Since 1973, GAAP (APB Opinion 28) has recognized the acceptability of presenting condensed interim information by public companies as provided for in Article 10 of the SEC’s Regulation S-X. Occasionally, a privately held company or a government entity inquires as to the availability of such an option for its own interim reporting. The answer cannot be found in the FASB literature, nor can it be readily found elsewhere.
Entities That Issue GAAP Financial Statements
As clearly written in its original form in 1973, APB Opinion 28 provides for summarized (or condensed) interim financial statements specifically to accommodate public companies (i.e., issuers) that generally prepare such condensed interim financial statements, principally for their quarterly reports on Form 10-Q in accordance with Regulation S-X. FASB’s discussion of the presentation of such information, which currently resides in Accounting Standards Codification (ASC) 270-10-50, “Disclosure of Summarized Interim Financial Data by Publicly Traded Companies,” clearly confirms that its minimal disclosure requirements is not GAAP: “It should be recognized that the minimum disclosures of summarized interim financial data required of publicly traded companies do not constitute a fair presentation of financial position and results of operations in conformity with generally accepted accounting principles (GAAP)” (ASC 270-10-50-1). Accordingly, the applicability of ASC 270-10-50 appears on its face to be limited solely to SEC issuers.
In seeking an answer to the question above, the author looked to AU-C 930, Interim Financial Information, which governs an auditor’s review of interim financial information of a nonissuer whose latest annual financial statements have been audited, as well as the published views of PricewaterhouseCoopers (section 29.6 of its proprietary financial statement presentation guide in its online subscription reference library, Inform).
By way of background, AU-C 930 was derived from AU section 722, which was amended in 2009 to remove guidance from the Accounting Standards Board’s (ASB) standards for reviews of the interim financial statements of issuers since such guidance already (and appropriately) resides in the PCAOB’s auditing standards, as well as to “establish standards and provide guidance on the independent accountant’s professional responsibilities when the accountant undertakes an engagement to review interim financial information [solely] of a nonissuer” [Statement on Auditing Standards (SAS) 116].
AU-C 930, which clearly applies only to nonissuers—because the authority of the ASB and the AICPA is so limited—clearly sets forth that the provisions in ASC 270 for condensed interim financial information issued by public companies “may be adapted by nonissuers as a fair presentation framework for condensed interim financial information” (AU-C 930.A2).
The statement from ASC 270-10-50-1 quoted above is reinforced in the operative auditing standard (AU-C 930.02). The standard sets forth three conditions that must be met for condensed financial information to be acceptable, the first of which is that the interim financial information must “purport to be prepared in accordance with an appropriate financial reporting framework, which includes appropriate form and content of interim financial information.” According to AU-C 930, this would include, for example, ASC 270, “Interim Reporting,” and Article 10 of Regulation S-X [AU-C 930.02(d)].
In the author’s view, this clearly implies that an “appropriate financial reporting framework,” as it relates to interim financial reporting, may include a combination of GAAP (as set forth in ASC Topic 270) and Article 10 of Regulation S-X. This author can only conclude, however, that the reporting accountant must refer to GAAP solely in relation to the measurement principles of the financial reporting framework in use, not to the disclosure and presentation requirements, which would be governed instead by both non-GAAP FASB (ASC 270-10-50-1) and SEC rules (Regulation S-X, Article 10, respectively).
The other two critical conditions for the use of condensed interim financial information provided in AU-C 930.02(d) are that—
- the condensed interim financial information include a note that the financial information does not represent complete financial statements and is to be read in conjunction with the entity’s latest audited annual financial statements, and
- such audited annual financial statements must accompany the entity’s interim financial statements, or be made readily available by the entity (in the author’s opinion, the most critical condition, since the availability of the omitted details effectively renders the omissions immaterial).
Audited financial statements are deemed to be readily available only if a third-party user can obtain the financial statements without any further action by the reporting entity (e.g., on the entity’s web-site). Being available “only upon request” is not considered readily available (AU-C 930.A3). This condition would not be achievable by an entity whose annual financial statements are not audited, and there is no comparable provision for reporting on condensed financial information in the AICPA’s Statements on Standards for Accounting and Review Services (SSARS). Nevertheless, this author believes the absence of an annual audit should not be viewed as a critical factor that should prevent such an entity from availing itself of the option to present condensed interim financial information to users who have access to full-disclosure annual financial statements.
