Financial Accounting Description Accountants_12 potx

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Management has identified all key factors expected to affect the entity during the prospective
period.
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Management has developed assumptions for each key factor.
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The assumptions are suitably supported.
To determine whether management has identified all key factors and developed assumptions for
each one, the accountant needs to possess, or obtain during the engagement, an appropriate knowl-
edge of the industry in which the entity will operate and the accounting principles and practices of
that industry.
The accountant can conclude that the assumptions are suitably supported if the preponderance of
information supports each significant assumption. Preponderance here does not imply a statistical
majority of information. A preponderance exists if the weight of available information tends to sup-
port the assumption. The AICPA Guide states, however, “Because of the judgments involved in de-
veloping assumptions, different people may arrive at somewhat different but equally reasonable
assumptions based on the same information.”
The accountant need not obtain support for the hypothetical assumptions in a projection, since
they are not necessarily expected to occur. For a projection, the accountant considers whether the
hypothetical assumptions are consistent with the purpose of the projection and whether the other
assumptions are suitably supported given the hypothetical assumption.
In evaluating the support for the assumptions, the accountant considers six factors:
1. Whether sufficient pertinent sources of information, both internal and external to the entity,
have been considered
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 assump-
tions are sufficiently reliable for that purpose
5. Whether the historical 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 assump-
tions, are reasonable
Support for assumptions may include market surveys, engineering studies, general economic in-
dicators, industry statistics, trends and patterns developed from an entity’s operating history, and in-
ternal data and analysis, accompanied by their supporting logical argument or theory.
The accountant determines whether the assumptions provide a reasonable basis for the statements
but cannot conclude that any outcome is expected because (1) realization of prospective results may
depend on management’s intentions, which cannot be examined; (2) there is substantial uncertainty in
the assumptions; (3) some of the information accumulated about an assumption may appear contra-
dictory; and (4) different but similarly reasonable assumptions concerning a particular matter might
be derived from common information.
(iii) Evaluating Presentation. The accountant compares the presentation of the prospective finan-
cial statements to the AICPA presentation guidelines [see Subsections 38.4(b) and (c)].
(b) STANDARD EXAMINATION REPORT. The accountant’s standard report on an examination
of prospective financial statements includes six statements:
1. A title that includes the word “independent”
2. An identification of the prospective financial statements presented
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PROSPECTIVE FINANCIAL STATEMENTS
3. An identification of the responsible party and a statement that the prospective financial state-
ments are the responsibility of the responsible party
4. A statement that the accountant’s responsibility is to express an opinion on the prospective fi-
nancial statements based on the examination
5. A statement that the examination of the prospective financial statements was conducted in ac-
cordance with attestation standards established by the AICPA and, accordingly, included such
procedures as the accountant considered necessary in the circumstances
6. A statement that the accountant believes that the examination provides a reasonable basis for
the opinion

7. The accountant’s opinion that the prospective financial statements are presented in confor-
mity with AICPA presentation guidelines and that the underlying assumptions provide a rea-
sonable basis for the forecast or a reasonable basis for the projection given the hypothetical
assumptions
8. A caveat that the prospective results may not be achieved
9. A statement that the accountant 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 accountant’s firm
11. The date of the examination report
The standard report on the examination of a financial forecast is as follows:
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 end-
ing. 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 Ameri-
can Institute of Certified Public Accountants and, accordingly, included such procedures as we con-
sidered 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 presenta-
tion of a forecast established by the American Institute of Certified Public Accountants, and the un-
derlying 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 responsi-
bility to update this report for events and circumstances occurring after the date of this report.
[Signature]
[Date]
* If the presentation is summarized, the opening sentence of the report would begin, “We have ex-
amined the accompanying summarized forecast of XYZ Company as of December 31, 20X1 ”

The standard report on the examination of a financial projection is as follows:
Independent Accountant’s Report
We have examined the accompanying projected balance sheet, statements of income, retained earn-
ings, 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 projection, which was prepared for [state spe-
cial 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 Amer-
ican Institute of Certified Public Accountants and, accordingly, included such procedures as we
38.7 EXAMINATION SERVICES 38
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considered necessary to evaluate both the assumptions used by management and the preparation
and presentation of the projection. We believe our examination provides a reasonable basis for our
opinion.
In our opinion, the accompanying projection is presented in conformity with guidelines for presen-
tation 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 hy-
pothetical 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”]. How-
ever, 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 mater-
ial. 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 are not in-
tended to be and should not be used by anyone other than these specified parties.
[Signature]
[Date]

* If the presentation is summarized, the opening sentence of the report would begin, “We have ex-
amined the accompanying summarized projection of XYZ Company as of December 31,
20X1 ”
When the prospective financial statements are presented as a range, the report also includes a sep-
arate paragraph describing the range [see Subsection 38.6(d) for an example].
(c) MODIFIED EXAMINATION REPORTS. There are four types of modified examination
reports:
1. A qualified report, used when the statements depart from the AICPA presentation guidelines
but the deficiency does not affect the assumptions (although if the matter is highly material,
the accountant may issue an adverse report)
2. An adverse report, used when the statements fail to disclose significant assumptions or when
the assumptions do not provide a reasonable basis for the presentation
3. A disclaimer used when the accountant is precluded from applying procedures considered
necessary in the circumstances
4. A reference to another accountant, used when another accountant examines the prospective fi-
nancial statements of a significant portion of the entity, such as a major subsidiary
(i) Qualified Opinion. The accountant issues a qualified opinion if there is a material presenta-
tion deficiency that does not affect the assumptions. The following is an examination report qualified
because of a presentation deficiency:
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 prepara-
tion and presentation of the forecast. We believe our examination provides a reasonable basis for
our opinion.
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PROSPECTIVE FINANCIAL STATEMENTS
The forecast does not disclose significant accounting policies. Disclosure of such policies is re-
quired 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 presentation of a forecast established by the American Institute of Certified Public
Accountants, and the underlying assumptions provide a reasonable basis for management’s fore-
cast. 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 mater-
ial. We have no responsibility to update this report for events and circumstances occurring after the
date of this report.
[Signature]
[Date]
(ii) Adverse Report. The accountant who believes a significant assumption is unsupported or not
disclosed issues an adverse opinion. An adverse opinion is also issued when the accountant believes
that a departure from the presentation guidelines not involving the assumptions is serious enough to
warrant it. The following is an example of an adverse report issued by the accountant because an as-
sumption was unreasonable:
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 Ameri-
can Institute of Certified Public Accountants and, accordingly, included such procedures as we con-
sidered necessary to evaluate both the assumptions used by management and the preparation and
presentation of the forecast. We believe 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 con-
tracts 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 an-
other 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 pre-
sentation of a financial forecast established by the American Institute of Certified Public Accoun-
tants 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 and circumstances occurring after the date of this report.
[Signature]
[Date]
There is no caveat about actual results differing from those forecasted since the accountant be-
lieves the forecast assumptions to be unreasonable.
(iii) Disclaimer.
The accountant who cannot apply all the procedures deemed necessary to support
an opinion on the statements issues a disclaimer. An example of a disclaimer follows:
Independent Accountant’s Report
We were engaged to examine the accompanying forecasted balance sheet, statements of income, re-
tained 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.
38.7 EXAMINATION SERVICES 38
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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% of fore-
casted 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 as-
sumption 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 re-
spect 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]
In a disclaimer there is no caveat about differences between actual and forecasted assumptions
since the accountant is not satisfied about the reasonableness of the assumptions.
Notwithstanding his scope limitation, if the accountant is aware of material deficiencies in the
forecast, those deficiencies should be discussed in the disclaimer.
(iv) Divided Responsibility. When another accountant is involved in the examination, the princi-
pal accountant may refer to the work of the other accountant as a basis, in part, for the principal ac-
countant’s own report. The reference is done in essentially the same way divided-responsibility
reports are done for audits of historical financial statements.
(d) INDEPENDENCE. The accountant who examines prospective financial statements is required
to be independent. If not, the accountant generally issues a compilation report rather than disclaim an
opinion after the examination.
38.8 AGREED-UPON PROCEDURES
(a) SCOPE OF SERVICE. An engagement to apply agreed-upon procedures to prospective
financial statements involves applying the procedures specified by the users of the statements
and reporting the results of their application. The level of service is flexible; the accountant’s
report may only be distributed to the users who specified the procedures. Thus, it is a limited-
distribution service.
(b) PROCEDURES. The procedures applied in an engagement may be limited or extensive, de-
pending on the users’ needs. For example, the service may consist of procedures below the level
done in a compilation (such as mere assembly) or may be similar to those done in an examination.
Alternatively, the service may consist of different levels of procedures applied to different amounts

