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Timestamp: 2017-09-22 13:20:44
Document Index: 489754307

Matched Legal Cases: ['art 1', 'art 2', 'art 3', 'art.\n1', 'art 1', 'art 2', 'art 3', 'art 3']

(Updated as of April 1, 2017)
This AICPA Guide has been developed under the supervision of the AICPA Auditing Standards Board (ASB) and Accounting and Review Services Committee (ARSC) to assist management in the preparation of financial forecasts and projections and to assist practitioners in performing and reporting on their examination and agreed-upon procedures engagements in accordance with Statements on Standards for Attestation Engagements (SSAEs) and their preparation and compilation engagements in accordance with Statements on Standards for Accounting and Review Services (SSARSs).
This guide is an interpretive publication pursuant to paragraph .A30 of AT-C section 105, Common Concepts to All Attestation Engagements (AICPA, Professional Standards), and paragraph .06 of AR-C section 60, General Principles for Engagements Performed in Accordance With Statements on Standards for Accounting and Review Services (AICPA, Professional Standards). Interpretive publications are recommendations on the application of SSAEs and SSARSs in specific circumstances, including engagements for entities in specialized industries. Interpretive publications are issued under the authority of the ASB and ARSC only after all members of the respective committee have been provided an opportunity to consider and comment on whether the proposed interpretative publication is consistent with SSAEs or SSARSs, respectively. The members of the ASB and the ARSC have found the guidance in this guide to be consistent with the existing SSAEs and SSARSs.
In accordance with paragraph .21 of AT-C section 105 and paragraph .17 of AR-C section 60, an accountant should consider interpretive publications applicable to his or her engagement in accordance with SSAEs or SSARS, respectively. If the accountant does not apply the interpretive guidance in an applicable AICPA Guide, the accountant should be prepared to explain how he or she complied with the SSAE or SSARS provisions addressed by such guidance.
AICPA Guides may include certain content presented as “Supplement,” “Appendix,” or “Exhibit.” A supplement is a reproduction, in whole or in part, of authoritative guidance originally issued by a standard setting body (including regulatory bodies) and applicable to entities or engagements within the purview of that standard setter, independent of the authoritative status of the applicable AICPA Guide.
Both appendixes and exhibits are included for informational purposes and have no authoritative status.
Any examination or agreed-upon procedures guidance in a guide appendix or chapter appendix in a guide, or in an exhibit, although not authoritative, is considered an other attestation publication. In applying such guidance, in accordance with paragraph .22 of AT-C section 105, the accountant should, exercising professional judgment, assess the relevance and appropriateness of such guidance to the circumstances of the engagement. Although the accountant determines the relevance of such guidance, such guidance in a guide appendix or exhibit has been reviewed by the AICPA Audit and Attest Standards staff and the accountant may presume that it is appropriate.
The ASB is the designated senior committee of the AICPA authorized to speak for the AICPA on all matters related to auditing, attestation, and quality control for nonissuers1 (that is, those entities not subject to the oversight authority of the PCAOB). Conforming changes made to the attestation guidance contained in this guide are approved by the ASB Chair (or his or her designee) and the Director of the AICPA Audit and Attest Standards Staff. Updates made to the attestation guidance in this guide exceeding that of conforming changes are issued after all ASB members have been provided an opportunity to consider and comment on whether the guide is consistent with the SSAEs.
Other Preparation, Compilation and Review Publications
Any preparation or compilation guidance in a guide appendix or chapter appendix in a guide, or in an exhibit, although not authoritative, is considered an other preparation, compilation, and review publication. In applying such guidance, in accordance with paragraph .18 of AR-C section 60, the accountant should, exercising professional judgment, assess the relevance and appropriateness of such guidance to the circumstances of the engagement. Although the accountant determines the relevance of such guidance, such guidance in a guide appendix or exhibit has been reviewed by the AICPA Audit and Attest Standards staff and the accountant may presume that it is appropriate.
The ARSC is the designated senior committee of the AICPA authorized to speak for the AICPA on all matters related to preparation, compilation, and review engagements. Conforming changes made to the guidance contained in this guide are approved by the ARSC chair (or his or her designee) and the Director of the AICPA Audit and Attest Standards staff. Updates made to the guidance in this guide exceeding that of conforming changes are issued after all ARSC members have been provided an opportunity to consider and comment on whether the guide is consistent with SSARSs.
