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AT Section 301

Financial Forecasts and Projections

Source: SSAE No. 10; SSAE No. 11.
Effective when the date of the practitioner’s report is on or after June 1, 2001, unless otherwise indicated.

Introduction

.01

This section sets forth standards and provides guidance to practitioners who are engaged to issue or do issue examination (paragraphs .29 to .50), compilation (paragraphs .12 to .28), or agreed-upon procedures reports (paragraphs .51 to .56) on prospective financial statements.

.02

Whenever a practitioner (a) submits, to his or her client or others, prospective financial statements that he or she has assembled, or assisted in assembling, that are or reasonably might be expected to be used by another (third) party fn 1 or (b) reports on prospective financial statements that are, or reasonably might be expected to be used by another (third) party, the practitioner should perform one of the engagements described in the preceding paragraph. In deciding whether the prospective financial statements are or reasonably might be expected to be used by a third party, the practitioner may rely on either the written or oral representation of the responsible party, unless information comes to his or her attention that contradicts the responsible party’s representation. If such third-party use of the prospective financial statements is not reasonably expected, the provisions of this section are not applicable unless the practitioner has been engaged to examine, compile, or apply agreed-upon procedures to the prospective financial statements.

.03

This section also provides standards for a practitioner who is engaged to examine, compile, or apply agreed-upon procedures to partial presentations. A partial presentation is a presentation of prospective financial information that excludes one or more of the items required for prospective financial statements as described in Appendix A [paragraph .68], “Minimum Presentation Guidelines.”

.04

The practitioner who has been engaged to or does compile, examine, or apply agreed-upon procedures to a partial presentation should perform the engagement in accordance with the guidance in paragraphs .12 to .28 for compilations, .29 to .50 for examinations, and .51 to .56 for agreed-upon procedures, respectively, modified to reflect the nature of the presentation as discussed in paragraphs .03, .57, and .58.

.05

This section does not provide standards or procedures for engagements involving prospective financial statements used solely in connection with litigation support services. A practitioner may, however, look to these standards because they provide helpful guidance for many aspects of such engagements and may be referred to as useful guidance in such engagements. Litigation support services are engagements involving pending or potential formal legal proceedings before a trier of fact in connection with the resolution of a dispute between two or more parties, for example, when a practitioner acts as an expert witness. This exception is provided because, among other things, the practitioner’s work in such proceedings is ordinarily subject to detailed analysis and challenge by each party to the dispute. This exception does not apply, however, if either of the following occur.

  1. The practitioner is specifically engaged to issue or does issue an examination, a compilation, or an agreed-upon procedures report on prospective financial statements.
  2. The prospective financial statements are for use by third parties who, under the rules of the proceedings, do not have the opportunity for analysis and challenge by each party to a dispute in a legal proceeding.

For example, creditors may not have such opportunities when prospective financial statements are submitted to them to secure their agreement to a plan of reorganization.

.06

In reporting on prospective financial statements, the practitioner may be called on to assist the responsible party in identifying assumptions, gathering information, or assembling the statements. fn 2 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. Accordingly, the practitioner’s engagement should not be characterized in his or her report or in the document containing his or her report as including “preparation” of the prospective financial statements. A practitioner may be engaged to prepare a financial analysis of a potential project where the engagement includes obtaining the information, making appropriate assumptions, and assembling the presentation. Such an analysis is not and should not be characterized as a forecast or projection and would not be appropriate for general use. However, if the responsible party reviewed and adopted the assumptions and presentation, or based its assumptions and presentation on the analysis, the practitioner could perform one of the engagements described in this section and issue a report appropriate for general use.

.07

The concept of materiality affects the application of this section to prospective financial statements as materiality affects the application of generally accepted auditing standards (GAAS) to historical financial statements. Materiality is a concept that is judged in light of the expected range of reasonableness of the information; therefore, users should not expect prospective information (information about events that have not yet occurred) to be as precise as historical information.

Definitions

.08

For the purposes of this section the following definitions apply.

  1. Prospective financial statements—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 statements and partial presentations are not considered to be prospective financial statements. fn 3
  2. Partial presentation—A presentation of prospective financial information that excludes one or more of the items required for prospective financial statements as described in Appendix A [paragraph .68], “Minimum Presentation Guidelines.” Partial presentations are not ordinarily appropriate for general use; accordingly, partial presentations should be restricted for use by specified parties who will be negotiating directly with the responsible party.
  3. 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 the 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. When 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 prospective financial statements are set forth in Appendix A [paragraph .68].
  4. 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 such as, “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 prospective financial statements are set forth in Appendix A [paragraph .68].
  5. Entity—Any unit, existing or to be formed, for which financial statements could be prepared in accordance with generally accepted accounting principles (GAAP) or another comprehensive basis of accounting. fn 4 For example, an entity can be an individual, partnership, corporation, trust, estate, association, or governmental unit.
  6. Hypothetical assumption—An assumption used in a financial projection to present a condition or course of action that is not necessarily expected to occur, but is consistent with the purpose of the projection.
  7. Responsible party—The person or persons who are responsible for the assumptions underlying the prospective financial statements. The responsible party usually is management, but it can be persons outside of the entity who do not currently have the authority to direct operations (for example, a party considering acquiring the entity).
  8. Assembly—The manual or computer processing of mathematical or other clerical functions related to the presentation of the prospective financial statements. Assembly does not refer to the mere reproduction and collation of such statements or to the responsible party’s use of the practitioner’s computer processing hardware or software.
  9. 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 statements and are the bases for the assumptions.

Uses of Prospective Financial Statements

.09

Prospective financial statements are for either general use or limited use. General use of prospective financial statements refers to the 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.

.10

Limited use of prospective financial statements refers to the use of prospective financial statements 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, and use solely within the entity. Third-party recipients of prospective financial statements intended for limited use can ask questions of the responsible party and negotiate terms directly with it. Any type of prospective financial statements that would be useful in the circumstances would normally be appropriate for limited use. Thus, the presentation may be a financial forecast or a financial projection.

.11

Because a financial projection is not appropriate for general use, a practitioner should not consent to the use of his or her name in conjunction with a financial projection that he or she believes will 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.

Compilation of Prospective Financial Statements

.12

A compilation of prospective financial statements is a professional service that involves the following:

  1. Assembling, to the extent necessary, the prospective financial statements based on the responsible party’s assumptions
  2. Performing the required compilation procedures, fn 5 including reading the prospective financial statements with their summaries of significant assumptions and accounting policies, and considering whether they appear to be presented in conformity with AICPA presentation guidelines fn 6 and not obviously inappropriate
  3. Issuing a compilation report

.13

A compilation is not intended to provide assurance on the prospective financial statements or the assumptions underlying such statements. Because of the limited nature of the practitioner’s procedures, a compilation does not provide assurance that the practitioner will become aware of significant matters that might be disclosed by more extensive procedures, for example, those performed in an examination of prospective financial statements.

.14

The summary of significant assumptions is essential to the reader’s understanding of prospective financial statements. Accordingly, the practitioner should not compile prospective financial statements that exclude disclosure of the summary of significant assumptions. Also, the practitioner should not compile a financial projection that excludes either (a) an identification of the hypothetical assumptions or (b) a description of the limitations on the usefulness of the presentation.

.15

The following standards apply to a compilation of prospective financial statements and to the resulting report.

  1. The compilation should be performed by a person or persons having adequate technical training and proficiency to compile prospective financial statements.
  2. Due professional care should be exercised in the performance of the compilation and the preparation of the report.
  3. The work should be adequately planned, and assistants, if any, should be properly supervised.
  4. Applicable compilation procedures should be performed as a basis for reporting on the compiled prospective financial statements. (See Appendix B [paragraph .69], “Training and Proficiency, Planning and Procedures Applicable to Compilations,” for the procedures to be performed.)
  5. The report based on the practitioner’s compilation of prospective financial statements should conform to the applicable guidance in paragraphs .18 through .28.

.16

The practitioner should consider, after applying the procedures specified in paragraph .69, whether representations or other information he or she has received appear to be obviously inappropriate, incomplete, or otherwise misleading, and if so, the practitioner should attempt to obtain additional or revised information. If he or she does not receive such information, the practitioner should ordinarily withdraw from the compilation engagement. fn 7 (Note that the omission of disclosures, other than those relating to significant assumptions, would not require the practitioner to withdraw. See paragraph .26.)

Working Papers

[.17]  

[.17]    [Paragraph deleted by the issuance of Statement on Standards for Attestation Engagements No. 11, January 2002.]

