Understanding the Most Common Notes in a Compilation Engagement

When preparing compiled financial information, it’s essential to include detailed notes that provide clarity and context to the financial statements. These notes help users understand the underlying principles and details that influence the numbers presented. In this blog, we will explore the most common notes in a compilation engagement, focusing on the Basis of Accounting, Property, Plant and Equipment, and Share Capital.

Basis of Accounting

Definition and Importance: The basis of accounting refers to the framework or set of rules used to prepare financial statements. This note is crucial because it informs users about how the financial information was compiled, providing insight into the methods and principles applied.

Common Types:

1. Cash Basis: Records transactions only when cash changes hands.
2. Cash Basis with Selected Accruals and Accounting Estimates: Combines cash basis with specific accruals and estimates.
3. Contractual or Regulatory Basis: Prescribed by agreements or regulations.

Example Note: “The financial statements have been prepared on a cash basis, recognizing revenue when received and expenses when paid. Certain accruals and estimates have been included to provide a more accurate reflection of financial position and performance.”

Property, Plant, and Equipment (PP&E)

Definition and Importance: Property, Plant, and Equipment (PP&E) refers to the long-term assets that a business uses in its operations, such as buildings, machinery, and equipment. This note provides details on the valuation, depreciation, and impairment of these assets, helping users understand their impact on the financial position.

Common Details Included:

1. Valuation Method: Historical cost, fair value, or another basis.
2. Depreciation: Methods and rates applied to allocate the cost over the asset’s useful life.
3. Impairment: Any reductions in the carrying value due to decreased utility or value.

Example Note: “Property, Plant, and Equipment are stated at historical cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, ranging from 5 to 20 years. No impairment losses were recognized during the period.”

Share Capital

Definition and Importance: Share capital represents the equity that shareholders have invested in the company. This note provides details on the types and amounts of shares issued, helping users understand the ownership structure and financial stability.

Common Details Included:

1. Types of Shares: Common and preferred shares, with details on rights and privileges.
2. Number of Shares Issued: Total shares issued and outstanding during the period.
3. Changes in Share Capital: Any increases or decreases during the period.

Example Note: “The company’s share capital consists of 10,000 common shares issued and outstanding, with no par value. During the period, an additional 1,000 common shares were issued for cash consideration of $10,000, bringing the total share capital to $110,000.”

Conclusion

Including detailed notes in a compilation engagement is essential for providing transparency and context to financial statements. The Basis of Accounting, Property, Plant and Equipment, and Share Capital notes are among the most common and critical disclosures. By ensuring these notes are comprehensive and clear, you can enhance the reliability and usefulness of your financial information.

If you need assistance with preparing or understanding your financial statements, our team at Shajani CPA is here to help. We specialize in providing tailored accounting services for family-owned enterprises. Contact us today to ensure your financial reporting meets the highest standards of transparency and accuracy. Tell us your ambitions, and we will guide you there.

This information is for discussion purposes only and should not be considered professional advice. There is no guarantee or warrant of information on this site and it should be noted that rules and laws change regularly. You should consult a professional before considering implementing or taking any action based on information on this site. Call our team for a consultation before taking any action. ©2024 Shajani CPA.

Shajani CPA is a CPA Calgary, Edmonton and Red Deer firm and provides Accountant, Bookkeeping, Tax Advice and Tax Planning service.

Trusts – Estate Planning – Tax Advisory – Tax Law – T2200 – T5108 – Audit Shield – Corporate Tax – Personal Tax – CRA – CPA Alberta – Russell Bedford – Income Tax – Family Owned Business – Alberta Business – Expenses – Audits – Reviews – Compilations – Mergers – Acquisitions – Cash Flow Management – QuickBooks – Ai Accounting – Automation – Startups – Litigation Support – International Tax – US Tax – Business Succession Planning – Business Purchase – Sale of Business