This guide applies to prospective financial information. This guide does not discuss the application of GAAP or GAAS. This guide is directed to entities that issue prospective financial information and practitioners who provide services on prospective financial information.
(Updates to this edition exceeded that of conforming changes.)
Jay Brodish, Jr.
Galyen Hansen
Ilene Kassman
Catherine Scweigel
M. Chad Singletary
(past members who contributed to this edition)
Elizabeth Gantnier
Michael A. Fleming, Chair
Shelia Balzer
Jimmy Burkes
Dustin T. Verity
The AICPA also thanks Don Pallais for his invaluable assistance in updating the 2017 edition of the guide.
Liese Faircloth
Judith Sherinsky
Senior Manager, Audit and Attest Standards
and Staff Liaison to the Accounting and Review Services Committee
This edition of the guide has been modified by the AICPA staff to include certain changes necessary due to the issuance of authoritative guidance since the guide was originally issued, and other revisions as deemed appropriate. Relevant authoritative guidance issued through November 1, 2016, has been considered in the development of this edition of the guide. However, this guide does not include all reporting and other requirements applicable to an entity or a particular engagement. This guide is intended to be used in conjunction with all applicable sources of relevant authoritative guidance.
SSARS No. 23, Omnibus Statement on Standards for Accounting and Review Services—2016 (AICPA, Professional Standards)
Users of this guide should consider authoritative guidance issued subsequent to those items listed previously to determine the effect, if any, of such guidance on entities and engagements covered by this guide. In determining the applicability of recently issued guidance, consider the effective date of such guidance.
The changes made to this edition of the guide are identified in appendix B, “Schedule of Changes Made to the Text From the Previous Edition.” The changes do not include all those that might be considered necessary if the guide were subjected to a comprehensive review and revision.
References to AICPA Professional Standards
In citing SSAEs and SSARSs and their related interpretations, references use AT-C and AR-C section numbers, as appropriate, within AICPA Professional Standards and not the original statement number.
Certain exceptions apply to these general rules, particularly in those circumstances where the guide describes prevailing or preferred industry practices for the application of a standard or regulation. In these circumstances, the applicable senior committee responsible for reviewing the guide’s content believes the guidance contained herein is appropriate for the circumstances.
QC section 10 applies to all CPA firms with respect to engagements in their accounting and auditing practice. In paragraph .06 of QC section 10, an accounting and auditing practice is defined as “a practice that performs engagements covered by this section, which are audit, attestation, compilation, review, and any other services for which standards have been promulgated by the ASB or the ARSC under the “General Standards Rule” (AICPA, Professional Standards, ET sec. 1.300.001) or the “Compliance With Standards Rule” (AICPA, Professional Standards, ET sec. 1.310.001) of the AICPA Code of Professional Conduct. Although standards for other engagements may be promulgated by other AICPA technical committees, engagements performed in accordance with those standards are not encompassed in the definition of an accounting and auditing practice.
Because of the importance of engagement quality, this guide includes an appendix, Overview of Statements on Quality Control Standards. This appendix summarizes key aspects of the quality control standard. This summarization should be read in conjunction with QC section 10, AU-C section 220, AT-C section 105, AR-C section 60, and the quality control standards issued by the PCAOB, as applicable.
The AICPA encourages you to visit the website at www.aicpa.org, and the Financial Reporting Center (FRC) at www.aicpa.org/FRC. The FRC supports members in the execution of high-quality financial reporting. Whether you are a financial statement preparer or a member in public practice, this center provides exclusive member-only resources for the entire financial reporting process, and provides timely and relevant news, guidance and examples supporting the financial reporting process. Another important focus of the Financial Reporting Center is keeping those in public practice up to date on issues pertaining to preparation, compilation, review, audit, attestation, assurance and advisory engagements. Certain content on the AICPA’s websites referenced in this guide may be restricted to AICPA members only.
AICPA’s Ethics Codification Project
The AICPA’s Professional Ethics Executive Committee (PEEC) restructured and codified the AICPA Code of Professional Conduct (code) so that members and other users of the code can apply the rules and reach appropriate conclusions more easily and intuitively. This is referred to as the AICPA Ethics Codification Project.
