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Sept 1992

Personal financial statements. (includes related article)

by Mancuso, Anthony J.

    Abstract- Personal financial statements can serve high net-worth individuals in a variety of ways. These financial statements, seldom used by the average individual, can help those who are affluent to obtain loans, enter into various investment transactions, develop financial plans or even run for public office. Preparing a personal financial statement often requires the expertise of CPAs who could act as auditors, reviewers or as issuers of a compilation report on personal financial statements. CPAs involved in the preparation of these statements are guided by GAAS or SSARS. The American Institute of Certified Public Accountants' State of Position 82-1 also provide GAAP for personal financial statements. The processes involved in the preparation of these statements are discussed.

Off the beaten path of financial presentations is the personal financial statement. Unlike businesses, individuals rarely maintain formal accounting systems or other historic records of what they own and what they owe. Also, rarely do individuals prepare personal financial statements as a matter of routine. High-net-worth individuals may request a personal financial statement for reasons such as the following:

* Obtaining a loan;

* Making a guarantee;

* Various investment transactions;

* Meeting a co-op board's financial requirements;0

* Developing an estate, retirement, or other financial plan;

* Developing strategies for minimizing income taxes;

* Identifying property under a divorce proceeding; or

* Running for public office.

Users of personal financial statements may seek CPA involvement to provide an independent voice about the reliability of the information. In this capacity, a CPA could audit, review, or merely issue a compilation report on personal financial statements depending on the level of assurance desired.

When a CPA is associated with personal financial statements, he or she is guided by professional standards, either GAAS or SSARS, depending on the level of service. GAAP for personal financial statements is set forth in AICPA Statement of Position (SOP) 82-1, Accounting and Financial Reporting for Personal Financial Statements. Guidance on the scope of work performed and the form of report issued for personal financial statements in accordance with SOP 82-1 is cited in the AICPA Personal Financial Statements Guide.

CPAs may also be asked to report on specified elements, accounts, or items of personal financial statements. In the latter circumstances, guidance is provided by SAS 62, Special Reports, SAS 35, Special Reports-Applying Agreed-Upon Procedures to Specified Elements, Accounts, or Items of a Financial Statement, or Accounting and Review Services (ARS) Interpretation 8 of SSARS 1, Reports on Specified Elements, Accounts, or Items of a Financial Statement.

Some CPAs have been reluctant to become associated with personal financial statements. When asked to perform an audit, CPAs have viewed the general lack of an internal control structure for individuals as a major stumbling block. Even the thought of the limited assurance called for in a review engagement might be viewed by some with trepidation. As a result, the most common level of service that a CPA performs on personal financial statements is a compilation.


As with any potential client relationship, before accepting an engagement involving personal financial statements, the CPA should evaluate the potential client relationship.

Facts That Might Bear on the Integrity of the Prospective Client. The character and reputation of the individual should be considered. The goal is to minimize the possibility of involvement with a client who lacks integrity.

Circumstances That Present Unusual Business Risk. Circumstances that present an unusual business risk should be considered. Unusual business risks might include an individual in serious financial difficulty.

The Ability to Serve the Prospective Client. Professional standards require a certain level of knowledge of the client's financial activities. Before accepting an engagement, the CPA should consider whether an appropriate understanding can be obtained of the nature of the client's financial activities and the specialized accounting principles and practices related to the prospective client's financial activities.

The Effect of the Lack of Independence on the Type of Report That May Be Issued. Lack of independence precludes a CPA from issuing a review report or audit opinion, but permits a CPA to issue a compilation report.

Whether Available Accounting Records or Other Data Provide Sufficient Basis for Providing the Services Requested. Incomplete or inadequate accounting records of a client's financial activities are sometimes likely to lead to problems in compiling, reviewing, or auditing personal financial statements.

Once an engagement is accepted, an understanding with the client should be established regarding the services to be performed and the terms and objectives of the engagement. Professional standards do not require a written engagement letter. However, obtaining an engagement letter is always advisable so no misunderstanding occurs as to the individual's responsibility for the personal financial statements and the estimates that are included therein.