Reports on Compiled Prospective Financial Statements

.18

The practitioner’s standard report on a compilation of prospective financial statements should include the following:

  1. An identification of the prospective financial statements presented by the responsible party
  2. A statement that the practitioner has compiled the prospective financial statements in accordance with attestation standards established by the American Institute of Certified Public Accountants
  3. A statement that a compilation is limited in scope and does not enable the practitioner to express an opinion or any other form of assurance on the prospective financial statements or the assumptions
  4. A caveat that the prospective results may not be achieved
  5. A statement that the practitioner assumes no responsibility to update the report for events and circumstances occurring after the date of the report
  6. The manual or printed signature of the practitioner’s firm
  7. The date of the compilation report

.19

The following is the form of the practitioner’s standard report on the compilation of a forecast that does not contain a range. fn 8

We have compiled the accompanying forecasted balance sheet, statements of income, retained earnings, and cash flows of XYZ Company as of December 31, 20XX, and for the year then ending, in accordance with attestation standards established by the American Institute of Certified Public Accountants. fn 9

A compilation is limited to presenting in the form of a forecast information that is the representation of management fn 10 and does not include evaluation of the support for the assumptions underlying the forecast. We have not examined the forecast and, accordingly, do not express an opinion or any other form of assurance on the accompanying statements or assumptions. Furthermore, 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. We have no responsibility to update this report for events and circumstances occurring after the date of this report.

[Signature]

[Date]

.20

When the presentation is a projection, the practitioner’s compilation report should include the report elements set forth in paragraph .18. Additionally, the report should include a statement describing the special purpose for which the projection was prepared as well as a separate paragraph that restricts the use of the report because it is intended to be used solely by the specified parties. The following is the form of the practitioner’s standard report on a compilation of a projection that does not contain a range.

We have compiled the accompanying projected balance sheet, statements of income, retained earnings, and cash flows of XYZ Company as of December 31, 20XX, and for the year then ending, in accordance with attestation standards established by the American Institute of Certified Public Accountants. fn 11 The accompanying projection was prepared for [state special purpose, for example, “the purpose of negotiating a loan to expand XYZ Company’s plant”].

A compilation is limited to presenting in the form of a projection information that is the representation of management and does not include evaluation of the support for the assumptions underlying the projection. We have not examined the projection and, accordingly, do not express an opinion or any other form of assurance on the accompanying statements or assumptions. Furthermore, even if [describe hypothetical assumption, for example, “the loan is granted and the plant is expanded,”] there will usually be differences between the projected and actual results, because events and circumstances frequently do not occur as expected, and those differences may be material. We have no responsibility to update this report for events and circumstances occurring after the date of this report.

The accompanying projection and this report are intended solely for the information and use of [identify specified parties, for example, “XYZ Company and DEF Bank”] and is not intended to be and should not be used by anyone other than these specified parties.

[Signature]

[Date]

.21

When the prospective financial statements contain a range, the practitioner’s standard report should also include a separate paragraph that states that the responsible party has elected to portray the expected results of one or more assumptions as a range. The following is an example of the separate paragraph to be added to the practitioner’s report when he or she compiles prospective financial statements, in this case a forecast, that contain a range.

As described in the summary of significant assumptions, management of XYZ Company has elected to portray forecasted [describe financial statement element or elements for which the expected results of one or more assumptions fall within a range, and identify the assumptions expected to fall within a range, for example, “revenue at the amounts of $X,XXX and $Y,YYY, which is predicated upon occupancy rates of XX percent and YY percent of available apartments,”] rather than as a single point estimate. Accordingly, the accompanying forecast presents forecasted financial position, results of operations, and cash flows [describe one or more assumptions expected to fall within a range, for example, “at such occupancy rates.”] However, there is no assurance that the actual results will fall within the range of [describe one or more assumptions expected to fall within a range, for example, “occupancy rates”] presented.

.22

The date of completion of the practitioner’s compilation procedures should be used as the date of the report.

.23

A practitioner may compile prospective financial statements for an entity with respect to which he or she is not independent. fn 12 In such circumstances, the practitioner should specifically disclose his or her lack of independence; however, the reason for the lack of independence should not be described. When the practitioner is not independent, he or she may give the standard compilation report but should include the following sentence after the last paragraph.

We are not independent with respect to XYZ Company.

.24

Prospective financial statements may be included in a document that also contains historical financial statements and the practitioner’s report thereon. fn 13 In addition, the historical financial statements that appear in the document may be summarized and presented with the prospective financial statements for comparative purposes. fn 14 An example of the reference to the practitioner’s report on the historical financial statements when he or she audited, reviewed, or compiled those statements is presented below.

[Concluding sentence of last paragraph]

The historical financial statements for the year ended December 31, 20XX, [from which the historical data are derived] and our report thereon are set forth on pages XX-XX of this document.

.25

In some circumstances, a practitioner may wish to expand his or her report to emphasize a matter regarding the prospective financial statements. Such information may be presented in a separate paragraph of the practitioner’s report. However, the practitioner should exercise care that emphasizing such a matter does not give the impression that he or she is expressing assurance or expanding the degree of responsibility he or she is taking with respect to such information. fn 15 For example, the practitioner should not include statements in his or her compilation report about the mathematical accuracy of the statements or their conformity with presentation guidelines.

Modifications of the Standard Compilation Report

.26

An entity may request a practitioner to compile prospective financial statements that contain presentation deficiencies or omit disclosures other than those relating to significant assumptions. The practitioner may compile such prospective financial statements provided the deficiency or omission is clearly indicated in his or her report and is not, to his or her knowledge, undertaken with the intention of misleading those who might reasonably be expected to use such statements.

.27

Notwithstanding the preceding, if the compiled prospective financial statements are presented on a comprehensive basis of accounting other than GAAP and do not include disclosure of the basis of accounting used, the basis should be disclosed in the practitioner’s report.

.28

The following is an example of a paragraph that should be added to a report on compiled prospective financial statements, in this case a financial forecast, in which the summary of significant accounting policies has been omitted.

Management has elected to omit the summary of significant accounting policies required by the guidelines for presentation of a forecast established by the American Institute of Certified Public Accountants. If the omitted disclosures were included in the forecast, they might influence the user’s conclusions about the Company’s financial position, results of operations, and cash flows for the forecast period. Accordingly, this forecast is not designed for those who are not informed about such matters.

Examination of Prospective Financial Statements

.29

An examination of prospective financial statements is a professional service that involves—

  1. Evaluating the preparation of the prospective financial statements.
  2. Evaluating the support underlying the assumptions.
  3. Evaluating the presentation of the prospective financial statements for conformity with AICPA presentation guidelines. fn 16
  4. Issuing an examination report.

.30

As a result of his or her examination, the practitioner has a basis for reporting on whether, in his or her opinion—

  1. The prospective financial statements are presented in conformity with AICPA guidelines.
  2. The assumptions provide a reasonable basis for the responsible party’s forecast, or whether the assumptions provide a reasonable basis for the responsible party’s projection given the hypothetical assumptions.

.31

The practitioner should follow the general, fieldwork, and reporting standards for attestation engagements as set forth in section 101, Attest Engagements, in performing an examination of prospective financial statements and reporting thereon. (See paragraph .70 for standards concerning such technical training and proficiency, planning the examination engagement, and the types of procedures a practitioner should perform to obtain sufficient evidence for his or her examination report.)

Working Papers

[.32]  

[.32]      [Paragraph deleted by the issuance of Statement on Standards for Attestation Engagements No. 11, January 2002.]

Reports on Examined Prospective Financial Statements

.33

The practitioner’s standard report on an examination of prospective financial statements should include the following:

  1. A title that includes the word independent
  2. An identification of the prospective financial statements presented
  3. An identification of the responsible party and a statement that the prospective financial statements are the responsibility of the responsible party
  4. A statement that the practitioner’s responsibility is to express an opinion on the prospective financial statements based on his or her examination
  5. A statement that the examination of the prospective financial statements was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants and, accordingly, included such procedures as the practitioner considered necessary in the circumstances
  6. A statement that the practitioner believes that the examination provides a reasonable basis for his or her opinion
  7. The practitioner’s opinion that the prospective financial statements are presented in conformity with AICPA presentation guidelines and that the underlying assumptions provide a reasonable basis for the forecast or a reasonable basis for the projection given the hypothetical assumptions fn 17
  8. A caveat that the prospective results may not be achieved
  9. A statement that the practitioner assumes no responsibility to update the report for events and circumstances occurring after the date of the report
  10. The manual or printed signature of the practitioner’s firm
  11. The date of the examination report

.34

The following is the form of the practitioner’s standard report on an examination of a forecast that does not contain a range.

Independent Accountant’s Report

We have examined the accompanying forecasted balance sheet, statements of income, retained earnings, and cash flows of XYZ Company as of December 31, 20XX, and for the year then ending. fn 18 XYZ Company’s management is responsible for the forecast. Our responsibility is to express an opinion on the forecast based on our examination.

Our examination was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants and, accordingly, included such procedures as we considered necessary to evaluate both the assumptions used by management and the preparation and presentation of the forecast. We believe that our examination provides a reasonable basis for our opinion.

In our opinion, the accompanying forecast is presented in conformity with guidelines for presentation of a forecast established by the American Institute of Certified Public Accountants, and the underlying assumptions provide a reasonable basis for management’s forecast. However, 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. We have no responsibility to update this report for events and circumstances occurring after the date of this report.