Although PEEC believes it was able to maintain the substance of the existing AICPA ethics standards through this process and limited substantive changes to certain specific areas that were in need of revision, the numeric citations and titles of interpretations have all changed. In addition, the ethics rulings are no longer in a question and answer format but rather, have been drafted as interpretations, incorporated into interpretations as examples, or deleted where deemed appropriate. For example,
Rule 101, Independence (ET sec. 101.01) is referred to as the “Independence Rule” (ET sec. 1.200.001) in the revised code.
the content from the ethics ruling entitled “Financial Services Company Client has Custody of a Member’s Assets” (ET sec. 191.081-.082) is incorporated into the “Brokerage and Other Accounts” interpretation (ET sec. 1.255.020) found under the subtopic “Depository, Brokerage, and Other Accounts” (ET sec. 1.255) of the “Independence” topic (ET sec. 1.200).
The revised code was effective December 15, 2014, and is available at http://pub.aicpa.org/codeofconduct. References to the code have been updated in this guide. To assist users in locating in the revised code content from the prior code, PEEC created a mapping document. The mapping document is available in Excel format in appendix D in the revised code.
To address concerns over the clarity, length, and complexity of its standards, the ASB established clarity drafting conventions and undertook a project to redraft all the standards it issues in clarity format. The redrafting of Statements on Standards for Attestation Engagements (SSAEs or attestation standards) in SSAE No. 18 represents the culmination of that process.
The attestation standards are developed and issued in the form of SSAEs and are codified into sections. SSAE No. 18 recodifies the “AT” section numbers designated by SSAE Nos. 10–17 using the identifier “AT-C” to differentiate the sections of the clarified attestation standards (AT-C sections) from the attestation standards that are superseded by SSAE No. 18 (AT sections).
The AT sections in AICPA Professional Standards remain effective through April 2017, by which time substantially all engagements for which the AT sections were still effective are expected to be completed. The clarified attestations found in AT-C sections are effective for practitioners’ reports dated on or after May 1, 2017.
1 See the definition of the term nonissuer in the AU-C Glossary (AICPA, Professional Standards).
Part 1—General Guidance Regarding Prospective Financial Information
Practitioners' Services
4 Types of Prospective Financial Information and Their Uses
5 Responsibility for Prospective Financial Information
Part 2—Guidance for Entities That Issue Prospective Financial Statements
6 Preparation Guidelines
7 Reasonably Objective Basis
Responsibility for Prospective Financial Statements
Distinguishing From Historical Financial Statements
Correction and Updating of a Financial Forecast
Uses of Partial Presentations
Preparation and Presentation of Partial Presentations
9 Illustrative Prospective Financial Information
Part 3—Guidance for Practitioners Who Provide Services on Prospective Financial Statements
10 Types of Practitioners' Services
Responsibility for Prospective Financial Information
Reasonably Objective Basis for Presentation
Change in Engagement to a Lower Level of Service
A Practitioner's Responsibility for Prospective Financial Information That Contains Disclosures About Periods Beyond the Prospective Period
11 Preparation of Prospective Financial Information
General Principles for Performing Engagements to Prepare Prospective Financial Information
Preconditions for Accepting an Engagement to Prepare Prospective Financial Information
Knowledge and Understanding of the Entity’s Financial Reporting Framework
Knowledge of Other Matters
Preparing the Prospective Financial Information
Preparation of Prospective Financial Information That Contains a Known Departure or Departures from the AICPA Presentation Guidelines
Preparation of Prospective Financial Information That Omits Substantially All Disclosures Required by the AICPA Presentation Guidelines
Communication With the Responsible Party
Appendix A—Illustrative Engagement Letters for a Preparation Engagement
12 Compilation Procedures
General Principles for Performing and Reporting on Compilations of Prospective Financial Information
Preconditions for Accepting a Compilation Engagement
Knowledge and Understanding of the Presentation Guidelines and Underlying Accounting Principles Used by the Entity
Reading the Prospective Financial Information
Other Compilation Procedures
Appendix A—Illustrative Engagement Letters for a Compilation
13 The Practitioner’s Compilation Report
Omission of Substantially All the Disclosures Required by the AICPA Presentation Guidelines
Known Departures From the AICPA Presentation Guidelines
Alert That Restricts the Use of the Practitioner’s Compilation Report
Emphasis-of-Matter or Other-Matter Paragraphs
