Prospective Financial Information Guide

Publisher: AICPA
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Ensure you have the most current authoritative guidance related to Prospective Financial Information.

AICPA Audit & Accounting Guides are developed and updated to provide guidance and discussions specific to current industry developments and trends. The 2012 Prospective Financial Information Guide provides information for entities that prepare prospective financial information, as well as practitioners who compile, examine and perform other agreed upon procedures on prospective financial information.

This AICPA Guide has been fully conformed to reflect the new standards resulting from the Clarity Project. Fully incorporating the clarified auditing standards into this year’s edition of the guide enables auditors to further their understanding of these recently issued auditing standards, as well as begin updating their audit methodologies, resources, and tools prior to the clarified auditing standards’ effective date. Additionally, this approach gives auditors the opportunity to review and understand the changes made by their third-party audit methodology and resource providers, if applicable. The clarified auditing standards are effective for audits of financial statements for periods ending on or after December 15, 2012 (calendar year 2012 audits).

This guide includes relevant guidance contained in applicable standards and other technical sources. Illustrative engagement letters, representation letters and sample reports are also included. The appendixes include excerpts from the SEC rules regarding financial projections and IRS regulations regarding tax shelter opinions. All content is reviewed by industry experts and the appropriate AICPA senior committee.

Updates significant to this edition include technical guidance contained in:

  • SSAE No. 17, Reporting on Compiled Prospective Financial Statements when the Practitioner’s Independence is Impaired

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First Except

Engagement Letter

The following is an excerpt from a sample engagement letter for a compilation of a financial forecast:

This letter sets forth our understanding of the terms and objectives of our engagement and the nature and limitations of the services we will provide.

We will compile, in accordance with attestation standards established by the American Institute of Certified Public Accountants, from information managementprovides, the forecasted balance sheet, statements of income, retained earnings, and cash flows, and summaries of significant assumptions and accounting policies of XYZ Company as of December 31, 20XX, and for the year then ending. A compilation is limited to presenting, in the form of a financial forecast, information that is the representation of management. We will not examine the financial forecast and therefore, will not express any form of assurance on the achievability of the forecast or the reasonableness of the underlying assumptions.

A compilation of a financial forecast involves assembling the forecast based on management's assumptions and performing certain other procedures with respect to the forecast without evaluating the support for, or expressing an opinion or any other form of assurance on, the assumptions underlying it.

If for any reason we are unable to complete our compilation of your financial forecast, we will not issue a report on it as a result of this engagement.

A financial forecast presents, to the best of management's knowledge and belief, the Company's expected financial position, results of operations, and cash flows for the forecast period. It is based on management's assumptions, reflecting conditions it expects to exist and the course of action it expects to take during the forecast period.
Management is responsible for representations about its plans and expectations and for disclosure of significant information that might affect the ultimate realization of the forecasted results.

There will usually be differences between the forecasted and actual results, because events and circumstances frequently do not occur as expected, and those differences may be material. Our report will contain a statement to that effect.

Second Excerpt

Reasonably Objective Basis

The responsible party has a reasonably objective basis to present a financial forecast if sufficiently objective assumptions can be developed for each key factor.   The following matters should be considered when evaluating whether such assumptions can be developed:

      • Can facts be obtained and informed judgments made about past and future events or circumstances in support of the underlying assumptions?
      • Are any of the significant assumptions so subjective that no reasonably objective basis could exist to present a financial forecast? (For example, the responsible party might not have a reasonably objective basis to present a forecast that includes royalty income from products not yet invented or revenue from a thoroughbred being reared to race. In such cases, it would be inappropriate to present a forecast because of the lack of a reasonably objective basis.)
      • Would people knowledgeable in the entity's business and industry select materially similar assumptions?
      • Is the length of the forecast period appropriate?

Other matters that responsible parties may consider when evaluating whether sufficiently objective assumptions can be developed are shown in exibith 7-1.

The evaluation of whether sufficiently objective assumptions can be developed for each key factor should be made within the following context:

      • A factor is evaluated by considering its significance to the entity's plans and the dollar magnitude and pervasiveness of the related assumption's potential effect on forecasted results (for example, whether assumptions developed would materially affect the amounts and presentation of numerous forecasted amounts).

        The responsible party's consideration of which key factors have the greatest potential impact on forecasted results is a matter of judgment and is influenced by the responsible party's perception of the needs of a reasonable person who will rely on the financial forecast. A key factor having the greatest potential impact on forecasted results is one in which omission or misstatement of the related assumption would probably, in light of surrounding circumstances, change or influence the judgment of a reasonable person relying on the financial forecast. (The more likely an assumption will have a significant impact on the overall forecasted results, and the more likely the factors that relate to the assumption indicate a less objective basis, the more likely a judgment should be made that there is no reasonably objective basis to present a financial forecast.)
      • The responsible party should seek out the best information that is available in order to develop the assumptions. Cost alone is an insufficient reason not to acquire needed information. However, the cost of incremental information should be commensurate with the anticipated benefit to be derived.
      • A conclusion that a reasonably objective basis exists for a forecast might be easier to support if the forecast were presented as a range.

System Requirements

Table of Contents

About the Publisher


About the AICPA The American Institute of CPAs is the world’s largest member association representing the accounting profession, with more than 412,000 members in 144 countries, and a history of serving the public interest since 1887. AICPA members represent many areas of practice, including business and industry, public practice, government, education and consulting. The AICPA sets ethical standards for the profession and U.S. auditing standards for private companies, nonprofit organizations, federal, state and local governments. It develops and grades the Uniform CPA Examination, and offers specialty credentials for CPAs who concentrate on personal financial planning; forensic accounting; business valuation; and information management and technology assurance. Through a joint venture with the Chartered Institute of Management Accountants, it has established the Chartered Global Management Accountant designation, which sets a new standard for global recognition of management accounting.

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