[Signature]

[Date]

.35

When a practitioner examines a projection, his or her opinion regarding the assumptions should be conditioned on the hypothetical assumptions; that is, he or she should express an opinion on whether the assumptions provide a reasonable basis for the projection given the hypothetical assumptions. The practitioner’s examination report on a projection should include the report elements set forth in paragraph .33. Additionally, the report should include a statement describing the special purpose for which the projection was prepared as well a separate paragraph that restricts the use of the report because it is intended to be used solely by specified parties. The following is the form of the practitioner’s standard report on an examination of a projection that does not contain a range.

Independent Accountant’s Report

We have examined the accompanying projected balance sheet, statements of income, retained earnings, and cash flows of XYZ Company as of December 31, 20XX, and for the year then ending. fn 19 XYZ Company’s management is responsible for the projection, which was prepared for [state special purpose, for example, “the purpose of negotiating a loan to expand XYZ Company’s plant”]. Our responsibility is to express an opinion on the projection based on our examination.

Our examination was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants and, accordingly, included such procedures as we considered necessary to evaluate both the assumptions used by management and the preparation and presentation of the projection. We believe that our examination provides a reasonable basis for our opinion.

In our opinion, the accompanying projection is presented in conformity with guidelines for presentation of a projection established by the American Institute of Certified Public Accountants, and the underlying assumptions provide a reasonable basis for management’s projection [describe the hypothetical assumption, for example, “assuming the granting of the requested loan for the purpose of expanding XYZ Company’s plant as described in the summary of significant assumptions.”] However, even if [describe hypothetical assumption, for example, “the loan is granted and the plant is expanded,”], there will usually be differences between the projected and actual results, because events and circumstances frequently do not occur as expected, and those differences may be material. We have no responsibility to update this report for events and circumstances occurring after the date of this report.

The accompanying projection and this report are intended solely for the information and use of [identify specified parties, for example, “XYZ Company and DEF National Bank”] and is not intended to be and should not be used by anyone other than these specified parties.

[Signature]

[Date]

.36

When the prospective financial statements contain a range, the practitioner’s standard report should also include a separate paragraph that states that the responsible party has elected to portray the expected results of one or more assumptions as a range. The following is an example of the separate paragraph to be added to the practitioner’s report when he or she examines prospective financial statements, in this case a forecast, that contain a range.

As described in the summary of significant assumptions, management of XYZ Company has elected to portray forecasted [describe financial statement element or elements for which the expected results of one or more assumptions fall within a range, and identify assumptions expected to fall within a range, for example, “revenue at the amounts of $X,XXX and $Y,YYY, which is predicated upon occupancy rates of XX percent and YY percent of available apartments,”] rather than as a single point estimate. Accordingly, the accompanying forecast presents forecasted financial position, results of operations, and cash flows [describe one or more assumptions expected to fall within a range, for example, “at such occupancy rates.”] However, there is no assurance that the actual results will fall within the range of [describe one or more assumptions expected to fall within a range, for example, “occupancy rates”] presented.

.37

The date of completion of the practitioner’s examination procedures should be used as the date of the report.

Modifications to the Practitioner’s Opinion fn 20

.38

The following circumstances result in the following types of modified practitioner’s report involving the practitioner’s opinion.

  1. If, in the practitioner’s opinion, the prospective financial statements depart from AICPA presentation guidelines, he or she should express a qualified opinion (see paragraph .39) or an adverse opinion. (See paragraph .41.) fn 21 However, if the presentation departs from the presentation guidelines because it fails to disclose assumptions that appear to be significant, the practitioner should express an adverse opinion. (See paragraphs .41 and .42.)
  2. If the practitioner believes that one or more significant assumptions do not provide a reasonable basis for the forecast, or a reasonable basis for the projection given the hypothetical assumptions, he or she should express an adverse opinion. (See paragraph .41.)
  3. If the practitioner’s examination is affected by conditions that preclude application of one or more procedures he or she considers necessary in the circumstances, he or she should disclaim an opinion and describe the scope limitation in his or her report. (See paragraph .43.)

.39

Qualified Opinion. In a qualified opinion, the practitioner should state, in a separate paragraph, all substantive reasons for modifying his or her opinion and describe the departure from AICPA presentation guidelines. His or her opinion should include the words “except” or “exception” as the qualifying language and should refer to the separate explanatory paragraph. The following is an example of an examination report on a forecast that is at variance with AICPA guidelines for presentation of a financial forecast.

Independent Accountant’s Report

We have examined the accompanying forecasted balance sheet, statements of income, retained earnings, and cash flows of XYZ Company as of December 31, 20XX, and for the year then ending. XYZ Company’s management is responsible for the forecast. Our responsibility is to express an opinion on the forecast based on our examination.

Our examination was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants and, accordingly, included such procedures as we considered necessary to evaluate both the assumptions used by management and the preparation and presentation of the forecast. We believe that our examination provides a reasonable basis for our opinion.

The forecast does not disclose significant accounting policies. Disclosure of such policies is required by guidelines for presentation of a forecast established by the American Institute of Certified Public Accountants.

In our opinion, except for the omission of the disclosure of the significant accounting policies as discussed in the preceding paragraph, the accompanying forecast is presented in conformity with guidelines for a presentation of a forecast established by the American Institute of Certified Public Accountants and the underlying assumptions provide a reasonable basis for management’s forecast. However, 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. We have no responsibility to update this report for events and circumstances occurring after the date of this report.

[Signature]

[Date]

.40

Because of the nature, sensitivity, and interrelationship of prospective information, a reader would find a practitioner’s report qualified for a measurement departure, fn 22 the reasonableness of the underlying assumptions, or a scope limitation difficult to interpret. Accordingly, the practitioner should not express his or her opinion about these items with language such as “except for . . .” or “subject to the effects of. . . .” Rather, when a measurement departure, an unreasonable assumption, or a limitation on the scope of the practitioner’s examination has led him or her to conclude that he or she cannot issue an unqualified opinion, he or she should issue the appropriate type of modified opinion described in paragraphs .41 through .44.

.41

Adverse Opinion. In an adverse opinion the practitioner should state, in a separate paragraph, all of the substantive reasons for his or her adverse opinion. His or her opinion should state that the presentation is not in conformity with presentation guidelines and should refer to the explanatory paragraph. When applicable, his or her opinion paragraph should also state that, in the practitioner’s opinion, the assumptions do not provide a reasonable basis for the prospective financial statements. An example of an adverse opinion on an examination of prospective financial statements is set forth below. In this case, a financial forecast was examined and the practitioner’s opinion was that a significant assumption was unreasonable. The example should be revised as appropriate for a different type of presentation or if the adverse opinion is issued because the statements do not conform to the presentation guidelines.

Independent Accountant’s Report

We have examined the accompanying forecasted balance sheet, statements of income, retained earnings, and cash flows of XYZ Company as of December 31, 20XX, and for the year then ending. XYZ Company’s management is responsible for the forecast. Our responsibility is to express an opinion on the forecast based on our examination.

Our examination was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants and, accordingly, included such procedures as we considered necessary to evaluate both the assumptions used by management and the preparation and presentation of the forecast. We believe that our examination provides a reasonable basis for our opinion.

As discussed under the caption “Sales” in the summary of significant forecast assumptions, the forecasted sales include, among other things, revenue from the Company’s federal defense contracts continuing at the current level. The Company’s present federal defense contracts will expire in March 20XX. No new contracts have been signed and no negotiations are under way for new federal defense contracts. Furthermore, the federal government has entered into contracts with another company to supply the items being manufactured under the Company’s present contracts.

In our opinion, the accompanying forecast is not presented in conformity with guidelines for presentation of a financial forecast established by the American Institute of Certified Public Accountants because management’s assumptions, as discussed in the preceding paragraph, do not provide a reasonable basis for management’s forecast. We have no responsibility to update this report for events or circumstances occurring after the date of this report.

[Signature]

[Date]

.42

If the presentation, including the summary of significant assumptions, fails to disclose assumptions that, at the time, appear to be significant, the practitioner should describe the assumptions in his or her report and express an adverse opinion. The practitioner should not examine a presentation that omits all disclosures of assumptions. Also, the practitioner should not examine a financial projection that omits (a) an identification of the hypothetical assumptions or (b) a description of the limitations on the usefulness of the presentation.

.43

Disclaimer of Opinion. In a disclaimer of opinion, the practitioner’s report should indicate, in a separate paragraph, the respects in which the examination did not comply with standards for an examination. The practitioner should state that the scope of the examination was not sufficient to enable him or her to express an opinion with respect to the presentation or the underlying assumptions, and his or her disclaimer of opinion should include a direct reference to the explanatory paragraph. The following is an example of a report on an examination of prospective financial statements, in this case a financial forecast, for which a significant assumption could not be evaluated.

Independent Accountant’s Report

We were engaged to examine the accompanying forecasted balance sheet, statements of income, retained earnings, and cash flows of XYZ Company as of December 31, 20XX, and for the year then ending. XYZ Company’s management is responsible for the forecast.

As discussed under the caption “Income From Investee” in the summary of significant forecast assumptions, the forecast includes income from an equity investee constituting 23 percent of forecasted net income, which is management’s estimate of the Company’s share of the investee’s income to be accrued for 20XX. The investee has not prepared a forecast for the year ending December 31, 20XX, and we were therefore unable to obtain suitable support for this assumption.