in the statements, such as a high level of work done on forecasted sales and very limited procedures
on forecasted expenses.
An accountant may perform an agreed-upon procedures attest engagement on prospective fi-
nancial statements provided that the following conditions are met:
1. The accountant is independent.
2. The accountant and the specified parties agree upon the procedures performed or to be per-
formed by the accountant. Generally, the accountant’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 a financial forecast does not constitute a
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PROSPECTIVE FINANCIAL STATEMENTS
procedure sufficient to permit an accountant to report on the results of applying agreed-
upon procedures.
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 speci-
fied parties.
6. Criteria to be used in the determination of findings are agreed upon between the accountant
and the specified parties.
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 ac-
countant’s report.
9. Where applicable, the accountant and the specified users agree on any agreed-upon material-
ity limits for reporting purposes.

10. Use of the report is to be restricted to the specified parties.
(c) REPORTS. The accountant’s report on the results of applying agreed-upon procedures
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 accountant’s report and the
character of the engagement
4. A statement that the procedures performed were those agreed to by the specified parties iden-
tified in the report
5. Identification of the responsible party and a statement that the prospective financial state-
ments 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 AICPA
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 to them) and related findings
9. Where applicable, a description of any agreed-upon materiality limits
10. A statement that the accountant 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 reason-
able basis for the projection given the hypothetical assumptions; and a statement that if the
accountant had performed additional procedures, other matters might have come to the ac-
countant’s 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
13. A caveat that the prospective results may not be achieved
14. A statement that the accountant assumes no responsibility to update the report for events and
circumstances occurring after the date of the report

38.8 AGREED-UPON PROCEDURES 38
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15. Where applicable, a description of the nature of the assistance provided by a specialist
16. The manual or printed signature of the accountant’s firm
17. The date of the report
The following is an example of a report on the application of agreed-upon procedures:
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 re-
spect to the forecasted balance sheet, 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 re-
sponsible 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 pro-
cedures is solely the responsibility of the specified parties. Consequently, we make no representa-
tion regarding the sufficiency of the procedures described below either for the purpose for
which this report has been requested or for any other purpose.
a. With respect to forecasted rental income, we compared the occupancy statistics about ex-
pected demand for rental of housing units used in the forecast to occupancy statistics for the
following comparable properties. Comparable properties for this purpose are defined as [de-
scribe characteristics of comparability, e.g., those located in Sample City with between xxx
and yyy rental units, rental prices within z% of those used in the forecast.]
[List comparable properties]
As a result of performing this procedure, we found occupancy statistics used in the forecast were

[describe findings].
b. We traced each amount in the forecast to underlying schedules prepared by management and
tested the arithmetical accuracy of management’s calculations of rental income, operating in-
come, and income tax expense contained thereon.
We found no differences as a result of these procedures.
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. Accord-
ingly, we do not express an opinion on whether the prospective financial statements are pre-
sented in conformity with AICPA presentation guidelines or on whether the underlying
assumptions provide a reasonable basis for the presentation. Had we performed additional pro-
cedures, 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, be-
cause 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 occur-
ring after the date of this report.
This report is intended solely for the information and use of the Boards of Directors of ABC Com-
pany and XYZ Corporation and is not intended to be and should not be used by anyone other than
these specified parties.
[Signature]
[Date]
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PROSPECTIVE FINANCIAL STATEMENTS
38.9 INTERNAL USE SERVICES
(a) SCOPE OF SERVICES. The accountant who assembles and submits or reports on prospective
financial statements for third-party use, must compile, examine, or apply agreed-upon procedures to
them. However, for internal use the accountant’s services and reports can be more flexible.
Internal use services generally are provided in the form of consulting, tax planning, or so-called
controllership services. In these types of service, the objective of the service is not to lend credibility

to the statements and there is no third-party reliance on them, so AICPA guidelines allow the accoun-
tant to structure the engagement and report to fit the circumstances.
The accountant may provide compilation, examination, or agreed-upon procedures for internal
use prospective financial statements but is not required to do so.
(b) DETERMINING WHETHER USE IS INTERNAL. The accountant may provide internal use
services if the accountant believes that third-party use is not reasonably expected. In arriving at this
belief, the accountant may rely on the oral or written representation of management, unless some-
thing comes to the accountant’s attention to contradict management’s representation.
The AICPA Guide (Section 10.02) provides the following guidelines for determining whether
out-
siders are considered third parties:
In deciding whether a party that is or reasonably might be expected to use an accountant’s report
is considered to be a third party, the accountant should consider the degree of consistency of in-
terest between [management] and the user regarding the forecast. If their interests are substan-
tially consistent (for example both the [preparer] and the user are employees of the entity about
which the forecast is made), the user would not be deemed to be a third party. On the other hand,
where the interests of the [preparer] and user are potentially inconsistent (for example, the [pre-
parer] is a nonowner manager and the user is an absentee owner), the user would be deemed a
third party. In some cases, this determination will require the exercise of considerable profes-
sional judgment.
(c) PROCEDURES. The procedures applied in an internal use engagement are usually based on
the nature of the engagement. They may focus on developing prospective data, or they may focus on
improving operations or financial planning with prospective data being only a by-product of the en-
gagement.
(d) REPORTS. The accountant’s report for internal use services is flexible. Such reports some-
times speak solely to the prospective financial statements, but often they focus on alternative or rec-
ommended courses of action.
The standard compilation, examination, or agreed-upon procedures reports may be issued for in-
ternal use, but often they are not used.
Reports on prospective financial statements for internal use generally take three broad forms:

