating employees or canceling an operating lease for facilities or equipment. It may also incur

costs in moving to smaller facilities or otherwise restructuring its activities as a result of financial difficulties or

the discontinuance of a component of its operations. FASB ASC 420-10, applies to costs of exit and disposal

activities, including restructuring costs and costs associated with disposal of a component of operations.

Although GAAP does not define exit or disposal activities, the authors interpret the term broadly and believe

the recognition, measurement, and disclosure guidance in FASB ASC 420-10 is likely to be relevant for many

costs incurred by small and midsize nonpublic companies in response to the economic contraction. The

following are categories of costs associated with exit or disposal activities:

• One-time termination benefits for terminated employees.



• Termination of a contract, other than a capital lease. (Termination of a capital lease should be accounted

for under FASB ASC 840-30-40-1.)

• Other associated costs, including the consolidation of facilities or the relocation of employees.

113.41 Those costs should be recognized when they are incurred. For example, if a company decides to lay off

employees, the cost of termination benefits should generally be recognized when the employees are notified.

However, recognition may vary if employees are required to render future services. Similarly, the cost of

terminating an operating lease should generally be recognized when the company notifies the lessor.

113.42 An obligation for costs incurred should be measured at fair value. Often the amount is measured based

on the amount of payments the company expects to make discounted using an appropriate rate, generally if

the payment period is longer than a year. The discount rate ordinarily approximates the short- term borrowing

rate that commercial lenders would offer the company at the time the liability is recognized. As a practical

matter, that approximates the fair value of the obligation under FASB ASC 820-10.

113.43 In addition, the disclosures required by FASB ASC 420-10-50 would provide the users of the

company's financial statements with relevant information about the effects of the economic contraction on the

company's costs and activities.

113.44 FASB ASC 420-10 also applies to costs associated with disposal activities for a component of an entity

accounted for under FASB ASC 360-10. Under FASB ASC 205-20-45, operations and cash flows that can be

clearly distinguished, operationally and for financial reporting purposes, from the rest of the company are

considered to comprise a component of the company. A component may be a reportable segment or an

operating segment, a reporting unit, a subsidiary, or an asset group. Under FASB ASC 205-20-45, the results

of operations of a discontinued component should be reported separately from the results of operations of

continuing components.

113.45 Under FASB ASC 420-10-25, the obligation for costs that will be incurred in disposing of the

component should be recognized when the liability is incurred. For example, even though the company

expects to incur a substantial loss in the following year from winding down those operations, the costs should

not be recognized until they are incurred. FASB ASC 420-10-30 requires measuring the liabilities recognized at

their fair value. As a practical matter, the fair value of the liabilities is likely to approximate the present value of

expected payments discounted using an appropriate rate, generally if the payment period is longer than a year.

113.46 It is not likely that a company would dispose of a component in response to the economic contraction.

For example, the authors believe termination of a product line would not be considered disposal of a

component. In addition to the presentation and related requirements of FASB ASC 205-20-45, FASB ASC 420-

10-50 prescribes disclosure requirements. Presenting discontinued operations is discussed in more detail in

section 403 of PPC's Guide to Preparing Financial Statements.

Liquidation of the Company 4



113.47 When a company is in liquidation (or liquidation is imminent), a going concern assumption is no longer

appropriate and the company's financial statements should be prepared on the liquidation basis of accounting.

That may occur, for example, if a company is terminated or discontinuance of a product line is so severe to the

company's operations that it cannot survive. As a practical matter, the authors believe companies in liquidation

will no longer have their financial statements reviewed or compiled. However, accountants may be called upon

for guidance in this area.

113.48 Presentations of assets and liabilities at their historical bases are no longer relevant to liquidating

entities, and companies should adjust the carrying amounts of assets and liabilities to the amounts expected in

liquidation. This adjustment results in measuring the assets at net realizable value and the liabilities at net

settlement value and discounting the values when the effect is significant. Since third-party fees, such as

finder's fees for disposing of equipment, brokerage fees, and collection agency fees, are often required in a

liquidation, they should be considered in the estimates. Because the definition of fair value assumes an orderly

transaction, which is different than the environment in a liquidation, the carrying amounts determined for

liquidation accounting do not meet the definition of fair value; they represent the net proceeds expected to be

realized under the plan of liquidation.

113.49 When deciding which financial statements to present for the year in which the conversion to liquidation

basis occurs, the authors recommend preparing statements of income and retained earnings and cash flows

from the beginning of the year to the date of conversion, a statement of changes in net assets in liquidation for

the period from the date of conversion to the end of the year, and a statement of net assets in liquidation at the

end of the year. Additional detail on the liquidation basis of accounting can be found in section 1906 of PPC's

Guide to Preparing Financial Statements.

