When will you be asked for financial statements?
Three situations come up often.
- Your corporate tax return. A corporation must include the information from its financial statements with its federal income tax return, the T2.
- A financing application. Your bank or a lender wants to understand your situation and your ability to repay before lending.
- A partner, a buyer or an investor. Before committing, they want to see numbers presented in a recognized format.
The work you need depends on what's required, and the requirement often comes from the person who will read your statements. So ask them before you hire anyone.
What you'll receive
You'll generally receive four items. The exact content depends on the accounting method chosen and on the needs of the people who will read them.
The balance sheet
The balance sheet is a snapshot of your business on the last day of its fiscal year: what it owns, what it owes and what belongs to the owners. The fiscal year is your business's accounting year. It doesn't necessarily follow the calendar, and accountants call its last day the "year-end." The balance sheet answers simple questions. How much money does the business have? How much does it owe its suppliers and its bank? What is the shareholders' share worth? The T2 return carries this same information in Schedule 100, which presents the corporation's financial position at the end of the tax year.
The income statement
The income statement is the movie of your year: your revenue, your expenses, and the resulting profit or loss. It's the one that answers the question "Was it a good year?" In the T2 return, Schedule 125 carries this information: the revenue earned and the expenses incurred during the tax year.
The notes
The notes are the written explanations that come with the numbers. One of them describes the accounting method used to prepare the statements, meaning the rules followed to record revenue, expenses and assets. That way, the reader knows the basis on which the amounts were calculated.
The compilation engagement report
The compilation engagement report is a short text signed by the CPA that explains what they did, and what they didn't do. It states that the information comes from you. The CPA gathered it and presented it as financial statements, without giving any guarantee or opinion on its accuracy. This report, with revised wording and format, replaces the former "Notice to Reader," which you may find on your statements from past years. Note: this report format comes from the Canadian standard CSRS 4200, which applies to compilations of periods ending on or after December 14, 2021.
What these documents say, and what they don't
Compiled financial statements are not audited. The CPA gathers your information, organizes it and presents it as financial statements. They make sure the calculations and groupings are accurate. They don't test your numbers and give no opinion on them.
A review engagement or an audit gives the reader a guarantee on your numbers: the CPA states how confident they are that the statements contain no significant errors. A compilation gives none. That isn't a flaw: it's the nature of this type of engagement, and the report says so clearly.
What compiled statements tell you | What they don't tell you |
|---|---|
Where your business stands, according to your books | That the CPA checked every amount |
That the calculations and groupings are accurate | That a CPA guarantees there are no significant errors |
Which accounting method was applied | That your internal controls were assessed |
What the CPA did, in their report | That they will suit every reader |
One practical consequence: the quality of your statements depends mostly on the quality of your books. The statements are based on the information you provide, and you remain responsible for it. That's why careful bookkeeping, closed every month matters as much as the compilation itself.
What you need to provide
The more your books are kept up during the year, the faster the year-end work goes. Here is what your CPA will generally ask you for.
Document | Why |
|---|---|
Bank and credit card statements up to the end of the fiscal year | To reconcile each account with your books |
Loan and line of credit statements, loan or lease agreements | To record the right debt balances on the balance sheet |
List of unpaid client invoices at the end of the fiscal year | To establish what you are owed |
List of supplier invoices to pay | To establish what you owe |
Invoices for major purchases: equipment, vehicle, renovations | To record long-lived assets and their depreciation |
Inventory count on the last day of the fiscal year, if applicable | To value the goods on hand |
Goods and services tax (GST) and Quebec sales tax (QST) returns filed during the year | To reconcile the taxes reported with the taxes recorded |
Payroll summaries, if you have employees | To record salaries and deductions |
Last year's financial statements and tax returns | To start from the right opening balances |
Depreciation spreads the cost of a long-lived asset over the years it is used.
When is a review engagement or an audit required instead?
CPAs offer three types of work on financial statements: compilation, review and audit. They differ in the extent of the work and in the guarantee the reader gets on your numbers. Alta Conseils prepares compiled financial statements. It does not perform review engagements or audits. These two engagements are described here to help you recognize the one you're being asked for.