plain paper, legend, and formal. Where there is a report on the statements, it may stand alone or may
be incorporated into another report, such as a consultant’s report.
(i) Plain Paper. “Plain paper” means that the accountant provides neither a report on the state-
ments nor any other written communication that accompanies them. In a plain-paper situation, there
would be nothing apparent to the reader to associate the accountant with the statements.
(ii) Legend. When an accountant’s written communication (such as a transmittal letter) accompa-
nies the prospective financial statements, the AICPA Guide (Section 22.09) requires that the accoun-
tant include (1) a caveat that prospective results may not be achieved and (2) a statement that the
prospective financial statements are for internal use only. Many accountants choose to present this as
a legend on the statement itself.
38.9 INTERNAL USE SERVICES 38
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(iii) Formal Report. The accountant may decide to issue a report on a service. However, the ac-
countant is not permitted to report on a forecast or projection, even for internal use, if it does not dis-
close the significant assumptions.
According to the AICPA Guide (Section 22.06), a report for internal use preferably:
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Is addressed to management
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Identifies the statements being reported on
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Describes the character of work performed and the degree of responsibility taken with respect
to the statements
•
Includes a caveat that the prospective results may not be achieved
•
Indicates the restrictions as to the distribution of the statements and report
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Is dated as of the date of the completion of the accountant’s procedures

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For a projection, describes the limitations on the usefulness of the presentation
The following is an example of a report on an internal use service consisting of assembly of
a forecast:
To Mr. John Doe, President
XYZ Company
We have assembled, from information provided by management, 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. We have not compiled or examined the financial forecast and ex-
press no assurance of any kind on it. Further, there will usually be differences between the forecasted
and actual results, because events and circumstances frequently do not occur as expected, and those dif-
ferences may be material. In accordance with the terms of our engagement, this report and the accom-
panying forecast are restricted to internal use and may not be shown to any third party for any purpose.
* If the presentation is summarized as discussed in Subsection 38.4(b), the first sentence would read, in part, “We have
assembled . . . the accompanying summarized forecast of XYZ Company ”
An example of a report on the assembly of a projection is as follows:
To Mr. John Doe, President
XYZ Company
We have assembled, from information provided by management, the accompanying projected balance
sheet, statements of income, retained earnings, and cash flows, and summaries of significant assump-
tions and accounting policies of XYZ Company as of December 31, 20XX,* and for the year then end-
ing. The accompanying projection and this report were prepared for [description of the special purpose,
e.g., “presentation to the Board of Directors of XYZ Company for its consideration as to whether to add
a third operating shift”]. We have not compiled or examined the financial projection and express no as-
surance of any kind on it. Further, even if [description of the hypothetical assumption, e.g., “the third
operating shift is added”], there will usually be differences between the projected and actual results, be-
cause events and circumstances frequently do not occur as expected, and those differences may be ma-
terial. In accordance with the terms of our engagement, this report and the accompanying projection are
restricted to internal use and may not be shown to any third party for any purpose.
* If the presentation is summarized as discussed in Subsection 38.4(b), the first sentence would read, in part, “We have

assembled . . . the accompanying summarized forecast of XYZ Company ”
In addition to the above, the accountant’s report on prospective financial statements for in-
ternal use would:
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PROSPECTIVE FINANCIAL STATEMENTS
1. Indicate if the accountant is not independent with respect to the client (the report would not
express any assurance on the statements if there is a lack of independence) and
2. Note any disclosures required under the presentation guidelines (see Subsection 34.4(a))
whose omission comes to the accountant’s attention (other than omitted assumptions).
The report might either describe the omitted disclosures or merely note the omission of dis-
closures in a manner such as:
This financial forecast was prepared to help you develop your personal financial plan.
Accordingly, it does not include all disclosures required by the guidelines established
by the American Institute of Certified Public Accountants for presentation of a financial
forecast.
38.10 SOURCES AND SUGGESTED REFERENCES
American Institute of Certified Public Accountants, Accounting and Review Services Committee, “Compilation
and Review of Financial Statements,” Statement on Standards for Accounting and Review Services No. 1.
AICPA, New York, 1978.
, Auditing Standards Board, “Attestation Standards: Revision and Recodification,” Statement on Stan-
dards for Attestation Engagements No. 10, AICPA, New York, 2001.
, Guide for Prospective Financial Information. AICPA, New York, 1999.
Commerce Clearing House, SEC Accounting Rules. CCH, Chicago, 1990.
Financial Accounting Standards Board, “Statement of Cash Flows,” Statement of Financial Accounting Stan-
dards No. 95. FASB, Stamford, CT, 1987.
Pallais, Don, and Holton, Stephen D., Guide to Forecasts and Projections, 3rd ed. Practitioners Publishing, Fort
Worth, TX, 1998.
38.10 SOURCES AND SUGGESTED REFERENCES 38

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CHAPTER
39
PERSONAL FINANCIAL STATEMENTS
Dennis S. Neier, CPA
Goldstein Golub Kessler LLP
Joel O. Steinberg, CPA
Goldstein Golub Kessler LLP
39.1 GUIDANCE 2
(a) Applicable Professional Standards 2
(b) Acceptance of Clients 2
(c) Establishing an Understanding
with the Client 3
(d) Client Representation Letters 3
39.2 GENERAL DESCRIPTION AND
REQUIREMENTS 3
(a) Definition 3
(b) Ownership 4
(c) Uses 4
(d) Accounting Basis 4
(e) Order of Presentation 4
39.3 ASSETS 9
(a) Estimated Current Value 9
(b) Receivables 9
(c) Marketable Securities 9
(d) Limited Partnership Interests 9
(e) Precious Metals 10
(f) Options on Assets Other than

Marketable Securities 10
(g) Life Insurance 10
(h) Closely Held Businesses 10
(i) Real Estate 11
(j) Personal Property 11
(k) Intangible Assets 11
(l) Future Interests 11
39.4 LIABILITIES 11
(a) Estimated Current Amount 11
(b) Noncancelable Commitments 12
(c) Contingent Liabilities 12
(d) Income Taxes Payable 12
39.5 PROVISION FOR INCOME
TAXES 12
(a) Definition 12
(b) Computing the Provision for
Income Taxes 13
(c) Tax Basis 13
(d) Disclaimer 13
39.6 STATEMENT OF CHANGES
IN NET WORTH 13
(a) Definition 13
(b) Uses 13
(c) Format 14
39.7 DISCLOSURES 14
39.8 COMPILATION 15
39.9 REVIEW 16
39.10 AUDITS 17
39.11 REPORTS 17
39.12 COMPILED FINANCIAL