Because, as described in the preceding paragraph, we are unable to evaluate management’s assumption regarding income from an equity investee and other assumptions that depend thereon, the scope of our work was not sufficient to express, and we do not express, an opinion with respect to the presentation of or the assumptions underlying the accompanying forecast. We have no responsibility to update this report for events and circumstances occurring after the date of this report.

[Signature]

[Date]

.44

When there is a scope limitation and the practitioner also believes there are material departures from the presentation guidelines, those departures should be described in the practitioner’s report.

Other Modifications to the Standard Examination Report

.45

The circumstances described below, although not necessarily resulting in modifications to the practitioner’s opinion, would result in the following types of modifications to the standard examination report.

.46

Emphasis of a Matter. In some circumstances, the practitioner may wish to emphasize a matter regarding the prospective financial statements but nevertheless intends to express an unqualified opinion. The practitioner may present other information and comments he or she wishes to include, such as explanatory comments or other informative material, in a separate paragraph of his or her report.

.47

Evaluation Based in Part on a Report of Another Practitioner. When more than one practitioner is involved in the examination, the guidance provided for that situation in connection with examinations of historical financial statements is generally applicable. When the principal practitioner decides to refer to the report of another practitioner as a basis, in part, for his or her own opinion, he or she should disclose that fact in stating the scope of the examination and should refer to the report of the other practitioner in expressing his or her opinion. Such a reference indicates the division of responsibility for the performance of the examination.

.48

Comparative Historical Financial Information. Prospective financial statements may be included in a document that also contains historical financial statements and a practitioner’s report thereon. fn 23 In addition, the historical financial statements that appear in the document may be summarized and presented with the prospective financial statements for comparative purposes. fn 24 An example of the reference to the practitioner’s report on the historical financial statements when he or she audited, reviewed, or compiled those statements is presented in paragraph .24.

.49

Reporting When the Examination Is Part of a Larger Engagement. When the practitioner’s examination of prospective financial statements is part of a larger engagement, for example, a financial feasibility study or business acquisition study, it is appropriate to expand the report on the examination of the prospective financial statements to describe the entire engagement.

.50

The following is a report that might be issued when a practitioner chooses to expand his or her report on a financial feasibility study. fn 25

Independent Accountant’s Report

  1. The Board of Directors
    Example Hospital
    Example, Texas
  2. We have prepared a financial feasibility study of Example Hospital’s (the Hospital’s) plans to expand and renovate its facilities. The study was undertaken to evaluate the ability of the Hospital to meet its operating expenses, working capital needs, and other financial requirements, including the debt service requirements associated with the proposed $25,000,000 [legal title of bonds] issue, at an assumed average annual interest rate of 10.0 percent during the five years ending December 31, 20X6.
  3. The proposed capital improvements program (the Program) consists of a new two-level addition, which is to provide fifty additional medical-surgical beds, increasing the complement to 275 beds. In addition, various administrative and support service areas in the present facilities are to be remodeled. The Hospital administration anticipates that construction is to begin June 30, 20X2, and to be completed by December 31, 20X3.
  4. The estimated total cost of the Program is approximately $30,000,000. It is assumed that the $25,000,000 of revenue bonds that the Example Hospital Finance Authority proposes to issue would be the primary source of funds for the Program. The responsibility for payment of debt service on the bonds is solely that of the Hospital. Other necessary funds to finance the Program are assumed to be provided from the Hospital’s funds, from a local fund drive, and from interest earned on funds held by the bond trustee during the construction period.
  5. Our procedures included analysis of the following:
    • Program history, objectives, timing, and financing
    • The future demand for the Hospital’s services, including consideration of the following:
      • Economic and demographic characteristics of the Hospital’s defined service area
      • Locations, capacities, and competitive information pertaining to other existing and planned area hospitals
      • Physician support for the Hospital and its programs
      • Historical utilization levels
    • Planning agency applications and approvals
    • Construction and equipment costs, debt service requirements, and estimated financing costs
    • Staffing patterns and other operating considerations
    • Third-party reimbursement policy and history
    • Revenue/expense/volume relationships
  6. We also participated in gathering other information, assisted management in identifying and formulating its assumptions, and assembled the accompanying financial forecast based on those assumptions.
  7. The accompanying financial forecast for the annual periods ending December 31, 20X2, through 20X6, is based on assumptions that were provided by or reviewed with and approved by management. The financial forecast includes the following:
    • Balance sheets
    • Statements of operations
    • Statements of cash flows
    • Statements of changes in net assets
  8. We have examined the financial forecast. Example Hospital’s management is responsible for the forecast. Our responsibility is to express an opinion on the forecast based on our examination. Our examination was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants and, accordingly, included such procedures as we considered necessary to evaluate both the assumptions used by management and the preparation and presentation of the forecast. We believe that our examination provides a reasonable basis for our opinion.
  9. Legislation and regulations at all levels of government have affected and may continue to affect revenues and expenses of hospitals. The financial forecast is based on legislation and regulations currently in effect. If future legislation or regulations related to hospital operations are enacted, such legislation or regulations could have a material effect on future operations.
  10. The interest rate, principal payments, Program costs, and other financing assumptions are described in the section entitled “Summary of Significant Forecast Assumptions and Rationale.” If actual interest rates, principal payments, and funding requirements are different from those assumed, the amount of the bond issue and debt service requirements would need to be adjusted accordingly from those indicated in the forecast. If such interest rates, principal payments, and funding requirements are lower than those assumed, such adjustments would not adversely affect the forecast.
  11. Our conclusions are presented below.
    • In our opinion, the accompanying financial forecast is presented in conformity with guidelines for presentation of a financial forecast established by the American Institute of Certified Public Accountants.
    • In our opinion, the underlying assumptions provide a reasonable basis for management’s forecast. However, 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.
    • The accompanying financial forecast indicates that sufficient funds could be generated to meet the Hospital’s operating expenses, working capital needs, and other financial requirements, including the debt service requirements associated with the proposed $25,000,000 bond issue, during the forecast periods. However, the achievement of any financial forecast is dependent on future events, the occurrence of which cannot be assured.
  12. We have no responsibility to update this report for events and circumstances occurring after the date of this report.

[Signature]

[Date]

Applying Agreed-Upon Procedures to Prospective Financial Statements

.51

The practitioner who accepts an engagement to apply agreed-upon procedures to prospective financial statements should follow the general, fieldwork, and reporting standards for attest engagements set forth in section 101 and the guidance set forth herein and in section 201, Agreed-Upon Procedures Engagements.

.52

A practitioner may perform an agreed-upon procedures attest engagement on prospective financial statements fn 26 provided the following conditions are met.

  1. The practitioner is independent.
  2. The practitioner and the specified parties agree upon the procedures performed or to be performed by the practitioner.
  3. The specified parties take responsibility for the sufficiency of the agreed-upon procedures for their purposes.
  4. The prospective financial statements include a summary of significant assumptions.
  5. The prospective financial statements to which the procedures are to be applied are subject to reasonably consistent evaluation against criteria that are suitable and available to the specified parties.
  6. Criteria to be used in the determination of findings are agreed upon between the practitioner and the specified parties. fn 27
  7. The procedures to be applied to the prospective financial statements are expected to result in reasonably consistent findings using the criteria.
  8. Evidential matter related to the prospective financial statements to which the procedures are applied is expected to exist to provide a reasonable basis for expressing the findings in the practitioner’s report.
  9. Where applicable, the practitioner and the specified users agree on any agreed-upon materiality limits for reporting purposes. (See section 201.25.)
  10. Use of the report is to be restricted to the specified parties. fn 28

.53

Generally, the practitioner’s procedures may be as limited or as extensive as the specified parties desire, as long as the specified parties take responsibility for their sufficiency. However, mere reading of prospective financial statements does not constitute a procedure sufficient to permit a practitioner to report on the results of applying agreed-upon procedures to such statements. (See section 201.15.)

.54

To satisfy the requirements that the practitioner and the specified parties agree upon the procedures performed or to be performed and that the specified parties take responsibility for the sufficiency of the agreed-upon procedures for their purposes, ordinarily the practitioner should communicate directly with and obtain affirmative acknowledgment from each of the specified parties. For example, this may be accomplished by meeting with the specified parties or by distributing a draft of the anticipated report or a copy of an engagement letter to the specified parties and obtaining their agreement. If the practitioner is not able to communicate directly with all of the specified parties, the practitioner may satisfy these requirements by applying any one or more of the following or similar procedures:

  • Compare the procedures to be applied to written requirements of the specified parties.
  • Discuss the procedures to be applied with appropriate representatives of the specified parties involved.
  • Review relevant contracts with or correspondence from the specified parties.

The practitioner should not report on an engagement when specified parties do not agree upon the procedures performed or to be performed and do not take responsibility for the sufficiency of the procedures for their purposes. (See section 201.36 for guidance on satisfying these requirements when the practitioner is requested to add other parties as specified parties after the date of completion of the agreed-upon procedures.)