Other accounting services may be rendered before providing audit, review, or compilation services. Those services usually involve gathering information by making inquiries of the client and reviewing available financial records. In gathering data for inclusion in personal financial statements, a CPA may consider the following documents. This list is not necessarily all inclusive, but it provides examples of key sources of information concerning the individual's assets and liabilities:

* Checkbooks. The individual's checkbook may serve as the primary record of cash receipts and disbursements and can provide information concerning the addition or disposition of assets and the creation or payment of liabilities.

* Broker's Statements. A broker's statement can be used as a source of information regarding marketable securities and loans that might be outstanding.

* Property Insurance Policies and Schedules. Insurance policies and schedules can be used to identify assets for possible inclusion.

* Wills. Assets in bequests in an individual's will should be considered for inclusion.

* Leases. Leases may be a source of information about assets and liabilities.

* Listing of Vault or Safe Deposit Contents. A list of contents can be used to consider whether all assets stored and owned are included in the financial statements.

* Real Estate and Personal Property Tax Returns. Tax returns can be a source for identifying assets and liabilities due the taxing authorities.

* Income Tax Returns. Income tax returns and revenue agents' reports can be used to identify assets providing income and potential income tax liabilities.

* Financial Records of Other Entities. Financial statements or tax returns of separate entities, such as a closely held business, a trust, or a profit-sharing or deferred compensation plan can be used as sources of information regarding the individual's interest in the entities.

* Inquiries. Inquiries can be made of the individual and, with the individual's authorization, of others who might have knowledge of the individual's financial activities concerning possible unrecorded assets and liabilities.


Basis of Presentation

Users of personal financial statements rely on them for making financial and economic decisions with the focus primarily on an individual's assets and liabilities. They believe it is more relevant to portray current values of assets and estimated current amounts of liabilities rather than historical cost information. Lenders require the use of estimated current value information to assess collateral. Personal loan applications generally require current value information. Estimated current values are required for estate, gift and income tax planning, and estimated current value information about assets is often required in federal and state filings of candidates for public office. Recognizing this, the AICPA Accounting Standards Division, issued SOP 82-1, which states that personal financial statements should present all assets at their estimated current value and liabilities at their estimated current amounts.

Presentation of Personal Financial Statements

Presentation of assets and liabilities in personal financial statements should be made in the most useful and readily understood manner. Thus, assets and liabilities should be presented in order of liquidity and maturity, without classification as to current and noncurrent status because the working capital concept applied to business entities is inappropriate.

Statement of Financial Condition. The statement of financial condition is the basic personal financial statement that presents estimated current values of assets, amounts of liabilities, income taxes on the differences between the estimated current values of assets and amounts of liabilities and their tax bases, and net worth at a specified date. The term net worth is used in the statement of financial condition to designate the difference between the total assets and total liabilities.

Statement of Changes in Net Worth.

This statement is not considered a basic financial statement; its presentation is optional pursuant to SOP 82-1. The statement of changes in net worth presents the major sources of changes in net worth as follows:

* Income and expenses;

* Increases and decreases in estimated current values of assets;

* Increases and decreases in the estimated current amount of liabilities; and

* Changes in estimated income taxes on the differences between estimated current values and amounts and tax bases.

The presentation of comparative financial statements for the current period and one or more prior periods may be desirable. SOP 82-1 states that comparative financial statements can be more informative than the presentation of financial statements for only one period. However, the presentation of comparative financial statements is optional.

When personal financial statements are prepared for one individual from a group of joint owners of assets, only that person's interest as a beneficial owner--determined under the property laws of the state having jurisdiction--should be included in personal financial statements. Legal advice may be required to determined whether an interest in property should be included as a person's asset, especially when property is held in joint tenancy, as community property, or through a similar joint ownership arrangement.

If an individual's business interest constitutes a large part of total assets, that interest should be shown separately from other investments. The estimated current value of an investment in a separate entity, such as a closely held corporation, a partnership, or a sole proprietorship, should be shown in one amount as an investment if the entity is marketable as a going concern. Assets and liabilities of the separate entity should not be combined with similar personal items.