Reference to Historical Financial Statements
Reporting on a Financial Forecast That Includes a Projected Sale of an Entity’s Real Estate Investment at the End of the Forecast Period
Reporting If the Prospective Financial Information Includes Disclosures About Periods Beyond the Prospective Period
14 Examination Procedures
Requesting a Written Assertion
Assessing Risks of Material Misstatement
Procedures to Evaluate Assumptions
Support for Assumptions
Evaluating the Preparation and Presentation of Prospective Financial Information
Assumptions Dependent on the Actions of Users
Additional Considerations for Partial Presentations
Illustrative Examination Procedures
Appendix A—Illustrative Engagement and Representation Letters for an Examination
15 The Practitioner’s Examination Report
Modifications to the Practitioner’s Opinion
Reporting If the Examination Is Part of a Larger Engagement
16 Application of Agreed-Upon Procedures
Nature of an Agreed-Upon Procedures Engagement
Use of Specialists and Internal Auditors
Adding Parties as Specified Parties (Nonparticipant Parties)
Appendix A—Illustrative Engagement and Representation Letters for Agreed-Upon Procedures Engagements
17 The Practitioner's Report on the Results of Applying Agreed-Upon Procedures
Responsible Party Refuses to Provide a Written Assertion
Adding Nonparticipant Parties
Knowledge of Matters Outside Agreed-Upon
General Guidance Regarding Prospective Financial Information
1.01 Prospective financial information is of interest to a broad spectrum of parties, including management, present or potential owners of equity interests, credit grantors, other informed third parties, government agencies, and the public.
1.02 This guide establishes guidelines for the preparation and presentation of forecasts and projections (referred to as prospective financial information). This guide also is intended to assist the practitioner in providing professional services related to and reporting on such information.
1.03 Prospective financial information is based on assumptions regarding future events. The assumptions are in turn based on a combination of available information and judgment, in which both history and intentions of managements and owners play a part.
1.04 Because no one can know the future, and because prospective financial information may be affected by many factors both internal and external to the entity, the practitioner is required to exercise professional judgment. This judgment may be used to evaluate when and how conditions are likely to change. These judgments subsequently may prove to be unrepresentative of future conditions; thus, the achievability and reliability of prospective financial information can never be guaranteed.
1.05 Prospective financial information is less amenable to objective verification than is historical data. When working with or using prospective information, it is essential to understand its inherent limitations.
1.06 This guide consists of three parts:
Part 1, General Guidance Regarding Prospective Financial Information (chapters 1–5), provides an introduction to and the foundation for the rest of the guide. It includes a general discussion of prospective financial reporting, defines terms used in the guide, and describes the guide’s structure.
Part 2, Guidance for Entities that Issue Prospective Financial Information (chapters 6–9), discusses the concepts underlying the preparation and presentation of prospective financial information. It establishes the AICPA guidelines for presentation of prospective financial information.
Part 3, Guidance for Practitioners Providing Services on Prospective Financial Information (chapters 10–17), describes the application of professional standards to engagements related to prospective financial information.
1.07 In April 2016, the Auditing Standards Board (ASB) issued Statement on Standards for Attestation Engagements (SSAE) No. 18, Attestation Standards: Clarification and Recodification (AICPA, Professional Standards), which supersedes the previously existing attestation standards that governed services on prospective financial information. SSAE No. 18 establishes standards for all examination, review, and agreed-upon procedures engagements under the attestation standards and creates standards specific to providing those services on prospective financial information.1 It is effective for reports dated on or after May 1, 2017.
1.08 In October 2016, the Accounting and Review Services Committee issued Statement on Standards for Accounting and Review Services (SSARS) No. 23, Omnibus Statement on Standards for Accounting and Review Services—2016 (AICPA, Professional Standards), which replaces the previous standards on compilations of prospective financial information (which was a section of the attestation standards), effective for reports dated on or after May 1, 2017. It also establishes new standards for preparation services on such information, effective for prospective financial information prepared on or after May 1, 2017.