STATEMENTS NOT EXPECTED
TO BE USED BY A THIRD
PARTY 23
39.13 SOURCES AND SUGGESTED
REFERENCES 24
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39.1 GUIDANCE
(a) APPLICABLE PROFESSIONAL STANDARDS. The authoritative guide on the prepara-
tion of personal finance statements is Statement of Position (SOP) 82-1, “Accounting and Fi-
nancial Reporting for Personal Financial Statements,” issued by the American Institute of
Certified Public Accountants (AICPA).
Accountants are often engaged to compile, review, or audit personal financial statements.
Standards for compilation of financial statements prescribed by Statement on Standards for Ac-
counting and Review Services (SSARS) No. 1, “Compilation and Review of Financial State-
ments,” as amended by SSARS 8, “Amendment to Statement on Standards for Accounting and
Review Services No. 1,” are applicable to the compilation of personal financial statements in the
same manner as to the compilation of other financial statements.
However, a subsequent AICPA release, SSARS No. 6, “Reporting on Personal Financial
Statements Included in Written Personal Financial Plans,” allows accountants to prepare per-
sonal financial statements that omit disclosures required by generally accepted accounting prin-
ciples (GAAP) so long as the statement will be used solely in the development of the client’s
personal financial plan and not to obtain credit or to meet other disclosure requirements. If an
accountant prepares a personal financial statement under this exemption, he should issue a writ-
ten report stating the restricted purpose of the statement and noting that it has not been audited,
reviewed, or compiled. Nonetheless, SSARS No. 6 does not preclude an accountant from com-
plying with SSARS No. 1, as amended, in such engagements. (Also see Section 39.8, “Compi-
lation and Review”).
Standards for review of financial statements prescribed by SSARS No. 1, as amended, apply

to the review of personal financial statements in the same manner as to the review of other fi-
nancial statements (also see Section 39.8) and generally accepted auditing standards (GAAS)
apply to the audit of personal financial statements in the same manner as to the audit of other fi-
nancial statements.
Accountants may also be asked to report on specified elements, accounts, or items of a per-
sonal financial statement. In those circumstances, the guidance provided by Statement on Audit-
ing Standards (SAS) No. 62, “Special Reports,” or Accounting and Review Services
Interpretation No. 8 of SSARS No. 1, “Reports on Specified Elements, Accounts, or Items of a
Financial Statement,” should be followed as applicable.
(b) ACCEPTANCE OF CLIENTS. Before accepting an engagement involving personal finan-
cial statements, the accountant ordinarily would evaluate certain aspects of the potential client
relationship.
The accountant may wish to consider facts that might bear on the integrity of the prospective
client. Consideration of the character and reputation of the individual helps to minimize the pos-
sibility of association with a client who lacks integrity. The extent of the accountant’s inquiries
before acceptance might depend on his or her previous knowledge of the client and the nature of
the client’s financial activities. The accountant may want to consult predecessor accountants or
auditors, attorneys, bankers, and others having business relationships with the individual re-
garding facts that might bear on the integrity of the prospective client. This does not suggest
that, in accepting an engagement, the accountant vouches for the integrity or reliability of a
client. However, prudence suggests that an accountant be selective in determining his or her
professional relationships.
The accountant may also wish to consider circumstances that present unusual business risk,
such as considering whether an individual is in serious financial difficulty.
In addition, the accountant may want to consider the effect of the lack of independence on
the type of report he may issue in compliance with professional standards. SSARS No. 1 permits
the accountant to issue a compilation report on personal financial statements of an individual
with respect to whom he is not independent. However, the accountant should be independent to
issue a review report or an audit opinion.
39

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2
PERSONAL FINANCIAL STATEMENTS
Before accepting an engagement involving personal financial statements, the accountant may
want to ask the potential client about the availability of records and consider whether available
records provide a basis sufficient for providing the services requested. Incomplete or inadequate
accounting records are likely to give rise to problems in compiling, reviewing, or auditing per-
sonal financial statements. Because of the informal nature of most personal financial records,
the accountant should evaluate the need to perform other accounting services in conjunction
with personal financial records.
Professional standards require the accountant to attain a certain level of knowledge of his
client’s financial activities. Before accepting an engagement, the accountant should consider
whether he can obtain an appropriate understanding of the nature of the prospective client’s fi-
nancial activities and the specialized accounting principles and practices related to any of the
client’s financial activities.
(c) ESTABLISHING AN UNDERSTANDING WITH THE CLIENT. Once the accountant has
decided to accept an engagement involving personal financial statements, he should establish an
understanding with the client, preferably in writing, regarding the services to be performed and
the terms and objectives of the engagement.
(d) CLIENT REPRESENTATION LETTERS. During an engagement, the client makes many
representations to the accountant. Generally accepted auditing standards require that an inde-
pendent auditor performing an audit in accordance with GAAS obtain written representations
from management for all financial statements and periods covered by the auditor’s reports. The
representation should be addressed to the auditor and should be made as of a date no earlier than
the date of the auditor’s report.
SAARS No. 1 requires that the accountant obtain a representation letter from the client as
part of every review engagement as well. Compilation engagements do not contemplate tests of
accounting records and of responses to inquiries by obtaining corroborating evidential matter.
However, because of the informal nature of most personal financial records, it is advisable to
obtain written representation from the client to confirm the oral representation made in all per-

sonal financial statement engagements.
39.2 GENERAL DESCRIPTION AND REQUIREMENTS
(a) DEFINITION. A personal financial statement presents the personal assets and liabilities of
an individual, a husband and wife, or a family. It is not a financial statement on a business owned
by the person; in fact, it differs from a business financial statement in several important ways (see
Exhibit 39.1).
The essential purpose of a personal financial statement is to measure wealth at a specified date—
to take a snapshot of the person’s financial condition. It does this by presenting:
•
Estimated current values of assets
•
Estimated current amounts of liabilities
•
A provision for income taxes based on the taxes that would be owed if all the assets were liqui-
dated and all the liabilities paid on the date of the statement
•
Net worth
The basic personal financial statement containing this information is called a statement of finan-
cial condition, not a balance sheet. Values and amounts for one or more prior periods may be in-
cluded for comparison with the current values and amounts, but this is optional. The statement of
changes in net worth is also optional (also, see Section 39.8). It presents the major sources of in-
crease or decrease in net worth (see Exhibit 39.2).
39.2 GENERAL DESCRIPTION AND REQUIREMENTS 39
•
3
(b) OWNERSHIP. A personal financial statement covering a whole family usually presents the
assets and liabilities of the family members in combination, as a single economic unit. However,
the members may have different ownership interests in these assets or liabilities. For example, the
wife may have a remainder interest in a testamentary trust, whereas the husband may own life in-
surance with a net cash surrender value. It may be useful, especially when the statement is to be

