section 3 financial statement presentation paragraph 3.17(d)

• FRS 102 Summary – Section 3 – Financial Statement Presentation

by Des O'Neill | Jan 19, 2016 | FRS102.com Blog

Section 3: Financial Statement Presentation

Section 3 explains that the financial statements of an entity shall give a true and fair view, what a complete set of financial statements is and what compliance with FRS 102 requires.

What is different?

Under FRS 102 it gives a choice to call the primary statements a balance sheet or a statement of financial position and a profit and loss account or statement of comprehensive income.

A statement of change in equity is now presented as a primary statement.

FRS 102 makes it clear when assessing going concern the minimum length of the time the directors need to look at in order to meet the definition of the foreseeable future is 12 months from the date of approval of the financial statements. This was not made explicit under old GAAP, however it was applied in practice.

An entity where financial statements comply with the requirements of FRS 102 shall make an explicit and unreserved statement of compliance in the notes.

A public benefit entity applying the specific requirements applicable to the public benefit entities shall make an explicit and unreserved statement that it is a public benefit entity.

What are the key points?

The fundamental principles for the preparation of financial statements that result in the faithful representation of transactions, other events and conditions, are the going concern assumption, consistency of presentation, comparability and materiality.  Where there are doubts about going concern this needs to be stated in the financial statements.

A complete set of financial statements includes each of the following for the current period and the previous comparable period:

• a statement of financial position (FRS 102 also allows the use of the word balance sheet);
• either a single statement of comprehensive income or a profit and loss account and a separate statement of comprehensive income where the entity has items posted to other comprehensive income;
• a statement of changes in equity;
• a statement of cash flows; and
• notes to the financial statements which includes an explicit statement that the financial statements have been prepared under FRS 102.

Where financial statements are prepared for periods longer or shorter than one year, the entity must disclose; that fact, the reason for using a longer or shorter period and the fact that comparable amounts presented in the financial statements are not entirely comparable.

Financial statements are required to make clear the name of the reporting entity, the presentational currency, date of the end of the reporting period, whether individual or group accounts are covered and the level of rounding, if any used.

What do accountants need to do?

Be aware of the requirements for FRS 102 financial statements presentation so they can prepare financial statements on this basis and advise clients.

What do companies need to do?

Be aware of the requirements for FRS 102 financial statements presentation and where necessary consult with the company accountant so that the entity prepares financial statements in compliance with FRS 102.

Recent Posts

• FRS 102 Summary – Section 1 – Scope
• FRS 102 Summary – Section 2 – Concepts and Pervasive Principles
• FRS 102 Summary – Section 4 – Statement of Financial Position
• FRS 102 Summary – Section 5 – Statement of Comprehensive Income and Income Statement Summary

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Section 3: Financial Statement Presentation

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FRS 102: Presentation of financial statements

The way financial statements are presented under FRS 102 are dealt with in Section 3 Financial Statement Presentation .  The Scope section outlines the ‘fair presentation of financial statements’ as well as how a reporting entity will confirm that they have complied, in all respects, with FRS 102 and goes on to explain what a ‘complete’ set of financial statements comprises under FRS 102 as well as considering fundamental issues such as going concern.

Fair presentation

Paragraph 3.2 to FRS 102 requires financial statements to present fairly the financial position, performance and cash flows of an entity.  This paragraph refers to the concept of ‘faithful representation’ which is one of the traits found in the qualitative characteristic ‘reliability’ that is dealt with in Section 2 Concepts and Pervasive Principles .  The characteristic ‘reliability’ explains that information is reliable when it is free from material error and bias and represents faithfully that which it either purports to represent or could reasonably be expected to represent.  It therefore follows that where clients apply FRS 102 and make additional disclosures where necessary, the presumption is that it will result in financial statements that fairly present the financial position, performance and cash flow of the entity.

In terms of the requirement to make ‘additional disclosures’, the standard recognises that such additional disclosures will be necessary when merely complying with the requirements in FRS 102 will be insufficient to understand the effect of particular transactions.

