A compilation engagement is usually required prior to preparation of a Small Business corporate tax return. Under a compilation engagement, financial statements are aggregated from the accounting information provided by you. Financial statements give you an idea of where your business is heading and documents your historical accounting data.
A compilation engagement does not provide any level of assurance over the accounting information, unlike the review and audit engagements. Your Financial Statements subject to a compilation engagement will be prepared in an easy-to-read format, however they may not be fully compliant with GAAP - now known as ASPE (Accounting Standard for Private Enterprises).
Your accountant makes certain the financial information is clerically accurate and in the correct format, however gives no assurance as to whether any of the professional standards are met.
Effective December 14, 2021, CPA Canada will be implementing new accounting standards. These new standards affect any corporation requiring the preparation of financial statements. The effective date comes just in time for many corporations with a year end of December 31, 2021.
Across the accounting industry, the previous compilation standards for financial statements were loosely defined. The new changes will standardize the extent of work required and clarify who can use the financial statements.
In general, the rules will become much more strict for the preparation of financial statements that are distributed to a third party. A third party includes anyone except management or the board – consider banks, suppliers, potential purchasers, divorce proceedings, etc.
Many business owners use their financial statements for tax return preparation and internal purposes only. In this case, the financial statements and corporate tax return can still be prepared. However, the financial statements will be issued without the accountant's letterhead.