The estimated current values of assets and the estimated current amounts of liabilities of limited business activities, such as an investment in real estate and a related mortgage, should be presented as separate amounts, especially if a large portion of the liabilities may be satisfied from soures unrelated to the investment.

The Use of OCBOA

As for other entities, personal financial statements may be prepared in conformity with a comprehensive basis of accounting other than GAAP. For purposes of personal financial statements OCBOA includes, for example, the tax return, historical cost, and cash receipts and disbursements bases. Such statements should clearly state that the basis of accounting used is not GAAP and the CPA's report would follow the guidance in SAS 62, Special Reports and The Personal Financial Statements Guide.

Guidelines for Determination of Current Values and Amounts

SOP 82-1 states the estimated current value of an asset in personal financial statements is the amount at which the item could be exchanged between a buyer and seller, each of who is well informed and willing, and neither of whom is compelled to buy or sell. In determining estimated current values, costs of disposal, such as commissions, if material, should be considered.

Estimated current value is sometimes difficult to determine and the cost of obtaining estimated current values of some assets directly may exceed the benefits of doing so. SOP 82-1 recognizes those difficulties and states judgment should be exercised in determining estimated current value.

Recent transactions involving similar assets and liabilities in similar circumstances generally provide a statisfactory basis for the determination of estimated current values of assets and estimated current amounts of liabilities. However, if recent sales information is unavailable, other methods may be used. Other methods might include the capitalization of past or prospective earnings, the use of liquidation values, the adjustment of historical cost based on changes in a specific price index, the use of appraisals, or the use of the discounted amounts of projected cash receipts and payments.

Specialists may need to be consulted for gathering information necessary for determining estimate current values of some assets. (Examples are works of art, jewelry, restricted securities, investments in closely held businesses, and real estate). In deciding whether the use of a specialist is necessary, the nature of the item and its materiality with respect to the individual's financial condition should be considered. Previous estimates may have been made by a specialist. If so, consideration should be given to the date of the previous estimate, the extent of changes in the circumstances since that date, and the method of up-dating the estimate.

Methods to determine estimated current values of assets and the estimated current amounts of liabilities should be consistently applied from period to period, unless facts and circumstances dictate a change. Significant changes in estimation methods should be disclosed.


Personal financial statements should include sufficient disclosures to make the statements adequately informative. The disclosures may be made within the body of the financial statements or in footnotes. Types of information that ordinarily should be disclosed are:

* A clear indication of the individuals covered by the financial statements;

* The methods used in determining the estimated current values of major assets and the estimated current amounts of major liabilities or major categories of assets and liabilities, since several methods are available, and changes in methods from one period to the next;

* If assets held jointly by the individual and by others are included in the statements, the nature of the joint ownership;

* If the individual's investment portfolio is material in relation to his or her other assets and is concentrated in one or a few companies or industries, the names of the companies or industries and the estimated current values of the securities.

* If an individual has a material investment in a closely held business, at least the following information:

a. The name of the company and the individual's percentage of ownership;

b. The nature of the business; and

c. Summarized financial information about assets, liabilities, and results of operations for the most recent year based on the financial statements of the business, including information about the basis of presentation (for example, GAAP, income tax basis, or cash basis) and any significant loss contingencies.

* Descriptions of intangible assets and their estimated useful lives;

* The face amount of life insurance the individual owns;

* Non-forfeitable rights that do not have certain characteristics, for example, pensions based on life expectancy;

* The following tax information:

a. The methods and assumptions used to compute the estimated income taxes on the differences between the estimated current values of assets and the estimated current amounts of liabilities and their tax bases and a statement that the provision will probably differ from the amounts of income taxes that might eventually be paid because those amounts are determined by the timing and the method of disposal, realization, or liquidation and the tax laws and regulations in effect at the time;

b. Unused operating loss and capital loss carryforwards;

c. Other unused deductions and credits, with their expiration periods, if applicable; and

d. The differences between the estimated current values of major assets and the estimated current amounts of major liabilities or categories of assets and liabilities and their tax bases.