Update to Regulation S-X
In connection with the SEC’s “Disclosure Update and Simplification” release, issued in August 2018 (Release 33-10532, http://bit.ly/2EyGVCz), interim financial statements (for periods beginning after November 5, 2018) included in Form 10-Q filings—but not registration statements—by all issuers will require, either in the notes or as a separate statement, reconciliations of changes in all equity accounts of beginning to ending balances of each line item caption in equity for each period for which an income statement is required to be filed (i.e., for both the year-to-date and quarterly periods and comparable prior periods). This author believes that all non-SEC issuer entities that opt to present condensed interim financial information will need to comply with these new requirements, once they become applicable to SEC issuers.
All authoritative GAAP for government entities is contained in GASB’s Codification of Governmental Accounting Standards and Financial Reporting Standards (GASBC). Although external reporting of interim financial information is relatively rare in the government environment, the question of applicability of the guidance and conclusion presented above to government entities may occasionally arise. Unfortunately, however, there is no discussion specifically about interim financial information in authoritative government accounting or auditing literature (i.e., the GASBC or the “Yellow Book,” respectively), except for the guidance contained in GASBC section 2900.104 (derived from GASB’s predecessor literature, National Committee on Government Accounting Statement 1, paras. 128 and 134). This guidance is totally nonprescriptive and discretionary with regard to report content and deals primarily with internal-use presentations that “properly serve management control needs,” such as for performance evaluation and future planning purposes.
The introduction to the GASBC broadly designates FASB standards among the nonauthoritative accounting literature for government financial reporting purposes. Thus, it may be observed “for transactions or other events not specified within the GASBC provided it does not conflict with or contradict authoritative GAAP” (GASBC sections 1000.103–.104) The summary that preceded the introduction to GASB Statement 62 when issued in 2010 (not included in the GASBC), which elevated selected pre–November 30, 1989, FASB standards to authoritative status for government enterprise funds and business-type activities, effectively reinforces that provision in limited circumstances, specifically that such activities may apply to “post–November 30, 1989, FASB pronouncements that do not conflict with or contradict GASB pronouncements.”
In issuing GASB Statement 62, the board’s approach was to adopt the accounting and reporting requirements essentially intact as they existed in what it considered to be applicable pre–11/30/89 FASB and AICPA pronouncements, modifying the language therein only as it was deemed appropriate to the governmental environment without affecting the substance of those provisions (Appendix B, Basis for Conclusions, GASB 62, para. 514, not included in the GASBC). Probably because of the extreme rarity of external interim reporting among government entities, ASC 270 was not among the pre–1989 FASB standards incorporated directly into the GASBC by GASB 62. Notwithstanding this, and in reliance on the broad language from GASBC sections 1000.103–.104 cited above, there is nothing in GASB 62 or the GASBC that this author believes would preclude a government entity from following FASB’s guidance for interim reporting.
In addition, Government Auditing Standards (i.e., the “Yellow Book”) reinforces and supplements the ASB’s more broadly applicable Generally Accepted Auditing Standards. Accordingly, this author believes the AU-C 930.A2 language cited above applies to all government entities subject to Yellow Book standards, as well as all other non-SEC issuers.
A Qualified Answer
Based on the foregoing analysis, this author concludes that, if all the applicable conditions of AU-C 930.02(d) are met, any private for-profit, not-for-profit, or government entity (including but not limited to government enterprise funds and business-type activities) may elect to present condensed interim disclosures under the ASC 230 guidance, provided a reference to a GAAP basis is supplemented with a reference specifically to ASC 270-10-50 or directly to Article 10 of Regulation S-X. In such cases, references to GAAP in the accountant’s review report should likewise be modified appropriately.
Because the presentation of condensed interim financial information is not GAAP, private entities with outstanding debt are advised to ascertain if this interim reporting alternative is acceptable to their lenders. If it is, and if the operative debt agreement requires interim financial statements prepared in accordance with GAAP, the agreement should be appropriately amended.