Company A Ltd has an investment property that the company owns to earn rentals and for capital appreciation in its balance sheet amounting to £800,000 as at 31 December 2015.  The carrying value of this investment property as at 2014 was £700,000 and the £100,000 gain has been accounted for at fair value through profit or loss with the gain being recognised in profit or loss to comply with the requirements of paragraph 16.7 to Section 16 Investment Property .   Company A currently leases the investment property out to an unconnected third party under a non-cancellable operating lease (accounted for under the provisions in Section 20 Leases ) for a period of ten years from the inception of the lease with no options to renew the lease.  This property has also been pledged as security in respect of a loan taken out from the bank to acquire land for investment purposes.  With regards to the acquired land, it is currently undeveloped in a remote location where market transactions for such land are infrequent.  The result of this is that the fair value of such land cannot be determined reliably without undue cost or effort.

The accounting for the investment property fair value gain will be fairly straight forward under Section 16, it is merely:

DR investment property                  £100k

CR profit and loss                             £100k

Being fair value uplift in investment property

To comply with the requirements in paragraph 3.2(a), additional disclosures will be necessary to enable a proper understanding of the full picture concerning the investment property as there is quite a bit going on where the company’s investment property is concerned.  The additional disclosures can be split into three components:

• Disclosures relating to the fair value of the investment property;
• The security pledged for the investment property; and
• The fact that the undeveloped land has not been valued at fair value.

Disclosures relating to the fair value of the investment property

Disclosure should be made as to who determined the fair value, so a typical disclosure could be as follows:

The fair value of the investment property has been determined by an independent, professionally-qualified valuer by reference to recent market prices of similar properties in the area .

The security pledged for the investment property

Disclosure should be made about the fact that the investment property has been pledged as security for the loan and a typical disclosure could be

The company’s investment property has been pledged as security for borrowings .

You would then cross-reference this disclosure to the additional disclosures necessary in relation to secured debt.

The fact that the undeveloped land has not been valued at fair value

This could be disclosed within the accounting policies section of the notes to the financial statements and an example disclosure could be as follows:

The directors consider that the fair value of the undeveloped land cannot be obtained without undue cost or effort to the group on the grounds that market transactions for similar properties in the location are infrequent.  As a result, the land is accounted for as property, plant and equipment and measured at cost less accumulated impairment losses .

All the above additional disclosures go to enable a better understanding of the company’s transactions where their investment properties are concerned to accord with paragraph 3.2 Fair presentation .

The explicit and unreserved statement of compliance

Reporting entities preparing their financial statements under FRS 102 principles are required to make an explicit and unreserved statement of compliance with the FRS within the notes to the financial statements.  This statement can typically be made within the accounting policies of the notes – usually as the first accounting policy.

Paragraph 3.4 to Section 3 Compliance with this FRS recognises that a client would only depart from the requirements of FRS 102 in extremely rare circumstances.  If such rare circumstances are encountered, additional disclosures are required to comply with the requirements of paragraph 3.5 (a) to (c).  This paragraph requires disclosure of the following:

• that management has concluded that the financial statements present fairly the entity’s financial position, financial performance and cash flows; [FRS 102 para 3.5(a)]
• that it has complied with this FRS or applicable legislation, except that it has departed from a particular requirement of this FRS or applicable legislation to achieve a fair presentation; [FRS 102 para 3.5(b)] and
• the nature of the departure, including the treatment that this FRS or applicable legislation would require, the reason why that treatment would be so misleading in the circumstances that it would conflict with the objective of financial statements set out in Section 2, and the treatment adopted. [FRS 102 para 3.5(c)]

The requirement to make an explicit and unreserved statement of compliance follows the same requirements in the IFRS for SMEs, which is based on IAS 1 Presentation of Financial Statements .

Company B Ltd has prepared its first FRS 102 financial statements for the year-ended 31 December 2015 and these are the first financial statements prepared by the company under FRS 102 principles.  The company also carries its freehold land and buildings under the revaluation model as permitted by Section 17 Property, Plant and Equipment .  An example of the accounting convention and statement of compliance could be as follows:

The financial statements have been prepared under the historical cost convention as modified by the revaluation of certain assets.  The financial statements of the company for the year-ended 31 December 2015 have been prepared in accordance with the Financial Reporting Standard applicable in the United Kingdom and Republic of Ireland issued by the Financial Reporting Council.  These are the company’s first set of financial statements prepared in accordance with FRS 102 (see note XX for an explanation of the transition).

