The Accounting and Review Services Committee (ARSC) of the American Institute of Certified Public Accountants (AICPA) has completed its project to clarify the compilation and review standards by issuing Statement on Standards for Accounting and Review Services (SSARS) No. 22, Compilation of Pro Forma Financial Information.
SSARS 22 supersedes SSARS 14 of the same title and is effective for compilation reports on pro forma financial information dated on or after May 1, 2017. It will be codified in Accounting and Review section (AR-C) 120.
When the guidance applies
SSARS 22 applies when an accountant has been engaged to perform a compilation engagement on pro forma financial information. Pro forma financial information shows what the historical financial statements would have looked like had a transaction or event — such as a business combination, disposition of a business line or change in capitalization — occurred at an earlier date.
Accountants engaged to compile pro forma financial information are required to comply with the guidance in AR-C 60, General Principles for Engagements Performed in Accordance With Statements on Standards for Accounting and Review Services, and AR-C 80, Compilation Engagements. A compilation engagement on pro forma financial information may be undertaken as a separate engagement or in conjunction with a compilation, a review or an audit of financial statements.
Clarification of what’s expected of management
When working on a pro forma compilation engagement, SSARS 22 clarifies that a CPA should obtain management’s agreement that it acknowledges and understands its responsibility for the preparation and fair presentation of the pro forma financial information in accordance with the applicable financial reporting framework. Management must also agree to include (or make readily available) the following in any document containing the pro forma financial information:
- The financial statements of the entity for the most recent year,
- Interim period historical financial information, if interim period pro forma financial information is presented, and
- In the case of a business combination, the relevant historical financial information for the significant constituent parts of the combined entity.
Financial statements and historical interim financial information are deemed to be “readily available” if a third party can obtain them without any further action by the entity. For example, historical interim financial information on a company’s website may be considered readily available; however, being available upon request isn’t considered readily available.
Additionally, pro forma financial information must be based on historical financial statements that have been compiled, reviewed or audited. Management must include (or make readily available) those historical financial statements, as well as a summary of significant assumptions, with any document containing the pro forma financial information.
It’s also critical for management to obtain the accountant’s permission before including the compilation report in any document containing the pro forma financial information which indicates that a compilation has been performed on such information.
Clarification of CPA requirements
SSARS 22 also clarifies that, in addition to the reporting requirements of AR-C 80, a compilation report on pro forma financial information should include the following:
- A reference to the financial statements from which the historical financial information was derived, and a statement about whether those historical statements were compiled, reviewed or audited,
- A reference to any modification of the compilation, review, or audit report on the historical financial statements, and
- A description of the nature and limitations of the pro forma financial information.
Furthermore, the CPA should obtain an understanding of the underlying transaction or event, ensure that management has fulfilled its responsibilities and document these procedures.
In October 2014, the ARSC issued SSARS 21, Statements on Standards for Accounting and Review Services: Clarification and Recodification, to clarify and revise the standards for reviews, compilations and engagements to prepare financial statements. Some accounting professionals nicknamed it “Super SSARS,” because SSARS 21 was the most significant change since the accounting and review standards were created in 1978. This project did not address pro forma compilations, however.
SSARS 22 is the missing piece of the Super SSARS project. It’s effective for compilation reports on pro forma financial information dated on or after May 1, 2017. Experienced accounting professionals are atop of these fundamental changes to the accounting and review standards — and they’ve trained their staffs and updated their systems and practice aids to comply with the new guidance.