1.09 This guide incorporates those standards in the sections on practitioners' services (part 3 of this guide). The guide also provides additional explanatory and illustrative material to aid the practitioner in applying the standards.
1.10 Previous editions of this guide have been superseded but nonetheless provide the basis for much of the guide’s content. The superseded editions are
Guide for Prospective Financial Statements (1986), which was based on the Statement on Standards for Accountants’ Services on Prospective Financial Information, “Financial Forecasts and Projections,” issued by the ASB in 1985.
Guide for Prospective Financial Information (1993), which incorporated three Statements of Position (SOPs) issued at the time by the ASB's Financial Forecasts and Projections Task Force: SOP 89-3, Questions Concerning Accountants' Services on Prospective Financial Statements; SOP 90-1, Accountants' Services on Prospective Financial Statements for Internal Use Only and Partial Presentations; and SOP 92-2, Questions and Answers on the Term Reasonably Objective Basis and Other Issues Affecting Prospective Financial Statements.
Guide for Prospective Financial Information (1997), which revised the 1993 edition to recognize the implications of the Private Securities Litigation Act of 1995. The 1997 edition was updated in 1999 to incorporate a number of changes needed to conform to authoritative pronouncements issued after 1997.
Guide for Prospective Financial Information (2006), which revised the previous edition to incorporate SSAE No. 10, Attestation Standards: Revision and Recodification and the guidance in AT sections 101–701, Attestation Standards: Revision and Recodification (AICPA, Professional Standards), issued in September 2002; AT section 20, Defining Professional Requirements in Statements on Standards for Attestation Engagements (AICPA, Professional Standards), issued in December 2005; and AT section 50, SSAE Hierarchy (AICPA, Professional Standards), issued in November 2006.
1.11 The SEC permits the publication of prospective financial information under certain conditions and has adopted the general policy of encouraging such publication. The SEC has indicated that companies that include prospective financial information in SEC filings or annual reports should meet certain broad standards and disclosure requirements. In addition, the SEC adopted a rule that essentially provides a safe harbor against SEC actions for statements made by or on behalf of companies that issue prospective information or by an independent accountant, unless such statements were (a) made other than in good faith or (b) disclosed without a reasonable basis.
1.12 The Private Securities Litigation Reform Act of 1995, in addition to other provisions, amends the Securities Act of 1933 and the Securities Exchange Act of 1934 by creating a new safe harbor for forward-looking statements made by an issuer, persons acting on behalf of such issuer, and any outside reviewer retained by such issuer to make a statement on behalf of such issuer. The act reshapes securities laws that professional investors and some class-action lawyers had used against corporations, practitioners, and securities underwriters. The law encourages voluntary disclosure of forward-looking information to investors by establishing a carefully designed safe harbor. Forward-looking statements that include meaningful and cautionary disclosures that identify factors that could alter forecasted results are protected by the safe harbor. However, there are certain notable exclusions to the safe harbor provisions of the act.
1 Statement on Standards for Attestation Engagements (SSAE) No. 18, Attestation Standards: Clarification and Recodification, is contained in the AT-C sections of AICPA Professional Standards. The sections that are specifically addressed by this guide are AT-C section 105, Concepts Common to All Attestation Engagements;AT-C section 205, Examination Engagements;AT-C section 210, Review Engagements; AT-C section 215, Agreed-Upon Procedures Engagements;and AT-C section 305, Prospective Financial Information.
2.01 Prospective financial information consists of prospective financial statements and partial presentations.1 Prospective financial statements may comprise a complete prospective presentation of financial position, results of operations, cash flows, and summaries of significant assumptions and significant accounting policies, or they may be condensed or summarized as long as they contain the items listed in paragraph 8.08. A presentation that does not include the applicable minimum items in paragraph 8.08, including presentations limited to specified elements or accounts, is considered to be a partial presentation.
2.02 Prospective financial information is often referred to by a number of different names, such as forecasts, projections, feasibility studies, break-even analyses, and budgets. Whatever such information is called, it is covered by this guide if the presentation fits the description of prospective financial information.