There may be some occasions when the reporting entity cannot make the explicit and unreserved statement of compliance with FRS 102 – albeit these situations are likely to be rare.

Company C Ltd has a year-end of 31 December 2015 and has prepared its financial statements for the year then ended.  The auditors have noted that the client has made an explicit and unreserved statement of compliance with FRS 102 in its accounting policies, but the company has failed to prepare a cash flow statement on the grounds that the directors believe preparing such a statement is too time-consuming and uninformative to the users of the financial statements.

In this example, the client is not eligible to make the explicit and unreserved statement of compliance because the financial statements do not comply  with paragraph 3.17(d) to FRS 102 which specifically requires a cash flow statement to be prepared in order to form a ‘complete’ set of financial statements.  Should this breach of FRS 102 not be remedied, there will also be implications for the auditor’s report.

Going concern

There are specific requirements in FRS 102 for management to consider the entity’s ability to continue as a going concern.  There are no changes from current practice contained in FRSSE (effective April 2008), current UK GAAP, EU-adopted IFRS and Going Concern and Liquidity Risk: Guidance for Directors of UK Companies 2009 which was issued by the Financial Reporting Council in October 2009; management must still be satisfied that the company is a going concern in order to prepare financial statements under the going concern presumption.  FRS 102 at paragraph 3.8 makes specific requirements for management to take into consideration all available information concerning the future which is at least, but not limited to, 12 months from the date on which the financial statements are issued.

A quick point for auditors in the UK and Republic of Ireland – auditors of UK and Republic of Ireland companies should beware where this is concerned because there is a difference in the ISA (UK and Ireland) 570 Going Concern and that of ISA 570 Going Concern which was issued by the International Auditing and Assurance Standards Board (IAASB).  ISA (UK and Ireland) 570, paragraph 17-1 and the Application and Other Explanatory Material at paragraph A10-2 requires auditors to consider if those charged with governance have paid particular attention in assessing going concern for a period of less than one year from the date of approval of the financial statements (if this is the case, the shorter period requires disclosure) .   However, under the mainstream ISA 570 issued by the IAASB this refers to a going concern assessment of 12 months from the date of the financial statements.  ISA 560 Subsequent Events defines the ‘date of the financial statements’ to be the ‘end of the reporting period’.  UK auditors should be careful because the going concern assessment is more onerous than under the mainstream ISA.

When dealing with going concern issues, if management become aware of material uncertainties which cast significant doubt on the entity’s ability to continue as a going concern, disclosure of those uncertainties must be made.  If management also consider that the going concern basis is not appropriate in the company’s circumstances, management must disclose that fact and the basis on which they have prepared the financial statements.

Company D Ltd is preparing their financial statements to 31 December 2015.  On 4 February 2016, following negotiations, the bank ‘called in’ the overdraft of £500,000 immediately due to the company’s ongoing financial difficulties.  This has had a catastrophic effect on Company D Ltd as they have failed to secure borrowing facilities with other financiers  and the directors have decided they have no alternative but to cease trading with immediate effect and liquidate the company.

The going concern basis is not appropriate in Company D’s situation and therefore the directors may make the following disclosures:

Report of the directors – statement of directors’ responsibilities

The last bullet point regarding the responsibility of the directors to prepare the financial statements on the going concern basis should be amended to make it clear that, despite their responsibilities still remaining the same, the going concern basis is no longer appropriate.  Such a disclosure could be:

As explained in Note X to the financial statements, the directors do not consider the going concern basis to be appropriate and these financial statements have therefore not been prepared on that basis.

Basis of preparation of the financial statements

The basis of preparation should explain the reasons why the going concern basis is no longer appropriate in the circumstances and the effect of this approach. Such a disclosure could be as follows:

The company has failed to reach agreement with its bankers concerning the renewal of the company’s borrowing facilities.  The company has ceased trading with immediate effect and therefore the financial statements have been prepared under the ‘break-up’ basis.  Fixed assets have been reclassified to current assets and restated to recoverable amount on the grounds that the company is no longer trading and are available for sale in their current condition and current assets have been stated at recoverable amounts.  Creditors falling due after more than one year have been reclassified as current. 