Reports on the Results of Applying Agreed-Upon Procedures

.55

The practitioner’s report on the results of applying agreed-upon procedures should be in the form of procedures and findings. The practitioner’s report should contain the following elements:

  1. A title that includes the word independent
  2. Identification of the specified parties
  3. Reference to the prospective financial statements covered by the practitioner’s report and the character of the engagement
  4. A statement that the procedures performed were those agreed to by the specified parties identified in the report
  5. Identification of the responsible party and a statement that the prospective financial statements are the responsibility of the responsible party
  6. A statement that the agreed-upon procedures engagement was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants
  7. A statement that the sufficiency of the procedures is solely the responsibility of the specified parties and a disclaimer of responsibility for the sufficiency of those procedures
  8. A list of the procedures performed (or reference thereto) and related findings (The practitioner should not provide negative assurance—see section 201.24.)
  9. Where applicable, a description of any agreed-upon materiality limits (See section 201.25.)
  10. A statement that the practitioner was not engaged to and did not conduct an examination of prospective financial statements; a disclaimer of opinion on whether the presentation of the prospective financial statements is in conformity with AICPA presentation guidelines and on whether the underlying assumptions provide a reasonable basis for the forecast, or a reasonable basis for the projection given the hypothetical assumptions; and a statement that if the practitioner had performed additional procedures, other matters might have come to his or her attention that would have been reported
  11. A statement of restrictions on the use of the report because it is intended to be used solely by the specified parties
  12. Where applicable, reservations or restrictions concerning procedures or findings as discussed in section 201.33, .35, .39, and .40
  13. A caveat that the prospective results may not be achieved
  14. A statement that the practitioner assumes no responsibility to update the report for events and circumstances occurring after the date of the report
  15. Where applicable, a description of the nature of the assistance provided by a specialist as discussed in section 201.19–.21
  16. The manual or printed signature of the practitioner’s firm
  17. The date of the report

.56

The following illustrates a report on applying agreed-upon procedures to the prospective financial statements. (See section 201.)

Independent Accountant’s Report
on Applying Agreed-Upon Procedures

Board of Directors—XYZ Corporation

Board of Directors—ABC Company

At your request, we have performed certain agreed-upon procedures, as enumerated below, with respect to the forecasted balance sheet and the related forecasted statements of income, retained earnings, and cash flows of DEF Company, a subsidiary of ABC Company, as of December 31, 20XX, and for the year then ending. These procedures, which were agreed to by the Boards of Directors of XYZ Corporation and ABC Company, were performed solely to assist you in evaluating the forecast in connection with the proposed sale of DEF Company to XYZ Corporation. DEF Company’s management is responsible for the forecast.

This agreed-upon procedures engagement was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants. The sufficiency of these procedures is solely the responsibility of the specified parties. Consequently, we make no representation regarding the sufficiency of the procedures described below either for the purpose for which this report has been requested or for any other purpose.

[Include paragraphs to enumerate procedures and findings.]

We were not engaged to and did not conduct an examination, the objective of which would be the expression of an opinion on the accompanying prospective financial statements. Accordingly, we do not express an opinion on whether the prospective financial statements are presented in conformity with AICPA presentation guidelines or on whether the underlying assumptions provide a reasonable basis for the presentation. Had we performed additional procedures, other matters might have come to our attention that would have been reported to you. Furthermore, 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. We have no responsibility to update this report for events and circumstances occurring after the date of this report.

This report is intended solely for the information and use of the Boards of Directors of ABC Company and XYZ Corporation and is not intended to be and should not be used by anyone other than these specified parties.

[Signature]

[Date]

Partial Presentations

.57

The practitioner’s procedures on a partial presentation may be affected by the nature of the information presented. Many elements of prospective financial statements are interrelated. The practitioner should give appropriate consideration to whether key factors affecting elements, accounts, or items that are interrelated with those in the partial presentation he or she has been engaged to examine or compile have been considered, including key factors that may not necessarily be obvious to the partial presentation (for example, productive capacity relative to a sales forecast), and whether all significant assumptions have been disclosed. The practitioner may find it necessary for the scope of the examination or compilation of some partial presentations to be similar to that for the examination or compilation of a presentation of prospective financial statements. For example, the scope of a practitioner’s procedures when he or she examines forecasted results of operations would likely be similar to that of procedures used for the examination of prospective financial statements since the practitioner would most likely need to consider the interrelationships of all accounts in the examination of results of operations.

.58

Because partial presentations are generally appropriate only for limited use, reports on partial presentations of both forecasted and projected information should include a description of any limitations on the usefulness of the presentation.

Other Information

.59

When a practitioner’s compilation, review, or audit report on historical financial statements is included in a practitioner-submitted document containing prospective financial statements, the practitioner should either examine, compile, or apply agreed-upon procedures to the prospective financial statements and report accordingly, unless the following occur.

  1. The prospective financial statements are labeled as a “budget.”
  2. The budget does not extend beyond the end of the current fiscal year.
  3. The budget is presented with interim historical financial statements for the current year.

    In such circumstances, the practitioner need not examine, compile, or apply agreed-upon procedures to the budget; however, he or she should report on it and—

  1. Indicate that he or she did not examine or compile the budget.
  2. Disclaim an opinion or any other form of assurance on the budget.

    In addition, the budgeted information may omit the summaries of significant assumptions and accounting policies required by the guidelines for presentation of prospective financial statements established by the AICPA, provided such omission is not, to the practitioner’s knowledge, undertaken with the intention of misleading those who might reasonably be expected to use such budgeted information, and is disclosed in the practitioner’s report. The following is the form of the standard paragraphs to be added to the practitioner’s report in this circumstance when the summaries of significant assumptions and accounting policies have been omitted.

The accompanying budgeted balance sheet, statements of income, retained earnings, and cash flows of XYZ Company as of December 31, 20XX, and for the six months then ending, have not been compiled or examined by us, and, accordingly, we do not express an opinion or any other form of assurance on them.

Management has elected to omit the summaries of significant assumptions and accounting policies required under established guidelines for presentation of prospective financial statements. If the omitted summaries were included in the budgeted information, they might influence the user’s conclusions about the company’s budgeted information. Accordingly, this budgeted information is not designed for those who are not informed about such matters.

.60

When the practitioner’s compilation, review, or audit report on historical financial statements is included in a client-prepared document containing prospective financial statements, the practitioner should not consent to the use of his or her name in the document unless:

  1. He or she has examined, compiled, or applied agreed-upon procedures to the prospective financial statements and his or her report accompanies them.
  2. The prospective financial statements are accompanied by an indication by the responsible party or the practitioner that the practitioner has not performed such a service on the prospective financial statements and that the practitioner assumes no responsibility for them.
  3. Another practitioner has examined, compiled, or applied agreed-upon procedures to the prospective financial statements and his or her report is included in the document.

    In addition, if the practitioner has audited the historical financial statements and they accompany prospective financial statements that he or she did not examine, compile, or apply agreed-upon procedures to in certain fn 29 client-prepared documents, he or she should refer to AU section 550, Other Information in Documents Containing Audited Financial Statements.

.61

The practitioner whose report on prospective financial statements is included in a client-prepared document containing historical financial statements should not consent to the use of his or her name in the document unless:

  1. He or she has compiled, reviewed, or audited the historical financial statements and his or her report accompanies them.
  2. The historical financial statements are accompanied by an indication by the responsible party or the practitioner that the practitioner has not performed such a service on the historical financial statements and that the practitioner assumes no responsibility for them.
  3. Another practitioner has compiled, reviewed, or audited the historical financial statements and his or her report is included in the document.

.62

An entity may publish various documents that contain information other than historical financial statements in addition to the compiled or examined prospective financial statements and the practitioner’s report thereon. The practitioner’s responsibility with respect to information in such a document does not extend beyond the financial information identified in the report, and he or she has no obligation to perform any procedures to corroborate other information contained in the document. However, the practitioner should read the other information and consider whether such information, or the manner of its presentation, is materially inconsistent with the information, or manner of its presentation, appearing in the prospective financial statements.

.63

If the practitioner examines prospective financial statements included in a document containing inconsistent information, he or she might not be able to conclude that there is adequate support for each significant assumption. The practitioner should consider whether the prospective financial statements, his or her report, or both require revision. Depending on the conclusion he or she reaches, the practitioner should consider other actions that may be appropriate, such as issuing an adverse opinion, disclaiming an opinion because of a scope limitation, withholding the use of his or her report in the document, or withdrawing from the engagement.

.64

If the practitioner compiles the prospective financial statements included in the document containing inconsistent information, he or she should attempt to obtain additional or revised information. If he or she does not receive such information, the practitioner should withhold the use of his or her report or withdraw from the compilation engagement.

.65

If, while reading the other information appearing in the document containing the examined or compiled prospective financial statements, as described in the preceding paragraphs, the practitioner becomes aware of information that he or she believes is a material misstatement of fact that is not an inconsistent statement, he or she should discuss the matter with the responsible party. In connection with this discussion, the practitioner should consider that he or she may not have the expertise to assess the validity of the statement made, that there may be no standards by which to assess its presentation, and that there may be valid differences of judgment or opinion. If the practitioner concludes that he or she has a valid basis for concern, he or she should propose that the responsible party consult with some other party whose advice might be useful, such as the entity’s legal counsel.