used in a divorce case, to disclose each individual’s interests separately. This may be done in sep-
arate columns within the statement, in the notes to the statement, or in additional statements for
each individual.
Often an individual covered by the statement is one of a group of joint owners of assets, as with
community property or property held in joint tenancy. In this case, the statement should include
only the individual’s interest as a beneficial owner under the laws of the state. If the parties’ shares
in the assets are not clear, the advice of an attorney may be needed to determine whether the per-
son should regard any interest in the assets as his or her own, and if so, how much. The statement
should make full disclosure of the joint ownership of the assets and the grounds for the allocation
of shares.
(c) USES. Many individuals or families use personal financial statements for investment, tax, re-
tirement, gift and estate planning, and obtaining credit. A personal financial statement may also be
required for disclosure to the court in a divorce case or to the public when the individual is a candi-
date or an incumbent of public office.
(d)
ACCOUNTING BASIS. SOP 82-1 establishes the use of estimated current val
ues and
amounts and the accrual basis of accounting as GAAP for personal financial statements. The AICPA
Personal Financial Statements Guide (the “Guide”) allows accountants to prepare, compile, review,
or audit personal financial statements on other comprehensive bases of accounting, such as histori-
cal cost, tax, or cash.
(e) ORDER OF PRESENTATION. Assets are presented in order of liquidity and liabilities in
order of maturity. No distinction is made between current and long-term assets and liabilities because
there is no operating cycle in a person’s financial affairs.
39
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4
PERSONAL FINANCIAL STATEMENTS
Personal Business
Objective Measurement of wealth Reporting of earnings, evaluation of

performance
Uses
Facilitation of financial planning;
procural of credit; provision of
disclosures to the public or the
court
Procural of credit, information for
shareholders, regulatory
requirements
Valuation Current value Historical cost
Method of
accounting
Accrual Accrual
Classification None: assets presented in order of
liquidity, liabilities in order of
maturity
Assets and liabilities classified current
or long term
Excess of assets
over liabilities
Net worth Equity earnings
Exhibit 39.1 Personal and business financial statements compared.
Assets and liabilities of a closely held business that is conducted as a separate entity are not
combined with similar personal items in a personal financial statement. Instead, the estimated
current net value of the person’s investment in the entity is shown as one amount. But if the
person owns a business activity that is not conducted as a separate entity, such as a real estate
investment with a related mortgage, the assets and liabilities of the activity are shown as sepa-
rate amounts.
39.2 GENERAL DESCRIPTION AND REQUIREMENTS 39
•

5
JAMES AND JANE PERSON
Statements of Financial Condition
December 31, 20X3 and 20X2
December 31
20X3 20X2
Assets
Cash $0,003,700 $0,015,600
Bonus receivable 20,000 10,000
Investments
Marketable securities (Note 2) 160,500 140,700
Stock options (Note 3) 28,000 24,000
Kenbruce Associates (Note 4) 48,000 42,000
Davekar Company, Inc. (Note 5) 550,000 475,000
Vested interest in deferred profit-sharing plan 111,400 98,900
Remainder interest in testamentary trust (Note 6) 171,900 128,800
Cash value of life insurance ($43,600 and $42,900), less loans
payable to insurance companies ($38,100 and $37,700)
(Note 7) 5,500 5,200
Residence (Note 8) 190,000 180,000
Personal effects (excluding jewelry) (Note 9) 55,000 50,000
Jewelry (Note 9) $0,040,000 $0,036,500
$1,384,000 $1,206,700
Liabilities
Income taxes—current year balance $00,08,800 $0,000,400
Demand 10.5% note payable to bank 25,000 26,000
Mortgage payable (Note 10) 98,200 99,000
Contingent liabilities (Note 11) $0,000,000 $0,000,000
132,000 125,400
Estimated income taxes on the differences between the estimated

current values of assets and the estimated current amounts of
liabilities and their tax bases (Note 12) 239,000 160,000
Net worth $1,013,000 $0,921,300
$1,384,000 $1,206,700
The notes are an integral part of these statements.
(Continued)
Exhibit 39.2 Illustrative financial statements. (Source: Reproduced with permission from AICPA, Per-
sonal Financial Statements Guide, Appendix E: Statement of Position No. 82-1, “Account-
ing and Financial Reporting for Personal Financial Statements,” 1992, pp. 53–58.)
39
•
6
PERSONAL FINANCIAL STATEMENTS
JAMES AND JANE PERSON
Statements of Changes in Net Worth
For the Years Ended December 31, 20X3 and 20X2
Year ended December 31
20X3 20X2
Realized increases in net worth
Salary and bonus $0,095,000 $085,000
Dividends and interest income 2,300 1,800
Distribution from limited partnership 5,000 4,000
Gains on sales of marketable securities $0,001,000 $000,500
$0,103,300 $091,300
Realized decreases in net worth
Income taxes 26,000 22,000
Interest expense 13,000 14,000
Real estate taxes 4,000 3,000
Personal expenditures $0,036,700 $032,500
$0,079,700 $071,500

Net realized increase in net worth $0,023,600 $019,800
Unrealized increases in net worth
Marketable securities (net of realized gains on securities sold) 3,000 500
Stock options 4,000 500
Davekar Company, Inc. 75,000 25,000
Kenbruce Associates 6,000
Deferred profit-sharing plan 12,500 9,500
Remainder interest in testamentary trust 43,100 25,000
Jewelry $0,003,500 $000,000
$0,147,100 $060,500
Unrealized decrease in net worth
Estimated income taxes on the differences between the
estimated current values of assets and the estimated current
amounts of liabilities and their tax bases $0,079,000 $022,000
Net unrealized increase in net worth $0,068,100 $038,500
Net increase in net worth 91,700 58,300
Net worth at the beginning of year $0,921,300 $863,000
Net worth at the end of year $1,013,000 $921,300
The notes are an integral part of these statements.
Exhibit 39.2 Continued.
39.2 GENERAL DESCRIPTION AND REQUIREMENTS 39
•
7
JAMES AND JANE PERSON
Notes to Financial Statements
Note 1. The accompanying financial statements include the assets and liabilities of James and Jane
Person. Assets are stated at their estimated current values and liabilities at their estimated current
amounts.
Note 2. The estimated current values of marketable securities are either (a) their quoted closing prices
or (b) for securities not traded on the financial statement date, amounts that fall within the range of quoted

bid and asked prices.
Marketable securities consist of the following:
December 31, 20X3 December 31, 20X2
Number of Estimated Number of Estimated
Shares or Current Shares or Current
Bonds Values Bonds Values
Stocks
Jaiven Jewels, Inc. 1,500 $098,813
McRae Motors, Ltd. 800 11,000 600 $004,750
Parker Sisters, Inc. 400 13,875 200 5,200
Rosenfield Rug Co. 1,200 96,000
Rubin Paint Company 300 9,750 100 2,875
Weiss Potato Chips, Inc. 200 $020,337 300 $025,075
$153,775 $133,900
Bonds
Jackson Van Lines, Ltd. (12% due 7/1/X9) 5 5,225 5 5,100
United Garvey, Inc. (7% due 11/15/X6) 2 $001,500 2 $001,700
$006,725 $006,800
$160,500 $140,700
Note 3. Jane Person owns options to acquire 4,000 shares of stock of Winner Corp. at an option price
of $5 per share. The option expires on June 30, 20X5. The estimated current value is its published selling
price.
Note 4. The investment in Kenbruce Associates is an 8% interest in a real estate limited partnership.
The estimated current value is determined by the projected annual cash receipts and payments capital-
ized at a 12% rate.
Note 5. James Person owns 50% of the common stock of Davekar Company, Inc., a retail mail order
business. The estimated current value of the investment is determined by the provisions of a shareholders’
agreement, which restricts the sale of the stock and, under certain conditions, requires the company to re-
purchase the stock based on a price equal to the book value of the net assets plus an agreed amount for
goodwill. At December 31, 20X3, the agreed amount for goodwill was $112,500, and at December 31,