Event after the reporting period (post balance sheet event)

This would be relevant in this scenario because the event causing the going concern presumption to be departed from occurred after the year-end.  A disclosure example could be as follows:

As disclosed in the accounting policies note at Note X, the company ceased to trade on 4 February 2016 on the grounds that the directors were unable to source additional finance to enable the business to continue as a going concern.  The going concern basis is not appropriate and the directors have therefore not prepared the financial statements on this basis.

Frequency and presentation of financial reports and comparatives

If a client changes their year-end and reports over a longer, or shorter, period than 12 months, FRS 102 at paragraph 3.10 requires the following disclosures:

•  that fact;
• the reason for using a longer or shorter period; and
• the fact that comparative amounts presented in the financial statements (including the related notes) are not entirely comparable.

The FRS also requires consistency in the way items are presented and classified in the financial statements from one period to the next.  However, it does recognise that there are situations where this might not be the case, for example:

• Where it becomes apparent after a significant change in the nature of the client’s operations, or following a review of the financial statements, that an alternative way of presenting or classifying items would be more appropriate.  Where this is the case, the provisions contained in Section 10 Accounting Policies, Estimates and Errors would need consideration; or
• If FRS 102, another applicable standard or Abstract issued by the FRC would require a change in presentation.

Company E Ltd has always charged depreciation of its plant and machinery in administration expenses.  However, the new financial director has expressed concern that this disproportionately increases the company’s gross profit margin because he considers that the plant and machinery is incidental to the way the company generates sales and has therefore obtained Board approval to change the method of presenting depreciation from administration expenses into cost of sales.  Following the finance director’s concerns, the Board were unanimous in their decision to change the basis of presentation on the grounds that this would achieve a more realistic gross profit margin.

This is an example of a change in presentation, which is a change in accounting policy and thus should be applied retrospectively to achieve consistent reporting.  In addition, paragraph 3.12 to FRS 102 would require the following additional disclosures:

• the nature of the reclassification;
• the amount of each item or class of items that is reclassified; and
• the reason for the classification.

If there were reasons why the directors could not reclassify the comparative amounts due to impracticability, they would have to make disclosures as to why reclassification of comparative amounts was not possible.

Comparative financial information is also required in financial statements which also extends to narrative and descriptive disclosures when it is considered relevant to give an understanding of the current period’s financial statements.

A ‘complete’ set of financial statements

Under FRS 102, a complete set of financial statements includes:

• A profit and loss account and statement of total recognised gains and losses (presented as one statement, or as two separate statements);
• Balance Sheet;
• Cash flow statement; and
• Supporting notes.

Each financial statement above is presented with equal prominence.

Terminology

Throughout this article, I have referred to ‘traditional’ terminology, such as the profit and loss account, balance sheet and cash flow statement.  However, the final section of this article deals with some terminology differences that are apparent in FRS 102, the most notable ones are outlined in the following table:

Those are some of the most ‘notable’ differences in the terminology and a full comprehensive list of the terminology equivalences can be found in FRS 102 at Appendix III on page 299.  However, don’t despair! Paragraph 3.22 does allow an entity to use alternative titles other than those used in FRS 102, provided they are not misleading, so the chances are that we will still refer to the balance sheet as the balance sheet.

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FRS 3: Reporting financial performance

Find links to the accounting standard, technical summaries, useful guides and other resources on FRS 3 collated by ICAEW Library & Information Service.

The accounting standard FRS 3 required entities to highlight specified components of financial performance in their reporting. It was issued by the Accounting Standards Board in October 1992 and subsequently amended in June 1993, June 1999 and July 2007.

This standard and all other old UK GAAP FRSs have been withdrawn for reporting periods starting on or after 1 January 2015. Topics within reporting financial performance are covered by Section 5, Section 6 and Section 10 of FRS 102 under new UK GAAP .

How can I get a copy of this standard?

Consolidated standard.

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However, we can provide copies of the consolidated standard, which includes amendments, through the Library's premium databases by email. Contact us by phone on +44 (0)20 7920 8620 or by email at  [email protected]  for more information.

