Special Purpose Financial Reporting
By Sean Devenish, Collins SBA
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Special Purpose Financial Reporting is the cornerstone of small to medium business services and the end outcome of the annual ‘compliance service’ for many firms alongside a tax return.
In the new age of accounting technology, we have to ask some important questions about this ‘product’ and how it is delivered. This article looks at the legislative and ethical requirements underpinning the product, the value they provide to clients, and what changes technology will usher in to the preparation and presentation of this bastion of accounting service.
Why do we prepare special purpose financial reports (SPFR)? For a small proprietary company that doesn’t meet the reporting entity definition, the reality is that there is no formal requirement.
For other entities, such as trusts, they are frequently compiled as a requirement of the trust deed, or in the absence of this revert to the company case where there is no requirement. The requirement is absent again for sole traders or partnerships.
The reality is that in most cases an SPFR is prepared purely to clearly define the output that an accounting firm provides, over and above the income tax return that is usually prepared in conjunction with it.
Independently, the SPFR is relied upon by a range of sources, including banks and government to gauge the financial viability of a business.
When we do prepare special purpose financial reports, there are a fairly minimal set of compliance obligations to bear in mind. Professionals subject to the Accounting Professional and Ethical Standards will look to APES 205 which merely requires three important disclosures, quoting from 6.1:
(a) that the Financial Statements are Special Purpose Financial Statements;
(b) the purpose for which the Special Purpose Financial Statements have been prepared; and
(c) the significant accounting policies adopted in the preparation and presentation of the Special Purpose Financial Statements.
These disclosures will be accompanied in the report by standard compilation letters and an engagement process that meet the requirements of APES 315 and APES 305 respectively.
Sometimes limited requirements are added in from other sources, for example, the ACNC requires special purpose financial reports to implement a minimum set of Australian accounting standards, but this is the exception rather than the rule.
The flexibility given to management in determining the financial reporting framework, and in turn the practitioner, to choose accounting policies is an important consideration. As we seek to add value while maintaining professional compliance, it is important that the policies and frameworks chosen are practical, add value to the client, and in fact reflect the way the SPFR is prepared.
Foremost on our mind as practitioners who deliver a service to our clients is how to provide more value to the clients.
Special purpose financial reports have long been considered complex and confusing to your average small to medium business client, and frequently end up unused and unread by the client.
A number of solutions have evolved to help alleviate these concerns. One of these is to ensure that an advisor steps through the SPFR with the client in person after the reports are prepared in order to help the client gain a better understanding of the financial information.
Others have found that providing additional commentary, graphs, charts or other graphical representations of financial data helps improve the client’s comprehension.
This in turn assists clients to make more informed decisions about their future, and potentially engage with their accountants at a more advisory level.
The key point is that with the advent of technology and a new era of financial reporting, special purpose financial reports can no longer remain the static document they are but need to evolve to better serve the purposes of the client.
New Age Reporting
With the massive transformation in client accounting technology and the product landscape over the last five or more years, there are a range of opportunities to expand the horizons and transform both the ease with which accountants can prepare worthwhile information and the ability for the client to understand that information.
These opportunities come with their associated challenges, which I will outline below:
The advent of client accounting in the cloud has afforded the opportunity of a ‘single ledger’ or a ‘single source of truth’. This helps to alleviate the confusion that results from multiple contradictory copies of financial information maintained by both the accountant and the client.
More importantly however is the ability through technology to integrate the reporting and workpaper preparation processes into a single streamlined process.
I have long maintained that merely taking a client’s cloud file and copying static data into the accounting firm’s ledger program to perform your work is a huge waste of the opportunities present from integration.
With successful integration, a firm should be able to make their changes and do their work on the client file itself, thus removing many steps in the report preparation process.
Ideally the accountant’s system evolves into being merely a ‘window’ into the client’s system, and both the associated workpapers and the SPFR output should ‘plug in’ to the client’s data without requiring constant manual duplication and/or reconciliation. This will allow for:
– Fast preparation that enables important information to be available to the client in a timely manner;
– Removal of multiple steps in the report preparation process; and
– Allowing rework and changes to the client file to flow through to all systems automatically without requiring the manual update of multiple standalone systems.
While many integrated systems described above do exist, the secondary challenge is to create a system that works with not just one major accounting provider, but with every single system that a client may use.
Restricting your system to work efficiently with only one accounting software provider creates a range of potential problems:
– You have to work inefficiently on a section of your client base that doesn’t use the preferred software product in order to provide services;
– You can artificially limit your practice to clients using a particular software product; and
– Your accounting team must learn to use multiple ‘integrated’ systems and live with inconsistent reporting amongst clients.
A product that can work effectively with all accounting systems is not a pipe dream and there are some notable software companies currently developing products that will be able to deliver efficient workflow practices on any client software.
Sensible Accounting Policies
Smart firms will ensure that their software provides accounting policies that are practical, provide value to the client, and most importantly, reflect the way that the accounting information is actually prepared.
This may mean letting go of, for example, tax-effect accounting (which is seldom applied in practice anyway) and other convoluted policies shipped with many mainstream ledger packages today.
Sensible accounting policies ensures continued professional compliance, while at the same time allows the firm to efficiently prepare information that is useful to the client in a timely manner.
Value Added Reports
In preparing new age reports, the value added process needs to be streamlined into the same process that prepares additional management reports, charts and other graphically enhanced reports that enable a client to better understand their information.
Simply having your accounting team prepare some additional Excel reports or entering data into yet another reporting system to prepare these is not efficient and adds an unhealthy cost to the delivery of the service.
In the new age smart accounting firms will be looking for reporting systems that meet their special purpose financial reporting obligations and with the same data providing insightful analysis into the client’s affairs.
The special purpose financial report is an important piece of client delivery and its preparation must continue to evolve to better satisfy client needs and be efficient to deliver.
As one of Collins SBA principal accountants, Sean focuses on accounting and business strategies to make his clients better business people; helping businesses to increase profit, improve systems and grow. Sean is part of a ‘new generation’ of accountant that embraces the extensive use of technology to deliver better solutions to clients. In addition to advising clients and delivering technology solutions, Sean performs speaking engagements on the use of the latest accounting technology platforms and how they are impacting the profession.
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