2.03 The objective of some financial presentations, commonly called pro forma information, is to show what the significant effects on historical financial information might have been, had a consummated or proposed transaction (or event) occurred at an earlier date. Although the transactions in question may be prospective and such presentations may look like those described in the guide, the guide does not apply to those presentations because they are essentially historical statements and do not purport to be prospective financial statements.
2.04 Practitioners are sometimes engaged for the expressed purpose of preparing, compiling, examining, or applying agreed-upon procedures to prospective financial information. Often, however, they are engaged to assist their clients in other areas. Examples are obtaining financing, deciding whether to lease or buy an asset, consummating a merger or acquisition, determining the tax consequences of future actions, or planning future operations. In providing such services, practitioners may become involved with prospective financial information. This guide applies to the provision of professional services when the practitioner is engaged to prepare, compile, examine, or apply agreed-upon procedures to prospective financial information.
2.05 The guidance on practitioners’ services described in this guide are applicable to services provided on both prospective financial statements and partial presentations.
2.06 The practitioner may perform procedures to achieve the engagement's objectives that exceed the procedures discussed in this guide. For example, the guide is not intended to cover all aspects of performing financial feasibility studies, although such studies usually contain prospective financial information. However, if a practitioner provides a service on a feasibility study that includes examining prospective financial information, then this guide applies to that service and resulting report. (Paragraph 15.26 illustrates a report on an examination of a financial forecast contained in a feasibility study.)
2.07 Practitioners may be engaged to provide a variety of services relating to prospective financial information, such as providing assistance in developing forecasting systems and identifying factors to be considered in developing prospective financial statements. This guide is not intended to provide comprehensive guidance regarding such services.2
2.08 Sometimes, practitioners are associated with prospective financial information that may be used in a pending or potential formal legal proceeding before a trier of fact in connection with the resolution of a dispute between two or more parties. These services are often called litigation support services.
2.09 This guide does not apply to engagements involving prospective financial information used solely in connection with litigation support services. A practitioner may, however, look to this guide because it provides helpful guidance for many aspects of such engagements and may be referred to as useful guidance in such engagements. Alternatively, a practitioner may be specifically engaged to provide an examination or agreed-upon procedures service on prospective financial information in connection with litigation support services. In that case, the guide does apply to the examination or agreed-upon procedures service.
2.10 Occasionally, a practitioner may be engaged to prepare a financial analysis of a potential project in which the engagement includes obtaining the information, making appropriate assumptions, and assembling the presentation. Such an analysis is not, and should not be characterized as, forecasted or projected information and would not be appropriate for general use unless a responsible party reviewed and adopted the assumptions and presentation and presented it as a financial forecast.
1 See the definition of prospective financial information that is presented in paragraph 3.12.
2 However, this guide may include information that would be useful to the practitioner when providing such services (see chapter 10, “Types of Practitioners' Services”).
3.01 Certain terms are defined as follows for the purposes of this guide.
3.02 AICPA presentation guidelines. The guidelines for presentation of prospective financial information contained in chapter 8, “Presentation Guidelines,” of this guide.1
3.03 Entity. Any unit, existing or to be formed, for which financial statements could be prepared in accordance with generally accepted accounting principles or special purpose frameworks.2 For example, an entity can be an individual, partnership, corporation, trust, estate, association, or governmental unit.
3.04 Financial forecast. Prospective financial statements that present, to the best of the responsible party's knowledge and belief, an entity's expected financial position, results of operations, and cash flows. A financial forecast is based on the responsible party's assumptions reflecting conditions it expects to exist and the course of action it expects to take. A financial forecast may be expressed in specific monetary amounts as a single-point estimate of forecasted results or as a range, where the responsible party selects key assumptions to form a range within which it reasonably expects, to the best of its knowledge and belief, the item or items subject to the assumptions to actually fall. If a forecast contains a range, the range is not selected in a biased or misleading manner (for example, a range in which one end is significantly less expected than the other). Minimum presentation guidelines for a financial forecast are set forth in paragraph 8.08.
3.05 Financial projection. Prospective financial statements that present, to the best of the responsible party's knowledge and belief, given one or more hypothetical assumptions, an entity's expected financial position, results of operations, and cash flows. A financial projection is sometimes prepared to present one or more hypothetical courses of action for evaluation, as in response to a question that begins for instance, “What would happen if . . . ?” A financial projection is based on the responsible party's assumptions reflecting conditions it expects would exist and the course of action it expects would be taken, given one or more hypothetical assumptions. A projection, like a forecast, may contain a range. Minimum presentation guidelines for a financial projection are set forth in paragraph 8.08.