Unconsolidated standard and amendments as first issued

Financial Reporting Standard 3: Reporting Financial Performance This is the full text of the standard as issued by the Accounting Standards Board in October 1992. It does not include the amendments made in June 1993, June 1999 and July 2007. The amendments made by FRS 22 and FRS 25 are also not included.

Amendment to Financial Reporting Standard 3: Reporting Financial Performance Amendment issued by the ASB in July 2007.

Amendment to FRS 3 Reporting Financial Performance - June 1999 Amendment issued by the ASB in June 1999.

Amendment (1993) In the annual accounting standards volume Accounting Standards 1995/96, FRS 3 was reprinted, as ‘amended 1993’, to include a new paragraph (31A) on insurance business.

FRS 3 has also been amended by  FRS 22: Earnings Per Share  and  FRS 25: Financial Instruments: Disclosure and Presentation .

Reporting Financial Performance Summary published by the Financial Reporting Council.

ICAEW guidance and support

Corporate Reporting Faculty The faculty offers assistance and support in IFRS, UK GAAP and other aspects of business reporting. It offers technical briefings and factsheets, IFRS and UK GAAP standards-trackers, plus practical advice from industry experts and working accountants.

FRS 3 Reporting Financial Performance Memorandum of comment (ICAEW REP 32/07) submitted in April 2007 by the ICAEW in response to the exposure draft of proposed amendments to FRS 3 published by the ASB in March 2007.

ASB publishes Amendment to FRS 3 ‘Reporting Financial Performance’ Press notice published on 6 July 2007 by the ASB.

Insurance companies: ASB issues amendment to FRS 3 ‘Reporting Financial Performance’ Press notice published on 17 June 1999 by the ASB.

Relevant Financial Reporting Review Panel findings

Findings of the Financial Reporting Review Panel in respect of the accounts of Princedale Group Plc for the period ended 30 April 2000 Press release issued by the FRRP on 28 August 2001.

Findings of the Financial Reporting Review Panel in Respect of the Accounts of Ensor Holdings Plc for the Year Ended 31 March 1999 Press release issued by the FRRP on 11 July 2000.

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• GOVERNMENT & AUDITING

Yellow Book revisions update independence guidance

• Governmental Auditing
• Audit & Assurance

Auditors performing engagements under generally accepted government auditing standards (GAGAS) are subject to new rules reinforcing the principles of transparency and accountability under revisions published by the U.S. Government Accountability Office (GAO) in July 2018.

The revised standards (also known as the “Yellow Book,” or GAS) were restructured by the GAO to separate the standard’s requirements from the application guidance (see the sidebar “ Restructured Yellow Book ”). Independence standards appear in Paragraphs 3.17–3.108 of the revised Yellow Book.

A clarified standard

Unless specifically prohibited under the Yellow Book (see the sidebar “ Prohibited Bookkeeping Services ”), a firm preparing accounting records and financial statements for an audit client creates threats to independence that either will or may require the firm to apply safeguards to maintain its independence.

While the 2011 rules required firms to consider these possibilities, the 2018 Yellow Book clarifies that preparing the financial statements in their entirety creates a significant threat to independence that should be reduced to an acceptable level by safeguards. A firm should also document the evaluation and how threats were effectively addressed.

For other permissible services involving preparation of accounting records and financial statements, firms should document the evaluation of the threat(s) to determine significance. If significant, the documentation should include a description of the safeguards applied to reduce any significant threat(s) to an acceptable level.

Clarifications appear in the following paragraphs of the new Yellow Book:

Paragraph 3.88 states that when preparing a client’s financial statements in their entirety from the client’s trial balance or underlying accounting records, firms should conclude that significant threats to independence exist. Under the Yellow Book’s conceptual framework approach (Paragraphs 3.26–3.63), when a firm encounters significant threats to independence, the firm should apply safeguards to eliminate or reduce the threats to an acceptable level.