Disclosure Considerations

113.50 The Ability of the Company to Continue as a Going Concern4

While authoritative accounting literature acknowledges that financial statements generally are prepared under

the assumption that the reporting entity will continue in existence, it does not address whether that assumption

should be reconsidered periodically or whether measurement or disclosure is required if there is uncertainty as

to whether the entity will continue in existence. SSARS No. 19 (AR 80.40-.43 and AR 90.47-.50) addresses the

accountant's responsibility when evidence or information comes to the accountant's attention during the

performance of a compilation or review engagement that a going concern uncertainty may exist.

113.51 SSARSs do not require performing procedures specifically designed to determine whether there is

uncertainty about the entity's ability to continue as a going concern. Instead, AR 90.47 states that “evidence or

information may come to the accountant's attention indicating that there may be an uncertainty about the

entity's ability to continue as a going concern for a reasonable period of time.” The notion of whether there is

uncertainty about the ability to continue as a going concern raises the question of “For how long?” The answer

in the SSARS is not more than one year from the end of the period being reported on.

113.52 The objective of the guidance in the SSARS is to determine whether the report on the engagement

should be modified. The accountant's report should be modified if disclosure of the going concern uncertainty

is not adequate. There is no requirement to include an explanatory paragraph in the accountant's report



whenever the accountant concludes that there is substantial doubt about the entity's ability to continue as a

going concern; however, the accountant is not precluded from emphasizing a going concern uncertainty in the

compilation or review report.

113.53 The Accounting and Review Services Committee is not authorized to prescribe measurement or

disclosure requirements. However, a nonauthoritative Exhibit to the SSARS provides going concern

considerations in compilation and review engagements and examples of information that might be disclosed.

113.54 Some users of financial statements interpret going concern disclosures as predicting doom. In fact,

many view them as causing a business to fail. Accordingly, the decision to disclose the information should not

be taken lightly. Normally, the disclosure is not provided unless there are serious concerns about the viability of

the business. If going concern disclosure is necessary, the authors recommend the following:

a. The disclosure should include all relevant factors, such as:

(1) pertinent conditions and events giving rise to the assessment of the company's ability to

continue as a going concern, even if the information is apparent from the financial statements;

(2) the possible effects of the conditions and events, management's evaluation of the significance

of the conditions and events, and any mitigating factors;

(3) management's plans, including possible discontinuance of operations; and

(4) information about the recoverability or classification of recorded assets or the amounts or

classifications of liabilities.

b. The wording should be neutral and should not be unduly pessimistic or optimistic.

c. If there are no mitigating factors or management has no specific plans to overcome the conditions, the

disclosure should be silent about their absence.

113.55 Disclosure of Subsequent Events



Due to the rapidly changing economic environment, companies may be faced with significant events that occur

after the date of their financial statements but before those statements are issued or available for issuance. For

example, the resolution of matters related to loan defaults, subsequent declines in the market value of

investments, discontinuance of a product line, or even the termination of the company may occur after year-

end.

113.56 FASB ASC 855-10 provides guidance on two types of subsequent events.

a. The first type provides additional information about whether an asset was impaired or a liability was

incurred at the end of the reporting period. This information should be considered in determining the

carrying amount of the asset or liability at the end of the reporting period.

b. The second type provides information that does not indicate that an asset was impaired or a liability was

incurred at the end of the reporting period but may require disclosure so the financial statements will not

be misleading.

113.57 To illustrate how to apply the guidance in financial statements prepared using generally accepted

accounting principles, assume that at year-end the company has a significant amount due under a trade

account with a major customer that is having financial difficulties and subsequent to year-end incurs a

substantial uninsured loss. That information should be considered in determining whether a loss should be

recognized for impairment of the principal outstanding under the account at year-end.

113.58 Now change the illustration so that the customer was not having financial difficulties at year-end.

Although the principal outstanding under the trade account was not impaired at year-end, it may be necessary

to disclose the subsequent uninsured loss in order to keep the financial statements from being misleading.

Similarly, decisions made after the date of the financial statements but before their issuance to discontinue a

product line would generally not be recognized in the financial statements but would be considered for

disclosure. Considerations in deciding whether to disclose subsequent changes in the fair value of marketable

securities are discussed beginning in paragraph 113.25.

113.59 FASB ASC 855-10-50 requires nonpublic companies to disclose the following:

• The date through which subsequent events have been evaluated by company management and whether

that date is the date the financial statements were available to be issued.

• The nature of, an estimate of the financial statement effect of, or a statement that such an estimate

cannot be made for subsequent events that are of such a nature that they must be disclosed to keep the

financial statements from being misleading.

Subsequent events are discussed in section 205.