3.06 General use. Use of prospective financial statements by persons with whom the responsible party is not negotiating directly.
3.07 Hypothetical assumption. An assumption used in a financial projection or in a partial presentation of projected information to present a condition or course of action that is not necessarily expected to occur, but is consistent with the purpose of the presentation.
3.08 Key factors. The significant matters on which an entity's future results are expected to depend. Such factors are basic to the entity's operations and thus encompass matters that affect, among other things, the entity's sales, production, service, and financing activities. Key factors serve as a foundation for prospective financial information and are the bases for the assumptions.
3.09 Limited use. Use of prospective financial information by the responsible party alone or by persons with whom the responsible party is negotiating directly.
3.10 Management. Those persons who are expected to direct the operations of the entity during the prospective period. Management typically refers to those persons at the highest level of authority within the entity.3
3.11 Partial presentation. A presentation of prospective financial information that excludes one or more of the applicable items required for prospective financial statements set forth in paragraph 8.08. A partial presentation can be either a forecast or a projection.
3.12 Prospective financial information. Any financial information about the future. The information may be presented as complete financial statements or limited to one or more elements, items, or accounts. Prospective financial information can be either a forecast or a projection.
3.13 Prospective financial statements. Prospective financial information that presents financial position, results of operations, and cash flows. They are either financial forecasts or financial projections including the summaries of significant assumptions and accounting policies. Although prospective financial statements may cover a period that has partially expired, statements for periods that have completely expired are not considered to be prospective financial statements. Pro forma financial statements4 and partial presentations are not considered to be prospective financial statements
3.14 Responsible party. The person or persons who are responsible for the assumptions underlying the prospective financial information. The responsible party usually is management, but it can be persons outside the entity who currently do not have the authority to direct operations (for example, a party considering acquiring the entity).5
1 Application of the guidelines in chapter 8, “Presentation Guidelines,” requires consideration of matters in other chapters in this guide, for example, the concepts of general and limited use (chapter 4, “Types of Prospective Financial Information and Their Uses”) and reasonably objective basis (chapter 7, “Reasonably Objective Basis”).
2 AU-C section 800, Special Considerations—Audits of Financial Statements Prepared in Accordance With Special Purpose Frameworks (AICPA, Professional Standards), and AR-C sections 70, Preparation of Financial Statements, and 80, Compilation Engagements (AICPA, Professional Standards) discuss special purpose frameworks, commonly called other comprehensive bases of accounting or OCBOA.
3 If the entity is to be formed in the future, the term management includes the promoters or other individuals who expect to be responsible for directing the operations of the entity.
4 See paragraph 2.03 for a description of pro forma financial statements.
5 See chapter 5, “Responsibility for Prospective Financial Information.”
Types of Prospective Financial Information and Their Uses
4.01 Entities prepare prospective financial information for a variety of reasons. For example, an entity may want to obtain external financing, consider a change in operations or accounting, or prepare a budget. The reason for which the prospective financial information is prepared determines the type of prospective information developed.
4.02 Prospective financial information is for either general use or limited use. This chapter discusses the differences between the two uses and the types of presentations that are appropriate for those uses.
4.03 General use of prospective financial statements refers to use of the statements by persons with whom the responsible party is not negotiating directly, for example, in an offering statement of an entity's debt or equity interests. Because recipients of prospective financial statements distributed for general use are unable to ask the responsible party directly about the presentation, the presentation most useful to them is one that portrays, to the best of the responsible party's knowledge and belief, the expected results. Thus, only a financial forecast is appropriate for general use.
4.04 Limited use of prospective financial information refers to use of prospective financial information by the responsible party alone or by the responsible party and third parties with whom the responsible party is negotiating directly. Examples include use in negotiations for a bank loan, submission to a regulatory agency,1 and use solely within the entity. Third-party recipients of prospective financial information intended for limited use can ask questions of the responsible party and negotiate the terms or structure of a transaction directly with such party. Any type of prospective financial information that would be useful in the circumstances would normally be appropriate for limited use. Thus, the presentation may be a financial forecast, a financial projection, or a partial presentation.
