The first thing I want to say is thank you. Thank you to all farm families who continue to do their work through the COVID-19 pandemic.
I’m going to use this and the next article to talk about corporate financial statements. I think there are a lot of farmers who don’t have a really good grasp on the different types of statements, how they are developed and what some of the differences are between the statements.
If a farm business is incorporated, the entity must file annual returns with Canada Revenue Agency. The vast majority of incorporated farms will also have annual financial statements prepared. There are options.
Read Also
Proactive approach best bet with looming catastrophes
The Pan-Canadian Action Plan on African swine fever has been developed to avoid the worst case scenario — a total loss ofmarket access.
Technically, farmers can complete and file their returns with CRA, and develop financial statements, themselves. But this just doesn’t happen very often, unless maybe, where a farmer was also an accountant.
I spend a lot of time talking to farmers and farm families about business management practices, including financial management. To be clear, I am not an accountant. I’m a management consultant who has some expertise and an interest in financial management. Through my career, I have gained some understanding of what accountants do in preparing financial statements.
I don’t have statistics to support this, but I think that the majority of incorporated farm businesses would use a chartered professional accountant (CPA) to assist with financial statement and corporate tax return preparation. I’m going to focus my comments on the financial statement preparation.
A set of financial statements will include a balance sheet, statement of earnings and statement of cash flows. The descriptions of the statements can vary a bit from accountant to accountant, as can the earnings statement in terms of how it’s organized. Notes to the financial statements will be included, depending on the type of financial statement being prepared. Financial statements are presented in accordance with Canadian generally accepted standards.
There are three types of financial statements: compilation, review engagement and audited statements, each including the component parts mentioned above. Most farms will receive compilation or review engagement financial statements. For that reason, I have not included any detail on audit statements. I’ve cut and pasted the text below directly from the CPA website.
Complete engagement (notice to reader)
This type of engagement involves the preparation of financial statements by a CPA. Included with the financial statements that are prepared is a report that is called a Notice to Reader stating that the financial statements are unaudited, and that there is no assurance provided by the CPA that the amounts are free from materially misstatements. The CPA simply compiles the financial statements with information provided by the client, or the client’s bookkeeper.
Review engagement
Typically, a review engagement is requested by stakeholders in a company to ensure that the amounts within the financial statements are plausible. Whereas in a Notice to Reader, where there is no assurance provided, a review engagement provides a low level of assurance from the CPA. The accountant will perform various analytical procedures, as well as discussions with the client, to ensure that the financial statement information is plausible. Should the CPA find that the amounts in the financial statements are plausible, a review engagement report is issued.
A review provides what is called negative assurance. This is a low level of assurance, meaning that nothing has come to the attention of the accountant that would leave them to believe that the financial statements are not, in all material respects, in accordance with Accounting Standards for Private Enterprises (ASPE) or International Financial Reporting Standards (IFRS), depending on which standards the company follows.
The first page of a set of financial statements, after the title page, is the notice given to anyone who reads and reviews the statements. There is important information on this page. It’s where the accountant reveals what type of financial statement is being presented. For example, a compilation or review.
In simple terms, when an accounting firm publishes a set of financial statements, it comments to any reader how much assurance is provided in the accuracy of the information. As noted in the text taken from the CPA website, there is no assurance provided in compilation statements. Essentially, a farmer submits his or her financial records for the year, either from a software program or some form of ledger. The accountant receives the records and re-organizes them. There will typically be a minimum of adjusting entries, such as calculating amortization on depreciable assets (often reported as capital cost allowance for income tax purposes).
More time is invested by the accountant in preparing a review engagement-based set of financial statements. As noted above, discussions with the client and elements of due diligence are applied to the file. With this additional effort, the accountant can provide a moderate level of assurance as to the accuracy of the financial information contained in the statements.
Terry Betker, PAg, is a farm management consultant based in Winnipeg. He can be reached at 204-782-8200 or terry.betker@backswath.com.