20X2, it was $100,000.
A condensed balance sheet of Davekar Company, Inc., prepared in conformity with generally ac-
cepted accounting principles, is summarized below:
(Continued)
Exhibit 39.2 Continued.
39
•
8
PERSONAL FINANCIAL STATEMENTS
December 31
20X3 20X2
Current assets $3,147,000 $2,975,000
Plant, property, and equipment—net 165,000 145,000
Other assets $0,120,000 $0,110,000
Total assets $3,432,000 $3,230,000
Current liabilities 2,157,000 2,030,000
Long-term liabilities $0,400,000 $0,450,000
Total liabilities $2,557,000 $2,480,000
Equity $0,875,000 $0,750,000
The sales and net income for 20X3 were $10,500,000 and $125,000 and for 20X2 were $9,700,000
and $80,000.
Note 6. Jane Person is the beneficiary of a remainder interest in a testamentary trust under the will of
the late Joseph Jones. The amount included in the accompanying statements is her remainder interest in
the estimated current value of the trust assets, discounted at 10%.
Note 7. At December 31, 20X3 and 20X2, James Person owned a $300,000 whole life insurance pol-
icy.
Note 8. The estimated current value of the residence is its purchase price plus the cost of improve-
ments. The residence was purchased in December 20X1, and improvements were made in 20X2 and
20X3.
Note 9. The estimated current values of personal effects and jewelry are the appraised values of those

assets, determined by an independent appraiser for insurance purposes.
Note 10. The mortgage (collateralized by the residence) is payable in monthly installments of $815 a
month, including interest at 10% a year through 20Y8.
Note 11. James Person has guaranteed the payment of loans of Davekar Company, Inc., under a
$500,000 line of credit. The loan balance was $300,000 at December 31, 20X3, and $400,000 at De-
cember 31, 20X2.
Note 12. The estimated current amounts of liabilities at December 31, 20X3, and December 31,
20X2, equaled their tax bases. Estimated income taxes have been provided on the excess of the estimated
current values of assets over their tax bases as if the estimated current values of the assets had been real-
ized on the statement date, using applicable tax laws and regulations. The provision will probably differ
from the amounts of income taxes that eventually might be paid because those amounts are determined
by the timing and the method of disposal or realization and the tax laws and regulations in effect at the
time of disposal or realization.
The estimated current values of assets exceeded their tax bases by $850,000 at December 31, 20X3,
and by $770,300 at December 31, 20X2. The excess of estimated current values of major assets over their
tax bases are—
December 31
20X3 20X2
Investment in Davekar Company, Inc. $430,500 $355,500
Vested interest in deferred profit-sharing plan 111,400 98,900
Investment in marketable securities 104,100 100,000
Remainder interest in testamentary trust 97,000 53,900
Exhibit 39.2 Continued.
39.3 ASSETS
(a) ESTIMATED CURRENT VALUE. Assets are presented at their estimated current value. This
is defined by SOP 82-1 as “the amount at which the item could be exchanged between a buyer and
a seller, each of whom is well informed and willing, and neither of whom is compelled to buy or
sell.” Sales commissions and other costs of disposal should be considered if they are expected to be
material.
SOP 82-1 recognizes that determining the estimated current value of some assets may be difficult,

and if the costs of doing so would appear to exceed the benefits, it recommends that the person use
his judgment.
In general, the best way to determine estimated current value is by reference to recent market
prices of similar assets in similar circumstances. If recent market prices are not available, other meth-
ods may be used, including the use of appraisals, the adjustment of historical cost by reference to a
specific price index, the capitalization of past or prospective earnings, the use of liquidation values,
or the use of discounted amounts of projected cash receipts.
Whatever method is used, it should be consistently applied from period to period for the same
asset.
(b) RECEIVABLES. Receivables are presented at the discounted amounts of cash expected to be
collected, using the prevailing interest rate at the date of the statement.
(c) MARKETABLE SECURITIES.
Marketable securities are stocks, bonds, unfulfilled futures
contracts, options on traded securities, certificates of deposit, and money market accounts for
which market quotations are publicly available. The estimated current value of a marketable secu-
rity is its closing price on the date of the statement, less the expected sales commission. Individual
Retirement Accounts and Keogh accounts should be presented net of the penalty charge for early
withdrawal.
If the security was not traded on that date, but published bid and asked prices are available, SOP
82-1 states that the estimated current value should be within the range of those prices. Some accoun-
tants, however, believe that only the bid price should be used, because “people can ask all they want
for an asset, but what matters is what others will pay for it.”
1
If bid and asked prices are not available for the date of the statement, the estimated current value
is the closing price on the last day that the security was traded, unless the trade occurred so far back
in the past as to be meaningless by the date of the statement.
On over-the-counter securities, unfortunately, the market does not speak with a single voice. Dif-
ferent quotations may be given by the financial press, quotation publications, financial reporting ser-
vices, and various brokers. In such a case, the mean of the bid prices, of the bid and asked prices, or of
the prices quoted by a representative sample of brokers may be used as the estimated current value.

Large blocks of stock may also pose a problem. If a large block of stock were dumped on the mar-
ket, the price might not hold up. On the other hand, a controlling interest might be worth more, share
for share, than a minority interest. Market prices may need to be adjusted for these factors to deter-
mine estimated current value. Preparers should consult a qualified stockbroker for an opinion on this
problem.
Restrictions on the transfer of a stock are yet another factor that might call for an adjustment of
market prices to determine estimated current value.
(d) LIMITED PARTNERSHIP INTERESTS. If interests in a limited partnership are actively
traded, the estimated current value of such an interest should be based on the prices of recent
39.3 ASSETS 39
•
9
1
M. D. Kinsman and B. Samuelson, “Personal Financial Statements: Valuation Challenges and Solutions,” Jour-
nal of Accountancy, September 1987, p. 139.
trades. If interests in the partnership are not actively traded, the current value of the part-
nership’s underlying assets may be used to measure the value of the interest [see Subsec-
tions 39.3(a) and (h)]. When this method is used, the person should consider discounting the
value of the interest for lack of marketability and lack of control over the general partner.
If it is not feasible to estimate the current value of the partnership’s underlying assets (and the in-
terests are not actively traded), the estimated current value of the interest may be shown as the
amount of cash that the person has invested. If the underlying assets of the partnership are considered
to be virtually worthless, however, the interest should be valued at zero.
The person’s share of the partnership’s negative tax basis, if any, should be included in the com-
putation of the provision for income taxes (see Section 39.5).
The statement should disclose the person’s share of any recourse debts of the partnership
and any commitments for future funding. If the person’s interest in the partnership repre-
sents a substantial proportion of ownership, it may be useful to disclose summarized finan-
cial information about the partnership as an investment in a closely held business [see
Subsection 39.3(h)].