Threats are at an acceptable level when a reasonable and informed third party would conclude that the firm could perform the audit without compromising its professional judgment. A firm that will apply effective safeguards should document the evaluation of threats to independence and describe the safeguards applied. Paragraph 3.69 provides examples of possible safeguards the firm could apply that could be effective for the potential threats that may exist:

• Separate personnel perform the audit and preparation of accounting records and financial statement services.
• An independent party (from inside or outside the firm) performs a second review of the preparation of accounting records and financial statement work.

A firm that cannot apply effective safeguards that reduce the threats to an acceptable level should not perform the preparation of accounting records and financial statement services during the period covered by the financial statements (or other subject matter of the engagement) and the period of professional engagement, as independence would be considered impaired.

Paragraph 3.89 states that a firm providing other preparation of accounting records and financial statement services should document its evaluation of threats to independence — even if the firm concludes that the threats are not significant — for the following activities:

• Recording transactions for which management has determined or approved the appropriate account classification or posting coded transactions to a client’s general ledger;
• Preparing certain line items or sections of the financial statements based on information in the client’s trial balance;
• Posting entries that management has approved to the client’s trial balance; and
• Preparing account reconciliations that identify reconciling items for management’s evaluation.

When threats to independence exist, firms should determine whether they are significant, because significant threats require the firm to apply safeguards to eliminate or reduce the threat(s) to an acceptable level. Auditors may consider the following factors in determining whether threats are significant, including:

• The extent to which the outcome of the service could have a material effect on the financial statements;
• The degree of subjectivity involved in determining the appropriate amounts or treatment for those matters reflected in the financial statements; and
• The extent of management’s involvement in determining significant matters of judgment.

Assume a firm performs services involving preparation of accounting records and/or financial statements that involve straightforward calculations (not subject to significant judgment) where the results of the work would not be material to the financial statements. Management is fully engaged in overseeing the services and has designated an individual with appropriate skills, knowledge, and experience to oversee the service.

If the firm concludes the self-review threat is not significant, it still should document its evaluation, including the rationale for its conclusion. If threats are significant, and safeguards will be applied that effectively reduce threats to an acceptable level, then the documentation should include a description of the safeguards applied. A firm that cannot apply effective safeguards that reduce the threats to an acceptable level should not perform services that involve the preparation of accounting records and financial statements during the period covered by its audit (or other attest services) and the period of engagement, as independence would be considered impaired.

Figure 2 of Chapter 3 provides a visual aid titled “Independence Considerations for Preparing Accounting Records and Financial Statements.” (See the graphic, “ Independence Considerations for Preparing Accounting Records and Financial Statements .”)

Other changes

The Yellow Book provides new application guidance on evaluating whether a client has sufficient skills, knowledge, or experience to oversee a nonaudit service. Paragraph 3.79 provides that an indicator of management’s ability to effectively oversee the service would include the ability to recognize a material error, omission, or misstatement in the results, or the reasonableness of the results, of the nonaudit service. If management lacks this ability, the firm should consider whether it can provide the nonaudit service and remain compliant with the Yellow Book independence standards.

Comparison to the AICPA Code of Professional Conduct

GAS Paragraphs 3.88–3.89 are more restrictive than the AICPA  Code of Professional Conduct (the AICPA Code) nonattest service provisions in ET Section 1.295.020. Except for certain services that are considered to impair independence (ET §1.295.120.03), the AICPA does not conclude that preparation of accounting records and financial statement services create threats or significant threats to independence requiring analysis and documentation. The AICPA Code generally considers the services described in Paragraphs. 3.88–3.89 of the Yellow Book to be permissible without the application of additional safeguards provided the firm complies with ET Section 1.295 (including the general requirements in ET §1.295.040). If preparation of accounting records and financial statement services proposed by a firm are not addressed in the Code, the firm should evaluate threats to independence under the AICPA Conceptual Framework for Independence (ET §1.210.010).

When is the revised Yellow Book effective?

The new Yellow Book is effective for financial audits, attestation engagements, and reviews of financial statements for periods ending on or after June 30, 2020, and for performance audits beginning on or after July 1, 2019. Early implementation is not permitted.

How can firms prepare for these changes?