4.05 Because a financial projection is not appropriate for general use, it should not be distributed to those who will not be negotiating directly with the responsible party (for example, in an offering statement of an entity's debt or equity interests), unless the projection is used to supplement a financial forecast and is for a period covered by the forecast.
4.06 A partial presentation also may be appropriate in many limited-use situations. For example, a responsible party may prepare a partial presentation to analyze whether to lease or buy a piece of equipment or to evaluate the income tax implications of a given election because it may only be necessary to assess the impact on one aspect of financial results rather than on the financial statements taken as a whole. Therefore, a partial presentation is often appropriate for use by third parties who will be negotiating directly with the responsible party. However, a partial presentation is not ordinarily appropriate for general use.
4.07 The classification of prospective financial information use as either general or limited is not dependent on the number of users. Rather, the use is considered limited if each of the users negotiates directly with the responsible party; the use is considered to be general if the users do not. Thus, prospective financial information to be used by even one passive user would be considered general use, whereas use by a number of persons who all negotiate directly with the responsible party would be considered limited use.
4.08 The responsible party should have a reasonably objective basis to present a financial forecast in order for it to be appropriate for general use. Because users expect financial forecasts to present the responsible party's best estimate, the term reasonably objective basis is intended to communicate to responsible parties a measure of the quality of information necessary to present a forecast. The responsible party has a reasonably objective basis to present a forecast if sufficiently objective assumptions can be developed for each key factor. In some instances, the nature of one or more assumptions may be so subjective that the responsible party could have no reasonably objective basis to present a forecast (see paragraph 7.04). In that case, the responsible party generally should not present prospective financial statements for general use.
4.09 If the responsible party does not have a reasonably objective basis for one or more assumptions, it nonetheless may be able to present prospective financial information for limited use. For example, it might be appropriate for the responsible party to (a) establish hypothetical assumptions that have no reasonably objective basis and present a financial projection (see paragraph 7.02) or (b) present a partial presentation that omits the element, item, or account that does not have a reasonably objective basis.
1 Submission to a regulatory agency is considered limited use even though, by law or regulation, the practitioner’s report may be made a matter of public record.
5.01 Prospective financial information, including the underlying assumptions, is the responsibility of the entity's responsible party.1 The responsible party cannot guarantee the achievement of the financial results set forth in the prospective financial information because achievability depends on many factors that are outside of its control. However, the responsible party may influence the operations of an entity through planning, organizing, controlling, and directing its activities and, therefore, is in a position to develop reasonable or appropriate assumptions with respect to key factors.
5.02 The responsible party may enlist the assistance of outside parties in preparing prospective financial information. For example, a practitioner may provide such assistance by helping the responsible party to identify key factors, develop assumptions, gather information, or assemble the information. The practitioner may also be engaged to develop a financial model so the responsible party or others may consider the results by using a variety of assumptions. Such activities ordinarily would not affect the practitioner's objectivity in examining the prospective financial information.2
5.03 Regardless of the extent of the practitioner's participation, the assumptions remain the responsibility of the responsible party. The practitioner may assist in the formulation of assumptions, but the responsible party is nonetheless responsible for the preparation and presentation of the prospective financial statements because the prospective financial statements are dependent on the actions, plans, and assumptions of the responsible party, and only it can take responsibility for the assumptions. That should include evaluating the assumptions, making key decisions, and adopting and presenting the assumptions as its own.
5.04 Occasionally, a practitioner may be engaged to prepare a financial analysis of a potential project in which the engagement includes obtaining information, making appropriate assumptions, and assembling the presentation. Such an analysis is not, and should not be, characterized as forecasted or projected information, and would not be appropriate for general use unless a responsible party reviewed and adopted the assumptions and presentation and presented it as a financial forecast.
1 See the definition of responsible party in paragraph 3.14.
2 Some of these services may not be appropriate if the practitioner is to be named in a filing with the SEC. The SEC and PCAOB have different independence rules. Therefore, when providing services for public companies, the practitioner should be aware of those rules.
Guidance for Entities That Issue Prospective Financial Statements