Choosing the basis of accounting for a compilation
What basis of accounting compiled financial information can use under ISRS 4410 (Revised), and when the compiler must tell the client it will not do.
By Achekam · · 5 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
A client asks for "a set of accounts for the bank". Another wants figures for a grant application, a third for a shareholder who is selling out, a fourth simply wants to know whether the business made money. All four are compilation engagements, and none of them necessarily calls for the same basis of accounting.
The compilation standard gives practitioners real room to choose. It also expects them to choose well, and to say so when the client's choice would mislead. This article covers where the basis comes from, how much flexibility there really is, and how to handle a basis that will not work.
Mandated frameworks, and when none applies
Sometimes the choice is made for you. Company law, a regulator, a funder's agreement or a lender's facility can prescribe the framework the statements must follow. Where that is so, the compiler's job is to apply it properly, and the first step is to check what applies to that entity in its own country, whether South Africa, Nigeria or Kenya.
Often, though, nothing is mandated: management accounts for the owner, a cash-based summary for a funder, a statement of assets and liabilities for a family settlement. That is where judgement comes in.
Flexibility without "anything goes"
IFAC's article on ISRS 4410 (Revised) notes that the standard allows flexibility to use an appropriate basis of accounting when a framework is not mandated, but does not permit an "anything goes" approach. The same article explains that a compilation engagement can be tailored to needs such as preparing financial information for bank lenders or grant funders, in connection with a change of ownership, or for internal use by management. IFAC's discussion of ISRS 4410 as a standard for today's compilation engagements sets these points out in more detail.
The breadth is intentional. According to the IAASB's 2012 news release on the revised standard, the IAASB's then chairman, Prof. Arnold Schilder, said ISRS 4410 (Revised) applies to entities of all sizes and to all forms of historical financial information. A cash receipts and payments statement for a burial society and a full set of statements for a trading company can both be compilations.
"Appropriate" is the limiting word. A basis is appropriate when it gives the intended users what they need for the decision they are making, and does not lead them to believe something untrue. A cash basis can suit an internal summary and still be wholly wrong for a lender who needs to know what the business owes.
Understanding the entity and the intended users
IFAC explains that ISRS 4410 (Revised) requires the practitioner to have sufficient understanding of both the entity and the basis of accounting to advise the client if the selected basis is inappropriate for the engagement. That understanding has three parts:
- The entity: what it does, how it earns its money, its significant balances and obligations, and anything unusual such as related-party loans or long-term contracts.
- The users: who will read the compiled information, for what decision, and what they will assume it shows.
- The basis: what it recognises, what it leaves out, and whether those omissions matter to these users.
Record the answers before the work starts. They are the reason the basis is right, and they are what a reviewer, or a court, will ask about if a user later says they were misled.
Building the statements and choosing the report level in Achekam
Where the compiled information is a set of annual financial statements, Achekam's Studio builds a draft from a mapped trial balance, with every figure calculated in code: the directors' report, the four primary statements, policies, notes and a detailed income statement. The practitioner's report follows the level chosen for the engagement, audit, independent review, compilation or none, so a compilation carries compilation wording rather than borrowed review language.
That matters because of what the report must say. IFAC explains that the practitioner's report required by ISRS 4410 (Revised) identifies the compiled information, sets out the respective roles of management and the practitioner, and states that no assurance is given. Choosing the compilation level deliberately, and checking the report reads that way, keeps users from mistaking the work for something it is not.
Own policies and custom lines
A basis other than full IFRS or IFRS for SMEs usually needs its own policy wording and its own presentation. The Studio includes standard accounting policy wording based on IFRS for SMEs, labelled for review before issue, and staff can write their own policies. For a special-purpose basis, write the policies to describe what was actually done, especially what was left out, rather than adapting standard wording that no longer fits.
Presentation can follow. A firm can add its own statement lines and groups and change the wording of any row title, and later builds keep those choices; each custom line still totals into a standard line. Notes take their figures from the mapped trial balance, and anything the trial balance does not hold is left as "[to be completed]", which is a useful prompt to ask the client rather than guess. For framework choices more generally, see choosing a reporting framework.
Telling the client the basis will not do
When the compiler concludes that the client's chosen basis is inappropriate, say so early and in writing:
- Explain who the users are and what they will assume the information shows.
- Explain what the chosen basis leaves out, and why that would mislead them.
- Recommend a basis that would serve them, and what it would take to apply it.
- Record the client's decision.
If the client insists on a basis the compiler believes would mislead the intended users, the compiler should not put its name to the result. Agreeing the basis at the start, in the engagement letter, avoids most of these conversations; compilation engagements under ISRS 4410 covers the letter and the rest of the standard.
Flexibility is one of the most useful features of the compilation standard. Used with a clear view of the users, it lets a small practice give each client exactly what its readers need, and no more.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