Firms need to evaluate independence with respect to the provision of nonaudit services during the period covered by the financial statements (or other subject matter of the engagement) and the period of professional engagement, which includes the period covered by the financial statements. Therefore, firms should evaluate whether they will be able to implement safeguards to eliminate or reduce significant threats to an acceptable level under the new standards. In some instances, nonaudit services provided by the auditor to the audited entity prior to June 30, 2020, may affect the auditor’s independence with respect to the subsequent financial audit conducted under the 2018 standards. In such cases, auditors should use professional judgment to comply with the applicable version of the standards.

Here’s an illustration of how a firm may comply with the requirements in the 2018 Yellow Book:

Nov. 1, 2019 – Oct. 15, 2020: Firm is engaged on Nov. 1, 2019, to provide services to the city of Medford (City) consisting of occasional account reconciliations (as requested by the client) that are significant to the financial statements and year-end help preparing the City’s financial statements, including all footnote disclosures (financial statements in their entirety). The firm performs no other nonaudit services for this client.

November 2020: Firm audits the City’s Sept. 30, 2020, fiscal year-end financial statements.

The 2018 Yellow Book applies to services involving preparation of accounting records and financial statements the firm performs after July 1, 2019. Based on the requirements in Paragraph 3.88 of the Yellow Book, prior to accepting the nonaudit services engagement, the firm should conclude that the financial statement preparation services create significant threats to independence and document the threats and safeguards applied to eliminate and reduce the threats to an acceptable level. Per Paragraph 3.89 of the Yellow Book, the firm should then document the firm’s evaluation of threats related to the monthly account reconciliations and, if significant, document the safeguards applied to eliminate or reduce threats to an acceptable level.

The firm considers threats to independence arising from these services in the aggregate and applies the following safeguards:

The firm assigns different personnel from different offices in the firm to the audit and nonaudit engagements. In addition, all audit engagements performed under the Yellow Book are subject to a second independent review by another partner in the firm. Finally, the firm documents management’s review and approval processes over the services provided to the client. The firm believes the combination of these safeguards will adequately reduce any self-review threats to an acceptable level.

What if the firm has only one shareholder and two staff and is unable to assign different personnel to the engagements or provide a second reviewer on the audit or preparation of accounting records and financial statement work? Assume the client is a small charitable organization and the cost to hire an outside CPA to perform an independent review of the services cannot be justified by the engagement fees.

In that case, the firm may need to relinquish or scale back the scope of its nonaudit services if it wishes to continue performing audit services for the client. Or the firm may resign from the audit engagement and perform only the preparation of accounting records and financial statement services. Independence would be impaired if the firm performed both the audit and nonaudit services described above without appropriate safeguards.

Preparing financial statements in their entirety

Paragraph 3.88 of the 2018 Yellow Book provides that “preparing financial statements in their entirety from a client-provided trial balance or underlying accounting records” creates significant threats to independence. Firms should consider whether, in substance, the firm’s financial statement preparation services reach the threshold of “in their entirety.”

Even if the firm concludes that the financial statement preparation services do not meet that threshold, providing preparation of accounting records and financial statement services still requires the firm to evaluate and then document the evaluation of threats to independence under Paragraph 3.89. That is, the firm should evaluate the significance of threats and, when threats are significant, apply safeguards to eliminate or reduce the threat to an acceptable level. The firm should consider the significance of the assistance provided to the subject matter of the audit and consider the following:

• Whether the services provided are material to the financial statements. For example, if the firm is providing or assisting with a single note disclosure on a new accounting standard that is material to the statements, that will likely create a significant threat.
• The comprehensiveness of the services provided. For example, if the firm helps with the statement of cash flows and most of the note disclosures, then threats will likely be significant.
• The cumulative effect of the services provided. For example, if the firm is assisting with cash to accrual or conversion entries in addition to financial statement preparation assistance, threats to independence will be more significant.

Paragraph 3.95 states that providing clerical assistance is unlikely to create a significant threat; however, Paragraph 3.89 requires documentation of the evaluation.

