What's new in prospective financial information. (Auditing)by Best, Mimi Blanco
"Prospective financial informartion. Any information about the future. The information may be presented as complete financial statements or limited to one or more elements, items or accounts." This is the definition that appears in the AICPAhs Guide for Prospective Financial Statements (the Guide).
However, as its name implies, the Guide primarily provides guidance on accountants' services in connection with prospective financial information presented as complete financial statements. The Guide contains only limited guidance for accounts' services on partial presentations.
Practitioners have requested additional guiadance in these areas and on accountants' services on prospective financial statements for internal use only. Also much of the existing guidance is based onb Rule 201(e) of the AICPA Code of Professional Ethics and related Interpretation 201-2. The interpretation, which applied to both partial presentations and prospective financial statements for internal use only, discussed the disclosure of assumptions, the disclosure of the character of the work done by the accountant, and the degree of responsibility taken by the accountant. Because Rule 201(e) and its related interpretation were deleted with the adoption of the Code of Professinal Conduct by the membership in January, 1988, there is a void in professional standards in these areas.
For these reasons, the ASB's Forecasts and Projections Task Force will soon release an exposure draft of a proposed statement of position (SOP) entitled Accountants' Services on Prospective Financial Statements for Internal Use Only and Partial Presentations designed to provide such guidance. The purpose of this article is to summarize the major provisions of this proposed SOP.
The proposed SOP is divided into two sections--one on partial presentations and the other on prospective financial statements for internal use only.
What is a Partial Presentation?
Sec. 400.06 of the Guide provides minimum presentation guidelines for presenting a financial forecast. These are summarized in Exhibit 1. A presentation that omits one or more of these minimum items, if applicable (it is applicable if it is an item that would normally be presented if historical financial statements were being prepared for the entity), is a partial presentation. (It is not a partial presentation if the omitted item is derivable from the information presented.) Examples of partial presentations include:
* Sales forecasts;
* Projections of financing needs;
* Forecasts that present operating income but not net income; and
* Projections of taxable income or forecasted tax returns that do not show significant changes in financial position.
The following is a summary of the key provisions of the proposed guidance for accounts' services on these types of presentations. This guidance would supersede Sec. 1000 of the Guide.
Limited-Use Presentations. The proposed SOP states that partial presentations may be appropriate in many limited-use circumstances, such as when analyzing whether to lease or buy a piece of equipment or when evaluating the income tax implications of a given tax election. However, the proposed SOP states that partial presentations are generally not appropriate for general-use and should not be included in a general-use document. This means that such presentations should not be distributed to third parties who will not be able to negotiate directly with the responsible party--for example, in an offering document of the entity's securities. The rationale behind this prohibition is the belief that a partial presentation may not contain sufficient information to enable a user to make an investment or other decision and could, therefore, be misleading.
The proposed guidance, however, also contains an exception to this rule: If the partial presentation is used to supplement a financial forecast for a period covered by the forecast, the partial presentation may be included with the financial forecast in a general-use document. This exception is consistent with that provided for financial projections (also generally considered appropriate only for limited-use documents) used to supplement a financial forecast as discussed in Sec. 210.05 of the Guide. It is also consistent with guidance currently included in Sec. 1000 of the Guide.
Preparation and Presentation. The proposed guidance provides information about how the preparation and presentation guidelines in Sec. 400 of the Guide may be applied to partial presentation. For example, it states that the concept of materiality should be related to the partial presentation taken as a whole.
Accountant's Involvement. When should an accountant report on a partial presentation--when he or she submits a partial presentation to the client or when he or she is otherwise associated with the partial presentation? Neither--the reporting "trigger" according to the exposure draft is "when engaged to issue a written communication about the reliability of a written partial presentation that is the responsibility of another party." Not surprisingly, much of this language is straight out of the attestation standards. Simply put, it means that the proposed SOP does not address oral assertions about prospective results, only partial presentations prepared in a written form by the party responsible for them. Also, the proposed SOP does not apply in situations where the accountant, rather than the responsible party, is the asserter--for example, when an accountant is engaged to prepare a financial analysis of a potential project by obtaining the information, making appropriate assumptions, and assembling the information.
However, the proposed SOP also prohibits an accountant from reporting on a partial presentation that excludes disclosure of the summary of significant assumptions or, for a projection, excludes the identification of the hypothetical assumptions. Further, the proposed guidance on partial presentations requires an accountant hired to express a conclusion about a partial presentation to either examine or apply agreed-upon procedures to it. In addition, it states that an accountant may also be engaged to compile a partial presentation to either examine or apply agreed-upon procedures to it. In addition, it states that an accountant may also be engaged to compile a partial presentation
Standard Reports. Examples of the standard report issued by the accountant on a compilation of a partial presentation of projected information and on an examination of a partial presentation of forecasted information are included in Exhibits 2 and 3 respectively. Notice that both reports contain the following:
* An identification of the partial presentation reported on;
* A caveat that the forecasted (projected) results may not be achieved;
* A statement that the accountant assumes no responsibility to update the report for events and circumstances occurring after the date of the report; and
* A description of any limitations on the usefulness of the presentation.
Prospective Financial Statements for
Internal Use Only
The proposed SOP does not drastically change existing guidance on accountants' services on prospective financial statements for internal use only. The guidance in Sec. 900 of the Guide allows the accountant to compile, examine, apply agreed-upon procedures, or perform any of a spectrum of services on a financial forecast or projection that will be restricted to internal use. The proposed SOP retains this guidance.
Reporting on an accountant's services on prospective financial statements for internal use only is not required by the Guide, and the SOP does not change that. For example, an accountant can submit a computer-generated financial forecast to a client without reporting on it when the forecast is for internal use only. However, the proposed SOP contains a requirement that, if the accountant includes the financial forecast with his or her written communication, the communication or the forecast should contain a statement that:
* The prospective results may not be achieved; and
* The financial forecast is for internal use only.
This requirement only reinstates reporting guidance previously contained in Sec. 900 of the Guide. As discussed earlier, this guidance was based on Interpretation 201-2, which stated that, when an accountant's name is associated with a forecast, the accountant should disclose the character of the work he or she has performed and the degree of responsibility he or she has taken.
The proposed SOP contains reporting guidance for the accountant who decides to report on his or her services. Proposed changes to current guidance include:
* Clarify that the accountant should not report on a financial forecast that excludes a summary of significant assumptions. Remember, Sec. 410.05 of the Guide states that the disclosure of significant assumptions may be made in an informal manner. For example, significant assumptions may be disclosed using computer printouts from electronic spreadsheet software that indicate the data and relationships among the forecasted amounts.
* Provide additional reporting guidance on items that the accountant would preferably include in the report when omissions of disclosures required under the guidelines for presentation of a financial forecast come to his or her attention. The proposed SOP provides the following sample language that the accountant may use when a financial forecast is included in a personal financial plan:
This financial forecast was prepared to help you develop your personal financial plan. Accordingly, it does not include all disclosures required by the guidelines established by the American Institute of Certified Public Accountants for the presentation of a financial forecast.
In summary, the proposed SOP would replace and expand upon current guidance on partial presentations and prospective financial statements for internal use only. Commentators are urged to provide written comments to the Forecasts and Projections Task Force.
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