Notice To Reader

Notice To Reader

Chartered Professional Accountant (“CPA”) prepares Notice to Reader financial statement (“NTR”) to comply with professional standards also known as Accounting Standards for Private Enterprises (“ASPE”). CPA must make a professional judgment and consider the reasonableness of financial data provided by business owners or their bookkeepers. If the CPA determines that the data is not reliable, the NTR cannot be prepared.

ASPE Financial Statement

Accounting Standards for Private Enterprises are established by the Accounting Standards Board for privately owned business. These standards are simpler than International Financial Reporting Standards, which is mandatory for publicly traded companies. ASPE became compulsory on January 1, 2011.

Business Financial Statement

Financial Statement for tax purpose does treat some items differently than ASPE. Here are a few items to consider;

For tax purpose, amortization is reported at Capital Cost Allowance tax rates while ASPE requires amortization reported at the economic or useful life of assets; Allowance of bad debt amount is different from bad debt calculation for ASPE purpose. Either income statement or balance sheet method is used for ASPE; and Non-taxable revenue and non-deductible expenses may not be reported in the tax basis financial statements; and Cash flow statement is optional for tax basis financial statements.

Benefits

Many business owners feel that they can operate their business without NTR and owners also believe that business financial statements are only needed to report to the government for corporate tax return purposes. However, one of the reasons for creating NTR is to lower corporate taxes.

The bookkeepers are not responsible for transactions that are outside the daily routine of sales invoices, purchase orders, and bank reconciliations. Notice to Reader helps small business owners notice any accounting issues to operate the business efficiently and effectively. For instance, high bad debts indicate to the owner to review the firm’s collection and credit policy. Bookkeeping software such as QuickBooksonline has many functionalities. However, the software cannot produce NTR as QuickBooks online is designed to provide monthly or quarterly profit and loss statements.

It is common that small business owners obtain loans from banks. The bank often has the organization’s assets as collateral. To protect the collaterals, it is not uncommon that the bank requests quarterly information from the company. If the bookkeeper provides this information to the bank without the review by the Charted Professional Accountant, the bank may question the reliability of the financial statements.

Component

The Notice to Reader report along with the financial statements includes:
A balance sheet that reports assets, liabilities and shareholder equity; Income Statement that focuses on revenues and expenses during a reporting period; and Note to financial statements, commonly known as footnotes. These footnotes provide additional information about the accounting methods used to produce financial statements.

The report clearly states the scope and limitations of the report, the individual who was responsible for producing the report and caution to the reader.

Procedure to Produce Notice to Reader Report

1. A bookkeeper provides a trial balance to a CPA. The trial balance is a summary of all transactions that occurred during the company’s reporting period;
2. A CPA reviews chart of accounts and communicates with the bookkeeper for error and omissions;
3. CPA prepares to adjust journal entries including, not limited to, depreciation and allowance for bad debts; and
4. NTR is exported to tax software for corporate tax returns.