Reminders regarding documentation unchanged from the 2011 Yellow Book

Unchanged from the 2011 Yellow Book, the firm should also document the firm’s:

• Consideration of management’s ability to effectively oversee the preparation of accounting records and financial statement services (Paragraph 3.107, 2018).
• Understanding with the client’s management or those charged with governance regarding:

1. The objectives of the nonaudit service;

2. The services to be provided;

3. The client’s acceptance of its responsibilities;

4. The firm’s responsibilities; and

5. Any limitations on the provision of nonaudit services (Paragraph 3.77, 2018).

Impact of the new Yellow Book on firms

Smaller firms that typically audit smaller governmental and other entities subject to GAGAS are bound to be most impacted by clarifications in the 2018 Yellow Book. These firms may be unable to assign separate personnel or other effective safeguards when providing audit and preparation of accounting records.

As illustrated, if threats are significant and effective safeguards cannot be applied, firms may need to choose between the audit and preparation of accounting records and financial statement services. Firms should also factor in additional time pre-engagement to apply the new rules, determine whether they can continue to perform both audit and preparation of accounting records and financial statement services, and, if so, prepare the required documentation for their workpapers.

Way forward

Clarifications to the Yellow Book independence standards make it clearer that firms should apply appropriate safeguards when preparing a client’s financial statements in their entirety. For other permissible services involving preparation of accounting records and financial statements, firms will need to evaluate threats to determine whether they are significant, and, if so, whether safeguards can effectively eliminate or reduce threats to an acceptable level so the firm is independent.

Documentation of the evaluation of these threats and, if applicable, safeguards applied to reduce any significant threats to an acceptable level will also be required whenever the firm is providing permissible services involving preparation of accounting records and financial statements. In some cases, especially in the smaller firm/client markets, a lack of effective safeguards may preclude firms from providing services involving the preparation of accounting records and financial statements to their audit clients. To maintain compliance with GAGAS, firms should proactively consider the impact of the 2018 Yellow Book independence standards on these client engagements.

Restructured Yellow Book

The GAO restructured the Yellow Book to separate the standard’s requirements from the application guidance. Requirements are included in a box that has a header indicating a requirement. Application guidance follows the related requirement boxes.

A glossary was added to the appendix to provide definitions for certain terms used. In addition, firms should look at terms defined in Paragraph 1.27.

Prohibited bookkeeping services

Paragraph 3.87, which is unchanged from the 2011 Yellow Book, outlines the types of bookkeeping services firms may not perform because they are management responsibilities that impair independence, that is:

• Determine or change journal entries, account codes or classifications for transactions, or other accounting records for the client without obtaining management’s approval;
• Authorize or approve the client’s transactions; and
• Prepare or make changes to source documents without management’s approval.

Independence considerations for preparing accounting records and financial statements

• GAO Yellow Book site
• 2018 Government Auditing Standards

— Catherine R. Allen , CPA, provides ethics and independence consultation and training through her consulting firm, Audit Conduct LLC, in Rocky Point, N.Y. Nancy Miller , CPA, is a managing director in the Independence Group at KPMG U.S. To comment on this article or to suggest an idea for another article, contact Ken Tysiac, the JofA ’s editorial director, at [email protected] .

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Final Report on draft Regulatory Technical Standards

2 févr. 2021 Similar to the pre-contractual section the draft RTS include a requirement to use a mandatory reporting template for the presentation of ... jc joint esas final report on rts under sfdr

3 sept. 2015 (b) The requirements of Section 7 Statement of Cash Flows and Section 3 Financial. Statement Presentation paragraph 3.17(d). FRS WEB Ready

JC 2021 50 - Final Report on draft Regulatory Technical Standards

22 oct. 2021 In section 2 the general background and rationale of the proposal is presented. Section 3 includes the RTS and the mandatory templates for ... jc final report on taxonomy related product disclosure rts

PUBLIC STATEMENT

29 oct. 2021 3. SECTION 1: PRIORITIES RELATED TO IFRS FINANCIAL STATEMENTS ... presentation of financial statements and impairment of assets. esma public statement on the european common enforcement priorities

The definitions relating to financial statement presentation Do you agree with the description of information location in Section 3:. DGFiP

• section 3 financial statement presentation paragraph 3.17(d)
• • the requirements of section 3 financial statement presentation paragraph 3.17(d)

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FRS 102 Section 1A exemptions – financial statement contents

Those paragraphs from which small entities are exempt when applying Section 1A and a brief description of their content are set out in the table below:

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