113.60 Disclosure of Commitments, Contingencies, Risks, and Uncertainties

The economic contraction is likely to expose small and midsize nonpublic companies to commitments and

contingencies that should be disclosed to keep their financial statements from being misleading. The economic

contraction is likely to create significant uncertainty about judgments in preparing the financial statements and

about future operations. Disclosure of significant uncertainties affecting the company and its financial

statements is likely to be necessary to keep the company's financial statements from being misleading.

113.61 Commitments

Commitments are contractual obligations for a future expenditure. The economic contraction may lead a

company to make commitments that may or may not be recognized as liabilities. For example:

a. A company agrees to pay a one-time termination benefit to a company manager if he stays until his

division is phased out. The obligation for the one-time termination benefit should be recognized and

disclosed as discussed beginning in paragraph 113.40.

b. As part of its efforts to increase sales of used vehicles, a company enters into an agreement with

another entity to purchase a minimum number of vehicles per quarter as their leases expire. The

commitment for the future purchases should not be recognized, but the financial statements of the

company should likely disclose the commitment.

113.62 Contingencies

FASB ASC 450-10-20 defines a contingency as an existing condition, situation, or set of circumstances

involving uncertainty as to possible gain or loss to a company that will ultimately be resolved when one or more

future events occur or fail to occur. The economic contraction may create a contingency that may or may not

be recognized. For example:

Because of the economic contraction, a commonly-controlled entity refinances its bank debt and,

as part of the refinancing the company, along with other commonly-controlled entities, is required

to guarantee the refinanced debt. The measurement provisions of FASB ASC 460-10-25-1

(formerly FASB Interpretation No. 45, “Guarantor's Accounting and Disclosure Requirements for

Guarantees, Including Indirect Guarantees of Indebtedness of Others”) would not apply to the

guarantee by the company, but its disclosure requirements would apply even if the likelihood of

the company's guarantee being exercised is remote.

113.63 Risks and Uncertainties

FASB ASC 275-10 provides the authoritative guidance on risks and uncertainties, the objectives of which are

to:



• Require disclosure of risks and uncertainties that could significantly affect the amounts reported in the

financial statements or the near-term functioning of the company.

• Communicate to financial statement users the inherent limitations in financial statements.

113.64 Disclosure is not required of all risks and uncertainties, which would be an impossible task, but is

required for certain risks and uncertainties that meet specified criteria. Disclosure is required in the following

four areas:

a. Nature of operations.

b. Use of estimates in the preparation of financial statements.

c. Certain significant estimates.

d. Current vulnerability due to certain concentrations.

113.65 The first two disclosures, nature of operations and use of estimates, are required for all financial

statements and tend to be somewhat boilerplate. The second two are required only for estimates and

concentrations that meet specified criteria.

a. Disclosure of estimates is required if it is at least reasonably possible that an estimate affecting the

financial statements will change in the near term, which generally is the following reporting year, and the

effect of the change would be material. As discussed throughout this section, the economic contraction is

likely to significantly increase the subjectivity of estimates and, as a result, there is the reasonable

possibility of significant changes in those estimates in future years.

b. Disclosure of concentrations existing at the date of the financial statements (for example, related to

sources of revenue or suppliers) is required if they make the company vulnerable to a near-term severe

impact and it is at least reasonably possible events that could cause the severe impact will occur in the

near term. For example, the announced consideration of bankruptcy by a major parts supplier would likely

make the company vulnerable to a severe impact within the next annual reporting year.

Risks and uncertainties are discussed further in section 514.



3ASU 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment, was issued in July 2012 and is

effective for annual and interim impairment tests performed for fiscal years beginning after September 15,

2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date

before July 27, 2012, if a nonpublic entity's financial statements for the most recent annual or interim period

have not yet been made available for issuance. The amendments permit an entity first to assess qualitative

factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a

basis for determining whether it is necessary to perform the quantitative impairment test in accordance with

FASB ASC 350-30. The more-likely-than-not threshold is defined as having a likelihood of more than 50%.

ASU 2012-02 applies to all entities that have indefinite-lived intangible assets, other than goodwill, reported in

their financial statements.

4The FASB has a two phase project on its agenda to provide guidance about the liquidation basis of

accounting and going concern uncertainties. The proposed guidance in phase one will require the liquidation

basis of accounting to be applied if liquidation is considered to be imminent, and this would be when a plan of

liquidation has been approved by the entity's owners or others are forcing the entity to liquidate and the entity's

ability to return to a going concern is remote. Liquidation basis financial statements should provide information

about the entity's resources and obligations in liquidation and also provide certain disclosures. An exposure

draft of the first phase has been issued and an exposure draft of the second phase, which addresses going

concern uncertainties, is planned for the 4th quarter of 2012.


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