(e) PRECIOUS METALS. The estimated current value of precious metals, like that of mar-
ketable securities, is their closing price on the date of the statement, less the expected sales
commission.
(f) OPTIONS ON ASSETS OTHER THAN MARKETABLE SECURITIES. Options to buy assets
other than marketable securities should first be valued at the difference between the exercise price
and the asset’s current value. Then this difference should be discounted at the person’s borrowing
rate over the option period, if this is material. The borrowing rate should reflect the cost of a loan se-
cured by the asset.
(g) LIFE INSURANCE. The estimated current value of a life insurance policy is its cash sur-
render value, less any loans against it. This information may be obtained from the insurance
company.
Disclosure of the face value of the policy is required by SOP 82-1. It may also be useful to dis-
close the death benefits that would accrue to family members covered by the statement.
(h) CLOSELY HELD BUSINESSES. If the person has a material investment in a closely held busi-
ness that is conducted as a separate entity, the statement should disclose the name of the company,
the person’s percentage of ownership, and the nature of the business. It should also disclose summa-
rized financial information on the company’s assets, liabilities, and results of operations, based on
the company’s financial statements for the most recent year. The basis of presentation of these state-
ments, such as GAAP, tax, or cash, should also be disclosed, and so should any significant loss con-
tingencies.
Determining the estimated current value of an investment in a closely held business, whether a
proprietorship, partnership, joint venture, or corporation, is notoriously difficult. The objective is to
approximate the amount at which the investment could be exchanged, on the date of the statement,
between a well-informed and willing buyer and seller, neither of whom is compelled to buy or sell.
This value is presented as a single item in the statement of financial condition, and a condensed bal-
ance sheet of the company should be presented in the notes.
SOP 82-1 recognizes several methods, or combinations of methods, for determining the es-
timated current value of a closely held business: appraisals, multiple of earnings, liquidation
value, reproduction value, discounted amounts of projected cash receipts, adjustments of book
value, and cost of the person’s share of the equity of the business. If a buyout agreement exists

specifying the amount that the person will receive when he withdraws, retires, or sells out,
SOP 82-1 says that it should be considered but that it does not necessarily determine estimated
current value.
39
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10
PERSONAL FINANCIAL STATEMENTS
A question that SOP 82-1 does not address is whether an accountant preparing a personal finan-
cial statement should try to value a closely held business at all. Competence in valuing businesses re-
quires a considerable degree of concentration on the subject, and some accountants’ litigation
liability coverage excludes valuations. Qualified appraisers, such as members of the American Soci-
ety of Appraisers or the Institute of Business Appraisers, are readily available to value the business.
Thus, some accountants believe that “the accountant should refrain from valuing the business inter-
est himself.”
2
(i) REAL ESTATE. The estimated current value of an investment in real estate or a leasehold may
be based on sales of similar properties in similar circumstances; on assessed value for property taxes,
considering the basis of the assessment and its relationship to market values in the area; on the dis-
counted amounts of projected cash flows from the property; or on an appraisal from a qualified real
estate appraiser.
The estimated current value of a property should be presented net of expected sales commissions
and closing costs.
(j) PERSONAL PROPERTY. Personal property includes but is not limited to cars, jewelry, an-
tiques, and art. These items should be valued at appraisal values derived from a specialist’s opinion
or at the values given in published guides such as the Blue Book for cars. If the costs of an appraisal
seem to outweigh the benefits, historical cost should be used.
(k) INTANGIBLE ASSETS. Patents, copyrights, and other intangible assets should be presented at
the net proceeds of a current sale of the asset or the discounted amount of cash flow arising from its
future use. If the amounts and timing of receipts from the asset cannot be reasonably estimated, the
asset should be presented at its purchased cost, evaluated for impairment.

(l) FUTURE INTERESTS. The following future interests should be shown in a personal financial
statement: guaranteed minimum portions of pensions, vested interests in pension or profit-sharing
plans, deferred compensation contracts, beneficial interests in trusts, remainder interests in prop-
erty subject to life estates, fixed amounts of alimony for a definite future period, and annuities.
Any other future interests should also be shown, so long as they are nonforfeitable rights for fixed
or determinable amounts; are not contingent on the holder’s life expectancy or the occurrence of a
particular event, such as disability or death; and do not require future performance of service by
the holder.
Such future interests should be presented at their discounted amounts. Suppose, for example, that
Sally Smith has an $80,000 interest in her employer’s profit-sharing plan, 75% of it vested. She
would receive her benefits in a lump sum one year after leaving the company. Assume the current in-
terest rates on similar investments are 10%, the present value of $1 to be received in one year is
$0.9091. Thus, Smith’s interest in the profit-sharing plan would be calculated as $80,000 ϫ 0.75 ϫ
0.9091, and would be shown at $54,546.
39.4 LIABILITIES
(a) ESTIMATED CURRENT AMOUNT. Payables and other liabilities are presented at their esti-
mated current amount. This is the amount of cash to be paid, discounted by the rate implicit in the
transaction in which the debt was incurred. Accounting Principles Board (APB) Opinion No. 21, “In-
terest on Receivables and Payables,” explains how to determine this rate.
39.4 LIABILITIES 39
•
11
2
J. G. Siegel and L. Lederfich, “Accounting and Disclosures for Personal Financial Statements,” CPA Journal,
February 1988, p. 67.
Although certain kinds of liabilities are not discounted in business financial statements, all liabil-
ities should be presented at their discounted amounts in personal financial statements. No distinction
is made between current and long-term liabilities.
With some home mortgages and other debts, the person may be able to pay off the debt currently
at an amount less than the present value of future payments. If this alternative exists, the debt should

be presented at the lower amount.
Personal liabilities such as home mortgages are shown separately from investment liabilities such
as margin accounts. Obligations related to limited partnership investments should be shown if the
person is personally liable for them. Debt that was included in the valuation of an investment in a
closely held business, however, should not be shown again here.
(b) NONCANCELABLE COMMITMENTS. Child support, alimony, pledges to charities, and
other noncancelable commitments to pay future sums should be presented as liabilities at their dis-
counted amounts if they have all of these characteristics:
•
The commitment is for a fixed or determinable amount.
•
The commitment is not contingent on someone else’s life expectancy or the occurrence of a
particular event, such as death or disability.
•
The commitment does not require future performance by others, as an operating lease does.
(c) CONTINGENT LIABILITIES. Among the contingent liabilities that should be considered for
disclosure are personal guarantees on others’ loans, liabilities for limited partnership obligations,
lawsuits against the person, inadequate medical insurance coverage, and noncoverage for personal
liability. Statement of Financial Accounting Standards (SFAS) No. 5, “Accounting for Contingen-
cies,” as amended, provides guidance on whether a contingent liability should be recorded, dis-
closed in a footnote, or omitted. This pronouncement says, in short, that a liability should be
recorded if its related contingent loss or range of loss can be estimated and its occurrence is proba-
ble. If the amount of loss cannot be estimated but its occurrence is either probable or possible, the
related liability should be disclosed in a footnote. If its occurrence is remote, neither recording nor
disclosure is required.
(d) INCOME TAXES PAYABLE. Income taxes currently payable include any unpaid income
taxes
for past tax years, deferred income taxes arising from timing differences, and the estimated
amount
of income taxes accrued for the elapsed portion of the current tax year to the date of the statement.