Compilation | Review engagement | Audit | |
|---|---|---|---|
What the CPA does | Gathers your information, presents it as financial statements and makes sure the calculations are accurate | Asks management questions and compares the data to judge whether the statements are plausible | Performs procedures based on risk, understands internal controls, assesses methods and estimates |
Guarantee on your numbers | None | Limited | Reasonable |
Document provided | Compilation engagement report | Review engagement report | Audit report |
Who can do it in Quebec | Any CPA | A CPA who holds a public accountancy permit, which may be limited to review engagements | A CPA who holds a public accountancy permit |
The public accountancy permit is the authorization the Ordre des CPA du Québec requires to perform a review engagement or an audit.
A review engagement or an audit is required instead when the reader of your statements needs a level of confidence that a compilation doesn't provide. That's the case, for example, with a lender, investors or a shareholders' agreement. That reader sets the requirement. Ask for it in writing, before the end of your fiscal year. If it calls for a review engagement or an audit, you'll need a firm where a CPA holds the required permit. Better to know early than to discover the requirement once the statements are compiled.
Are your compiled statements used for your T2 and CO-17 corporate income tax returns?
Yes: the statements for your fiscal year are the basis for the corporation's income tax returns.
- The T2. You must provide the information from your financial statements when you file the T2, the corporation income tax return. It is submitted using the General Index of Financial Information (GIFI), the format the Canada Revenue Agency (CRA) uses to receive these numbers. You'll find it in particular in Schedule 100 (balance sheet) and Schedule 125 (income statement).
- The notes and the report. Also include the notes to the financial statements and the accountant's report, when they have been prepared.
- The CO-17. In Quebec, Alta prepares the corporation's CO-17 return from the same statements as the T2.
In other words, well-prepared statements serve twice: for your tax returns and for your financial partners. They also serve a third time: for you. Prepared the same way from one year to the next, they show you how your revenue, your margins and your debts are changing.
What to do
Right now
- If a bank, a lender or a partner asks you for financial statements, get them to state in writing the work expected (compilation, review engagement or audit) and the deadline.
- Keep your books every month rather than once a year. Reconcile your bank accounts with your statements: every line on the statement must match an entry.
At the end of the fiscal year
- Gather the documents in the table above in the weeks after the end of your fiscal year.
- If applicable, count your inventory on the exact last day of the fiscal year.
When the statements are delivered
- Read them over before they go out. Ask about any amounts that surprise you: you remain responsible for the information.
- Send your bank or partner the complete statements, with their notes and the compilation engagement report.
Frequently asked questions
My old statements say "Notice to Reader": is that the same thing?
Yes, in substance: it's the same compilation work, under the old report format. If last year's statements carry a "Notice to Reader" and this year's a compilation engagement report, nothing is wrong. Instead, compare the accounting method described in the notes. If it changed from one year to the next, some amounts can't be compared directly: ask your CPA to show you which ones.
Will my bank take statements without a CPA's opinion seriously?
If it has accepted a compilation, the report is exactly what it expects. What it will look at next is consistency: numbers that agree with your bank statements, your sales tax returns and last year's statements. If it wants a guarantee on your numbers, it will tell you. That's why the question comes up before the work starts, not when the statements are delivered.
My books aren't up to date: can compiled statements still be prepared?
Compiled statements are based on your books. So they have to be completed first: enter the missing transactions and reconcile the bank accounts up to the end of the fiscal year. At Alta, catching up on late books, or on prior years, is a separate engagement, estimated separately. Allow for that time if your bank expects your statements by a specific date.
Will I receive a cash flow statement?
Not necessarily. This statement shows where the money came from and where it went during the year: day-to-day operations, investments and financing. It isn't included in every accounting engagement: you have to ask for it specifically. If your lender wants one, say so from the start.
Keep reading
Alta Conseils keeps your books, closes each month and prepares your compiled financial statements with their compilation engagement report. It also prepares the corporation's T2 and CO-17 returns. For a specific need, such as a deadline set by your bank, write to us.
- Bookkeeping and month-end close with Alta Conseils: complete, reconciled books, the foundation of your compiled statements.
- Our pricing and what's included: the starting point of the package and the custom engagement, put in writing before we begin.
- When and how to register for GST and QST: if your business is just starting or its sales are growing.