.66

If, after discussing the matter as described in paragraph .65, the practitioner concludes that a material misstatement of fact remains, the action he or she takes will depend on his or her judgment in the particular circumstances. The practitioner should consider steps such as notifying the responsible party in writing of his or her views concerning the information and consulting his or her legal counsel about further appropriate action in the circumstances.

Effective Date

.67

This section is effective when the date of the practitioner’s report is on or after June 1, 2001. Early application is permitted.

Appendix A

Minimum Presentation Guidelines fn *

.68

    1. Prospective information presented in the format of historical financial statements facilitates comparisons with financial position, results of operations, and cash flows of prior periods, as well as those actually achieved for the prospective period. Accordingly, prospective financial statements preferably should be in the format of the historical financial statements that would be issued for the period(s) covered unless there is an agreement between the responsible party and potential users specifying another format. Prospective financial statements may take the form of complete basic financial statements fn 1 or may be limited to the following minimum items (where such items would be presented for historical financial statements for the period). fn 2

  1. Sales or gross revenues
  2. Gross profit or cost of sales
  3. Unusual or infrequently occurring items
  4. Provision for income taxes
  5. Discontinued operations or extraordinary items
  6. Income from continuing operations
  7. Net income
  8. Basic and diluted earnings per share
  9. Significant changes in financial position fn 3
  10. A description of what the responsible party intends the prospective financial statements to present, a statement that the assumptions are based on the responsible party’s judgment at the time the prospective information was prepared, and a caveat that the prospective results may not be achieved
  11. Summary of significant assumptions
  12. Summary of significant accounting policies

    2. A presentation that omits one or more of the applicable minimum items a through i above is a partial presentation, which would not ordinarily be appropriate for general use. If an omitted applicable minimum item is derivable from the information presented, the presentation would not be deemed to be a partial presentation. A presentation that contains the applicable minimum items a through i above, but omits items j through l above, is subject to all of the provisions of this section applicable to complete presentations.

Appendix B

Training and Proficiency, Planning, and Procedures Applicable to Compilations

.69

Training and Proficiency

    1. The practitioner should be familiar with the guidelines for the preparation and presentation of prospective financial statements. The guidelines are contained in the AICPA Audit and Accounting Guide Guide for Prospective Financial Information.

    2. The practitioner should possess or obtain a level of knowledge of the industry and the accounting principles and practices of the industry in which the entity operates or will operate that will enable him or her to compile prospective financial statements that are in appropriate form for an entity operating in that industry.

Planning the Compilation Engagement

    3. To compile the prospective financial statements of an existing entity, the practitioner should obtain a general knowledge of the nature of the entity’s business transactions and the key factors upon which its future financial results appear to depend. He or she should also obtain an understanding of the accounting principles and practices of the entity to determine whether they are comparable to those used within the industry in which the entity operates.

    4. To compile the prospective financial statements of a proposed entity, the practitioner should obtain knowledge of the proposed operations and the key factors upon which its future results appear to depend and that have affected the performance of entities in the same industry.

Compilation Procedures

    5. In a compilation of prospective financial statements the practitioner should perform the following, where applicable.

  1. Establish an understanding with the client regarding the services to be performed. The understanding should include the objectives of the engagement, the client’s responsibilities, the practitioner’s responsibilities, and limitations of the engagement. The practitioner should document the understanding in the working papers, preferably through a written communication with the client. If the practitioner believes an understanding with the client has not been established, he or she should decline to accept or perform the engagement.
  2. Inquire about the accounting principles used in the preparation of the prospective financial statements.
    (1) For existing entities, compare the accounting principles used to those used in the preparation of previous historical financial statements and inquire whether such principles are the same as those expected to be used in the historical financial statements covering the prospective period.
    (2) For entities to be formed or entities formed that have not commenced operations, compare specialized industry accounting principles used, if any, to those typically used in the industry. Inquire whether the accounting principles used for the prospective financial statements are those that are expected to be used when or if the entity commences operations.
  3. Ask how the responsible party identifies the key factors and develops its assumptions.
  4. List, or obtain a list of the responsible party’s significant assumptions providing the basis for the prospective financial statements and consider whether there are any obvious omissions in light of the key factors upon which the prospective results of the entity appear to depend.
  5. Consider whether there appear to be any obvious internal inconsistencies in the assumptions.
  6. Perform or test the mathematical accuracy of the computations that translate the assumptions into prospective financial statements.
  7. Read the prospective financial statements, including the summary of significant assumptions, and consider whether—
    (1) The statements, including the disclosures of assumptions and accounting policies, appear to be not presented in conformity with the AICPA presentation guidelines for prospective financial statements. fn 1
    (2) The statements, including the summary of significant assumptions, appear to be not obviously inappropriate in relation to the practitioner’s knowledge of the entity and its industry and, for the following:

        (a) Financial forecast, the expected conditions and course of action in the prospective period

        (b) Financial projection, the purpose of the presentation
  8. If a significant part of the prospective period has expired, inquire about the results of operations or significant portions of the operations (such as sales volume), and significant changes in financial position, and consider their effect in relation to the prospective financial statements. If historical financial statements have been prepared for the expired portion of the period, the practitioner should read such statements and consider those results in relation to the prospective financial statements.
  9. Confirm his or her understanding of the statements (including assumptions) by obtaining written representations from the responsible party. Because the amounts reflected in the statements are not supported by historical books and records but rather by assumptions, the practitioner should obtain representations in which the responsible party indicates its responsibility for the assumptions. The representations should be signed by the responsible party at the highest level of authority who the practitioner believes is responsible for and knowledgeable, directly or through others, about matters covered by the representations.
    (1) For a financial forecast, the representations should include the responsible party’s assertion that the financial forecast presents, to the best of its knowledge and belief, the expected financial position, results of operations, and cash flows for the forecast period and that the forecast reflects the responsible party’s judgment, based on present circumstances, of the expected conditions and its expected course of action. The representations should also include a statement that the forecast is presented in conformity with guidelines for presentation of a forecast established by the American Institute of Certified Public Accountants. The representations should also include a statement that the assumptions on which the forecast is based are reasonable. If the forecast contains a range, the representation should also include a statement that, to the best of the responsible party’s knowledge and belief, the item or items subject to the assumption are expected to actually fall within the range and that the range was not selected in a biased or misleading manner.
    (2) For a financial projection, the representations should include the responsible party’s assertion that the financial projection presents, to the best of its knowledge and belief, the expected financial position, results of operations, and cash flows for the projection period given the hypothetical assumptions, and that the projection reflects its judgment, based on present circumstances, of expected conditions and its expected course of action given the occurrence of the hypothetical events. The representations should also (i) identify the hypothetical assumptions and describe the limitations on the usefulness of the presentation, (ii) state that the assumptions are appropriate, (iii) indicate if the hypothetical assumptions are improbable, and (iv) if the projection contains a range, include a statement that, to the best of the responsible party’s knowledge and belief, given the hypothetical assumptions, the item or items subject to the assumption are expected to actually fall within the range and that the range was not selected in a biased or misleading manner. The representations should also include a statement that the projection is presented in conformity with guidelines for presentation of a projection established by the American Institute of Certified Public Accountants.
  10. Consider, after applying the above procedures, whether he or she has received representations or other information that appears to be obviously inappropriate, incomplete, or otherwise misleading and, if so, attempt to obtain additional or revised information. If he or she does not receive such information, the practitioner should ordinarily withdraw from the compilation engagement. fn 2 (Note that the omission of disclosures, other than those relating to significant assumptions, would not require the practitioner to withdraw; see paragraph .26.)

Appendix C

Training and Proficiency, Planning, and Procedures Applicable to Examinations

.70

Training and Proficiency

    1. The practitioner should be familiar with the guidelines for the preparation and presentation of prospective financial statements. The guidelines are contained in the AICPA Audit and Accounting Guide Guide for Prospective Financial Information.

    2. The practitioner should possess or obtain a level of knowledge of the industry and the accounting principles and practices of the industry in which the entity operates or will operate that will enable him or her to examine prospective financial statements that are in appropriate form for an entity operating in that industry.

Planning an Examination Engagement

    3. Planning the examination engagement involves developing an overall strategy for the expected scope and conduct of the engagement. To develop such a strategy, the practitioner needs to have sufficient knowledge to enable him or her to adequately understand the events, transactions, and practices that, in his or her judgment, may have a significant effect on the prospective financial statements.