If the statement date coincides with the tax year end, there is obviously no difficulty in estimating
the amount for the current year. If the dates do not coincide, the estimate should be based on tax-
able income to date and the tax rate applicable to estimated taxable income for the whole year. The
taxes for the current year should be shown net of amounts withheld from pay or paid with esti-
mated tax returns.
39.5 PROVISION FOR INCOME TAXES
(a) DEFINITION. The personal financial statement presents a provision for the income taxes that
would be owed if all of the person’s assets were sold, and all of his or her liabilities paid, on the date
of the statement. This provision should be shown under its full title as given in SOP 82-1: “Estimated
income taxes on the differences between the estimated current values of assets and the estimated cur-
rent amounts of liabilities and their tax bases.” It is presented in the statement as one amount and is
shown between liabilities and net worth. A note discloses the methods and assumptions used to com-
pute it (see Exhibit 39.2).
39
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PERSONAL FINANCIAL STATEMENTS
(b) COMPUTING THE PROVISION FOR INCOME TAXES. Currently applicable income
tax laws and regulations, state and local as well as federal, should be used in computing the pro-
vision for income taxes. Recapture of depreciation, available carryovers, the exclusion for the
gain on the sale of a residence, the deductibility of state income taxes against federal income
taxes, and alternative minimum taxes should all be considered.
Because most of these considerations apply to some assets or liabilities but not to others, the pro-
vision for income taxes should be computed separately for each asset and each liability. It is not nec-
essary, however, to disclose all these computations in the note. For example, note 12 in Exhibit 39.2,
which is reproduced from SOP 82-1, shows only the excess of estimated current values over the tax
bases of major assets.
(c) TAX BASIS. It is often difficult to determine the tax basis of an asset or liability acquired
long ago or by inheritance or trade. In such a case, the preparer may use a conservative estimate of
the tax basis in computing the provision for income taxes, with a note disclosing how the estimate

was determined.
(d) DISCLAIMER. SOP 82-1 requires a statement that “the provision will probably differ from the
amounts of income taxes that might eventually be paid because those amounts are determined by the
timing and the method of disposal, realization, or liquidation and the tax laws and regulations in ef-
fect at the time of disposal, realization, or liquidation.” This statement should be made in the note
(see Exhibit 39.2, note 12).
39.6 STATEMENT OF CHANGES IN NET WORTH
(a) DEFINITION. A statement of changes in net worth is an optional supplement to the
statement of financial condition. It presents the major sources of change in the person’s net
worth.
Whereas the statement of financial condition may or may not show amounts for prior peri-
ods and thus may not show change in net worth at all, the statement of changes in net worth
should present:
•
Increases in net worth produced by income, by increases in the estimated current values of as-
sets, by decreases in the estimated current amounts of liabilities, and by decreases in the provi-
sion for income taxes
•
Decreases in net worth produced by expenses, by decreases in the estimated current values of
assets, by increases in the estimated current amounts of liabilities, and by increases in the pro-
vision for income taxes
The statement of changes in net worth does not attempt to measure net income. It combines in-
come and other changes because the financial affairs of an individual or family are a mixture of busi-
ness and personal activities.
The accountant is not precluded from undertaking an engagement to issue a compilation re-
port on a statement of financial condition when a statement of changes in net worth has not
been prepared.
(b) USES. Accountants have often found that lenders do not require a statement of changes in
net worth from persons seeking credit; and that credit-seekers, for their part, are not eager to re-
veal so much information about their standard of living. But a statement of changes in net worth

can be very useful in financial planning. As one accountant observes, knowing the amounts and
sources of increase or decrease in wealth enables the person to estimate how much he or she will
39.6 STATEMENT OF CHANGES IN NET WORTH 39
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13
have to increase earnings or decrease consumption to achieve a desired level of wealth—or, on the
other hand, how much he or she may decrease earnings or increase consumption and still achieve
the same goal.
3
(c) FORMAT. The sample statement of changes in net worth shown in Exhibit 39.2, which is re-
produced from SOP 82-1, distinguishes realized from unrealized sources of increase or decrease in
net worth, thus dividing the sources into four categories: realized increases, realized decreases, unre-
alized increases, and unrealized decreases.
39.7 DISCLOSURES
A personal financial statement should include sufficient disclosures to make it adequately informa-
tive. These disclosures may be made either in the body of the statement or in the notes. The follow-
ing list, although not exhaustive, indicates the nature and type of information that should ordinarily
be disclosed:
•
The names of the individuals covered by the statement
•
The fact that assets are presented at their estimated current values and liabilities at their esti-
mated current amounts
•
The methods used to determine current values and amounts, and any change in these methods
from one period to the next
•
If any assets shown in the statement are jointly held, the nature of the joint ownership
•
If the person’s investments in securities are material in relation to his or her other assets, and if

they are concentrated in one or a few companies or industries, the names of those companies or
industries and the estimated current value of each security
•
Information on material investments in closely held businesses, including the name of the com-
pany; the person’s percentage of ownership; the nature of the business; summarized financial
information on the company’s assets, liabilities, and results of operations, based on the com-
pany’s financial statements for the most recent year; the basis of presentation of these state-
ments, such as GAAP, tax, or cash; and any significant loss contingencies
•
Description of intangible assets and their estimated useful lives
•
The face amount of life insurance
•
Nonforfeitable rights, such as pensions based on life expectancy, that were omitted from the
statement because they do not have all the characteristics required for inclusion [see Sub-
section 39.3(l)]
•
The following tax information:
•
The methods and assumptions used in computing the provision for estimated income taxes
on the differences between the estimated current values of assets and the estimated current
amounts of liabilities and their tax bases
•
A statement that this provision will probably differ from the amounts of income taxes that
might eventually be paid, because these amounts will be determined by the actual timing and
method of disposal, realization, or liquidation, and by the tax laws and regulations in effect
at the time of disposal, realization, or liquidation
•
Unused operating-loss and capital-loss carryforwards
•

Other unused deductions and credits, with their expiration periods, if applicable
39
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PERSONAL FINANCIAL STATEMENTS
3
I. O. Bull, “Personal Financial Statements—Suggestions for Improvement,” CPA Journal, December
1984, p. 42.