* Maturities, interest rates, collateral, and other pertinent details relating to receivable and debt; and

* Non-cancelable commitments for example, operating leases.

GAAP other than those discussed in SOP 82-1 may apply to personal financial statements. SFAS 57, Related Party Disclosures, provides guidance on related party disclosures, and SFAS 5, Accounting for Contingencies, and related amendments and interpretations, provides guidance on accounting for contingencies and are examples of such GAAP requirements.


A CPA may be asked to audit, review or compile personal financial statements. Standards for compilations, reviews, and audits are prescribed by SSARS 1 and GAAS, and are applicable for personal financial statements as for other financial statements.


SSARS 1 states that the CPA should posses a general understanding of the nature of the individual's financial transactions, the form of available accounting records, the stated qualifications of accounting personnel, the accounting basis on which the financial statements are to be presented, and the form and content of the financial statements. The CPA ordinarily obtains knowledge of these matters through experience with the individual or inquiry of the individual whose financial statements are being compiled.

Ordinarily a CPA can compile personal financial statements based on the individual's representation of the estimated current values of assets and the estimated current amounts of liabilities. At a minimum, however, the CPA should obtain an understanding of the methods by which the individual determined the estimated current values of major assets and current amounts of significant liabilities and consider whether the methods are appropriate in light of the nature of each asset or liability.

The CPA is not required to make inquiries or perform other procedures to verify, corroborate, or review information supplied by the individual. However, the CPA should obtain additional or revised information if he or she becomes aware information supplied by the individual is incorrect, incomplete, or otherwise unsatisfactory.


The CPA should posses a level of knowledge of the accounting principles and practices applicable to personal financial statements and an understanding of the individual's financial activities and financial position that will provide him, through the performance of inquiry and analytical procedures, with a reasonable basis for expressing limited assurance that there are no material modifications that should be made to the financial statements for the statements to be in conformity with GAAP. The CPA's understanding of financial activities should include a general understanding of the nature of assets and liabilities, sources of income, and the nature of significant expenditures and material transactions with related parties.


The scope of the audit should enable the independent auditor to conclude that he or she has a reasonable basis for expressing an opinion on whether the statements are presented fairly, in all material respects, in conformity with GAAP. GAAS include gaining and documenting an understanding of the internal control structure, assessing control risk, testing accounting records, and obtaining responses to inquiries and other procedures considered necessary. Because of the nature of personal financial records, obtaining evidential matter may sometimes be difficult. As a result, it may be impracticable to conduct an audit of personal financial statements in accordance with GAAS and express an unqualified opinion.

Representation Letters

During an engagement, the client makes many representations to the CPA, oral and written, in response to specific inquiries or through the financial statements. Such representations from the client are an important part of the information gathered. Written representations from the client to confirm oral representations given to the CPA indicate and document the continuing appropriateness of those representations and reduce the possibility of misunderstanding.

GAAS require that the independent auditor obtain certain written representations as part of every engagement. Review and compilation engagements do not contemplate tests of accounting records and responses to inquiries by obtaining corroborating evidential matter. However, because of the informal nature of most personal financial records, it is advisable to obtain written representations from the client to confirm the oral representations made in all personal financial statement engagements.

Written representations should be addressed to the CPA. Because the CPA is concerned with events occurring through the date of the report that may require adjustment to or disclosure in the financial statements, the representation letter should be dated as of that date and signed by the individual whose financial condition is being presented.


The preparation of personal financial statements for the high net worth individual can be a major undertaking. Having a CPA provide assurances about the reliability of the information in the financial statements is an additional significant task. In an article in the Journal of Commercial Bank Lending, May 1991, "Making Something of a Personal Financial Statement," Dev Strischek stated, "For the small business borrower, the middle market guarantor, and the private bank customer, a CPA-prepared personal financial statement is still a luxury as well as an intellectual hurdle."

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