    4. Factors to be considered by the practitioner in planning the examination include the following:

  1. The accounting principles to be used and the type of presentation
  2. The anticipated level of attestation risk related to the prospective financial statements fn 1
  3. Preliminary judgments about materiality levels
  4. Items within the prospective financial statements that are likely to require revision or adjustment
  5. Conditions that may require extension or modification of the practitioner’s examination procedures
  6. Knowledge of the entity’s business and its industry
  7. The responsible party’s experience in preparing prospective financial statements
  8. The length of the period covered by the prospective financial statements
  9. The process by which the responsible party develops its prospective financial statements

    5. The practitioner should obtain knowledge of the entity’s business, accounting principles, and the key factors upon which its future financial results appear to depend. The practitioner should focus on areas such as the following:

  1. The availability and cost of resources needed to operate (Principal items usually include raw materials, labor, short-term and long-term financing, and plant and equipment.)
  2. The nature and condition of markets in which the entity sells its goods or services, including final consumer markets if the entity sells to intermediate markets
  3. Factors specific to the industry, including competitive conditions, sensitivity to economic conditions, accounting policies, specific regulatory requirements, and technology
  4. Patterns of past performance for the entity or comparable entities, including trends in revenue and costs, turnover of assets, uses and capacities of physical facilities, and management policies

Examination Procedures

    6. The practitioner should establish an understanding with the responsible party regarding the services to be performed. The understanding should include the objectives of the engagement, the responsible party’s responsibilities, the practitioner’s responsibilities, and limitations of the engagement. The practitioner should document the understanding in the working papers, preferably through a written communication with the responsible party. If the practitioner believes an understanding with the responsible party has not been established, he or she should decline to accept or perform the engagement. If the responsible party is different than the client, the practitioner should establish the understanding with both the client and the responsible party, and the understanding also should include the client’s responsibilities.

    7. The practitioner’s objective in an examination of prospective financial statements is to accumulate sufficient evidence to restrict attestation risk to a level that is, in his or her professional judgment, appropriate for the level of assurance that may be imparted by his or her examination report. In a report on an examination of prospective financial statements, the practitioner provides assurance only about whether the prospective financial statements are presented in conformity with AICPA presentation guidelines and whether the assumptions provide a reasonable basis for management’s forecast, or a reasonable basis for management’s projection given the hypothetical assumptions. He or she does not provide assurance about the achievability of the prospective results because events and circumstances frequently do not occur as expected and achievement of the prospective results is dependent on the actions, plans, and assumptions of the responsible party.

    8. In his or her examination of prospective financial statements, the practitioner should select from all available procedures—that is, procedures that assess inherent and control risk and restrict detection risk—any combination that can restrict attestation risk to such an appropriate level. The extent to which examination procedures will be performed should be based on the practitioner’s consideration of the following:

  1. The nature and materiality of the information to the prospective financial statements taken as a whole
  2. The likelihood of misstatements
  3. Knowledge obtained during current and previous engagements
  4. The responsible party’s competence with respect to prospective financial statements
  5. The extent to which the prospective financial statements are affected by the responsible party’s judgment, for example, its judgment in selecting the assumptions used to prepare the prospective financial statements
  6. The adequacy of the responsible party’s underlying data

    9. The practitioner should perform those procedures he or she considers necessary in the circumstances to report on whether the assumptions provide a reasonable basis for the following.

  1. Financial forecast. The practitioner can form an opinion that the assumptions provide a reasonable basis for the forecast if the responsible party represents that the presentation reflects, to the best of its knowledge and belief, its estimate of expected financial position, results of operations, and cash flows for the prospective period fn 2 and the practitioner concludes, based on his or her examination, (i) that the responsible party has explicitly identified all factors expected to materially affect the operations of the entity during the prospective period and has developed appropriate assumptions with respect to such factors fn 3 and (ii) that the assumptions are suitably supported.
  2. Financial projection given the hypothetical assumptions. The practitioner can form an opinion that the assumptions provide a reasonable basis for the financial projection given the hypothetical assumptions if the responsible party represents that the presentation reflects, to the best of its knowledge and belief, expected financial position, results of operations, and cash flows for the prospective period given the hypothetical assumptions fn 4 and the practitioner concludes, based on his or her examination, that:
    (1) The responsible party has explicitly identified all factors that would materially affect the operations of the entity during the prospective period if the hypothetical assumptions were to materialize and has developed appropriate assumptions with respect to such factors and
    (2) The other assumptions are suitably supported given the hypothetical assumptions. However, as the number and significance of the hypothetical assumptions increase, the practitioner may not be able to satisfy himself or herself about the presentation as a whole by obtaining support for the remaining assumptions.

    10. The practitioner should evaluate the support for the assumptions.

  1. Financial forecast—The practitioner can conclude that assumptions are suitably supported if the preponderance of information supports each significant assumption.
  2. Financial projection—In evaluating support for assumptions other than hypothetical assumptions, the practitioner can conclude that they are suitably supported if the preponderance of information supports each significant assumption given the hypothetical assumptions. The practitioner need not obtain support for the hypothetical assumptions, although he or she should consider whether they are consistent with the purpose of the presentation.

    11. In evaluating the support for assumptions, the practitioner should consider—

  1. Whether sufficient pertinent sources of information about the assumptions have been considered. Examples of external sources the practitioner might consider are government publications, industry publications, economic forecasts, existing or proposed legislation, and reports of changing technology. Examples of internal sources are budgets, labor agreements, patents, royalty agreements and records, sales backlog records, debt agreements, and actions of the board of directors involving entity plans.
  2. Whether the assumptions are consistent with the sources from which they are derived.
  3. Whether the assumptions are consistent with each other.
  4. Whether the historical financial information and other data used in developing the assumptions are sufficiently reliable for that purpose. Reliability can be assessed by inquiry and analytical or other procedures, some of which may have been completed in past audits or reviews of the historical financial statements. If historical financial statements have been prepared for an expired part of the prospective period, the practitioner should consider the historical data in relation to the prospective results for the same period, where applicable. If the prospective financial statements incorporate such historical financial results and that period is significant to the presentation, the practitioner should make a review of the historical information in conformity with the applicable standards for a review. fn 5
  5. Whether the historical financial information and other data used in developing the assumptions are comparable over the periods specified or whether the effects of any lack of comparability were considered in developing the assumptions.
  6. Whether the logical arguments or theory, considered with the data supporting the assumptions, are reasonable.

    12. In evaluating the preparation and presentation of the prospective financial statements, the practitioner should perform procedures that will provide reasonable assurance as to the following.

  1. The presentation reflects the identified assumptions.
  2. The computations made to translate the assumptions into prospective amounts are mathematically accurate.
  3. The assumptions are internally consistent.
  4. Accounting principles used in the—
    (1) Financial forecast are consistent with the accounting principles expected to be used in the historical financial statements covering the prospective period and those used in the most recent historical financial statements, if any.
    (2) Financial projection are consistent with the accounting principles expected to be used in the prospective period and those used in the most recent historical financial statements, if any, or that they are consistent with the purpose of the presentation. fn 6
  5. The presentation of the prospective financial statements follows the AICPA guidelines applicable for such statements. fn 7
  6. The assumptions have been adequately disclosed based on AICPA presentation guidelines for prospective financial statements.

    13. The practitioner should consider whether the prospective financial statements, including related disclosures, should be revised because of any of the following:

  1. Mathematical errors
  2. Unreasonable or internally inconsistent assumptions
  3. Inappropriate or incomplete presentation
  4. Inadequate disclosure

    14. The practitioner should obtain written representations from the responsible party acknowledging its responsibility for both the presentation and the underlying assumptions. The representations should be signed by the responsible party at the highest level of authority who the practitioner believes is responsible for and knowledgeable, directly or through others in the organization, about the matters covered by the representations. Paragraph .69, subparagraph 5i describes the specific representations to be obtained for a financial forecast and a financial projection. See paragraph .43 for guidance on the form of report to be rendered if the practitioner is not able to obtain the required representations.

Footnotes (AT Section 301— Financial Forecasts and Projections):

fn 1 However, paragraph .59 permits an exception to this for certain types of budgets.

fn 2 Some of these services may not be appropriate if the practitioner is to be named as the person reporting on an examination in a filing with the Securities and Exchange Commission (SEC). SEC Release Nos. 33-5992 and 34-15305, “Disclosure of Projections of Future Economic Performance,” state that for prospective financial statements filed with the commission, “a person should not be named as an outside reviewer if he actively assisted in the preparation of the projection.”

fn 3 The objective of pro forma financial information is to show what the significant effects on the historical financial information might have been had a consummated or proposed transaction (or event) occurred at an earlier date. Although the transaction in question may be prospective, this section does not apply to such presentations because they are essentially historical financial statements and do not purport to be prospective financial statements. See section 401, Reporting on Pro Forma Financial Information.

fn 4 AU section 623, Special Reports, discusses comprehensive bases of accounting other than GAAP.

fn 5 See Appendix B [paragraph .69], subparagraph 5, for the required procedures.

fn 6 AICPA presentation guidelines are detailed in the AICPA Audit and Accounting Guide Guide for Prospective Financial Information.

fn 7 The practitioner need not withdraw from the engagement if the effect of such information on the prospective financial statement does not appear to be material.

fn 8 The forms of reports provided in this section are appropriate whether the presentation is based on GAAP or on another comprehensive basis of accounting.

fn 9 When the presentation is summarized as discussed in Appendix A [paragraph .68], this sentence might read, “We have compiled the accompanying summarized forecast of XYZ Company as of December 31, 20XX, and for the year then ending in accordance with attestation standards established by the American Institute of Certified Public Accountants.”

fn 10 If the responsible party is other than management, the references to management in the standard reports provided in this section should be changed to refer to the party who assumes responsibility for the assumptions.

fn 11 When the presentation is summarized as discussed in Appendix A [paragraph .68], this sentence might read as follows.

We have compiled the accompanying summarized projection of XYZ Company as of December 31, 20XX, and for the year then ending in accordance with attestation standards established by the American Institute of Certified Public Accountants.

fn 12 In making a judgment about whether he or she is independent, the practitioner should be guided by the AICPA Code of Professional Conduct. Also, see the Auditing Interpretation “Applicability of Guidance on Reporting When Not Independent," (AU section 9504.19–.22).

fn 13 The practitioner’s responsibility with respect to those historical financial statements upon which he or she is not engaged to perform a professional service is described in AU section 504, Association With Financial Statements, in the case of public entities, and Statement on Standards for Accounting and Review Services (SSARS) No. 1, Compilation and Review of Financial Statements, paragraph 3 [AR section 100.03], in the case of nonpublic entities. [Footnote revised, November 2002, to reflect conforming changes necessary due to the issuance of Statement on Standards for Accounting and Review Services No. 9.]

fn 14 AU section 552, Reporting on Condensed Financial Statements and Selected Financial Data, discusses the practitioner’s report where summarized financial statements are derived from audited statements that are not included in the same document.

fn 15 However, the practitioner may provide assurance on tax matters in order to comply with the requirements of regulations governing practice before the Internal Revenue Service (IRS) contained in 31 CFR pt. 10 (Treasury Department Circular No. 230).

fn 16 AICPA presentation guidelines are detailed in the AICPA Audit and Accounting Guide Guide for Prospective Financial Information.

fn 17 The practitioner’s report need not comment on the consistency of the application of accounting principles as long as the presentation of any change in accounting principles is in conformity with AICPA presentation guidelines as detailed in the AICPA Audit and Accounting Guide Guide for Prospective Financial Information.

fn 18 When the presentation is summarized as discussed in Appendix A [paragraph .68], this sentence might read, “We have examined the accompanying summarized forecast of XYZ Company as of December 31, 20XX, and for the year then ending.”

fn 19 When the presentation is summarized as discussed in Appendix A [paragraph .68], this sentence might read, “We have examined the accompanying summarized projection of XYZ Company as of December 31, 20XX, and for the year then ending.”

fn 20 Paragraphs .38 through .44 describe circumstances in which the practitioner’s standard report on prospective financial statements may require modification. The guidance for modifying the practitioner’s standard report is generally applicable to partial presentations. Also, depending on the nature of the presentation, the practitioner may decide to disclose that the partial presentation is not intended to be a presentation of financial position, results of operations, or cash flows. Illustrative reports on partial presentations may be found in the AICPA Audit and Accounting Guide Guide for Prospective Financial Information.

fn 21 However, the practitioner may issue the standard examination report on a financial forecast filed with the SEC that meets the presentation requirements of article XI of Regulation S-X.

fn 22 An example of a measurement departure is the failure to capitalize a capital lease in a forecast where the historical financial statements for the prospective period are expected to be presented in conformity with GAAP.

fn 23 The practitioner’s responsibility with respect to those historical financial statements upon which he or she is not engaged to perform a professional service is described in AU section 504, in the case of public entities, and SSARS No. 1, paragraph 3 [AR section 100.03], in the case of nonpublic entities. [Footnote revised, November 2002, to reflect conforming changes necessary due to the issuance of Statement on Standards for Accounting and Review Services No. 9.]

fn 24 AU section 552 discusses the practitioner’s report for summarized financial statements derived from audited financial statements that are not included in the same document.

fn 25 Although the entity referred to in the report is a hospital, the form of report is also applicable to other entities such as hotels or stadiums. Also, although the illustrated report format and language should not be departed from in any significant way, the language used should be tailored to fit the circumstances that are unique to a particular engagement (for example, the description of the proposed capital improvement program, paragraph c; the proposed financing of the program, paragraphs b and d; the specific procedures applied by the practitioner, paragraph e; and any explanatory comments included in emphasis-of-a-matter paragraphs, paragraph i, which deals with general matter; and paragraph j, which deals with specific matters).

fn 26 Practitioners should follow the guidance in AU section 634, Letters for Underwriters and Certain Other Requesting Parties, when requested to perform agreed-upon procedures on a forecast and report thereon in a letter for an underwriter.

fn 27 For example, accounting principles and other presentation criteria as discussed in chapter 8, “Presentation Guidelines,” of the AICPA Audit and Accounting Guide Guide for Prospective Financial Information.

fn 28 In some cases, restricted-use reports filed with regulatory agencies are required by law or regulation to be made available to the public as a matter of public record. Also, a regulatory agency as part of its oversight responsibility for an entity may require access to restricted-use reports in which they are not named as a specified party. (See section 101.79.)

fn 29 AU section 550 applies only to such prospective financial statements contained in (a) annual reports to holders of securities or beneficial interests, annual reports of organizations for charitable or philanthropic purposes distributed to the public, and annual reports filed with regulatory authorities under the Securities Exchange Act of 1934 or (b) other documents to which the auditor, at the client’s request, devotes attention. AU section 550 does not apply when the historical financial statements and report appear in a registration statement filed under the Securities Act of 1933 [in which case, see AU section 711, Filings Under Federal Securities Statutes].

fn * Note: This Appendix describes the minimum items that constitute a presentation of a financial forecast or a financial projection, as specified in the AICPA Audit and Accounting Guide Guide for Prospective Financial Information. Complete presentation guidelines for entities that choose to issue prospective financial statements, together with illustrative presentations, are included in the Guide. The Guide also prescribes presentation guidelines for partial presentations.

fn 1 The details of each statement may be summarized or condensed so that only the major items in each are presented. The usual footnotes associated with historical financial statements need not be included as such. However, significant assumptions and accounting policies should be disclosed.

fn 2 Similar types of financial information should be presented for entities for which these terms do not describe operations. Further, similar items should be presented if a comprehensive basis of accounting other than GAAP is used to present the prospective financial statements. For example, if the cash basis were used, item a would be cash receipts.

fn 3 The responsible party should disclose significant cash flows and other significant changes in balance sheet accounts during the period. However, neither a balance sheet nor a statement of cash flows, as described in FASB Statement No. 95, Statement of Cash Flows, is required. Furthermore, none of the specific captions or disclosures required by FASB Statement No. 95 is required. Significant changes disclosed will depend on the circumstances; however, such disclosures will often include cash flows from operations. See the AICPA Audit and Accounting Guide Guide for Prospective Financial Information, Exhibits 9.07 and 9.11, for illustrations of alternate methods of presenting significant cash flows.

fn 1 Presentation guidelines for entities that issue prospective financial statements are set forth and illustrated in the AICPA Audit and Accounting Guide Guide for Prospective Financial Information.

fn 2 The practitioner need not withdraw from the engagement if the effect of such information on the prospective financial statements does not appear to be material.

fn 1 Attestation risk is the risk that the practitioner may unknowingly fail to appropriately modify his or her examination report on prospective financial statements that are materially misstated, that is, that are not presented in conformity with AICPA presentation guidelines or have assumptions that do not provide a reasonable basis for management’s forecast, or management’s projection given the hypothetical assumptions. It consists of (a) the risk (consisting of inherent risk and control risk) that the prospective financial statements contain errors that could be material and (b) the risk (detection risk) that the practitioner will not detect such errors.

fn 2 If the forecast contains a range, the representation should also include a statement that, to the best of the responsible party’s knowledge and belief, the item or items subject to the assumption are expected to actually fall within the range and that the range was not selected in a biased or misleading manner.

fn 3 An attempt to list all assumptions is inherently not feasible. Frequently, basic assumptions that have enormous potential impact are considered to be implicit, such as conditions of peace and absence of natural disasters.

fn 4 If the projection contains a range, the representation should also include a statement that, to the best of the responsible party’s knowledge and belief, given the hypothetical assumptions, the item or items subject to the assumption are expected to actually fall within the range and that the range was not selected in a biased or misleading manner.

fn 5 If the entity is an SEC registrant or non-SEC registrant that makes a filing with a regulatory agency in preparation for a public offering or listing, the practitioner should perform the procedures in AU section 722, Interim Financial Information, paragraphs .13 through .19. If the entity is nonpublic, the practitioner should perform the procedures in SSARS No. 1, Compilation and Review of Financial Statements, paragraphs 24 through 33 [AR section 100.24–.33]. [Footnote revised, November 2002, to reflect conforming changes necessary due to the issuance of Statement on Auditing Standards No. 100 and Statement on Standards for Accounting and Review Services No. 9.]

fn 6 The accounting principles used in a financial projection need not be those expected to be used in the historical financial statements for the prospective period if use of different principles is consistent with the purpose of the presentation.

fn 7 Presentation guidelines for entities that issue prospective financial statements are set forth and illustrated in the AICPA Audit and Accounting Guide Guide for Prospective Financial Information.

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