Personal Financial Statements
By Mancuso, Anthony J.
Personal financial statements can serve high net-worth individuals in a
variety of ways. These financial statements, seldom used by the
average individual, can help those who are affluent to obtain loans,
enter into various investment transactions, develop financial plans
or even run for public office. Preparing a personal financial
statement often requires the expertise of CPAs who could act as
auditors, reviewers or as issuers of a compilation report on
personal financial statements. CPAs involved in the preparation of
these statements are guided by GAAS or SSARS. The American Institute
of Certified Public Accountants' State of Position 82-1 also provide
GAAP for personal financial statements. The processes involved in
the preparation of these statements are discussed.
Off the beaten path of
financial presentations is the personal financial statement. Unlike
businesses, individuals rarely maintain formal accounting systems or
other historic records of what they own and what they owe. Also, rarely
do individuals prepare personal financial statements as a matter of
routine. High-net-worth individuals may request a personal financial
statement for reasons such as the following:
- Obtaining a loan
- Making a guarantee
- Various investment transactions
- Meeting a co-op board's financial requirements
- Developing an estate, retirement, or other financial plan
- Developing strategies for minimizing income taxes
- Identifying property under a divorce proceeding, or
- Running for public office
Users of personal financial statements may seek CPA involvement to
provide an independent voice about the reliability of the information.
In this capacity, a CPA could audit, review, or merely issue a
compilation report on personal financial statements depending on the
level of assurance desired.
When a CPA is associated with personal financial statements, he or
she is guided by professional standards, either GAAS or SSARS, depending
on the level of service. GAAP for personal financial statements is set
forth in AICPA Statement of Position (SOP) 82-1, Accounting and
Financial Reporting for Personal Financial Statements. Guidance on the
scope of work performed and the form of report issued for personal
financial statements in accordance with SOP 82-1 is cited in the AICPA
Personal Financial Statements Guide.
CPAs may also be asked to report on specified elements, accounts, or
items of personal financial statements. In the latter circumstances,
guidance is provided by SAS 62, Special Reports, SAS 35, Special
Reports-Applying Agreed-Upon Procedures to Specified Elements, Accounts,
or Items of a Financial Statement, or Accounting and Review Services
(ARS) Interpretation 8 of SSARS 1, Reports on Specified Elements,
Accounts, or Items of a Financial Statement.
Some CPAs have been reluctant to become associated with personal
financial statements. When asked to perform an audit, CPAs have viewed
the general lack of an internal control structure for individuals as a
major stumbling block. Even the thought of the limited assurance called
for in a review engagement might be viewed by some with trepidation. As
a result, the most common level of service that a CPA performs on
personal financial statements is a compilation.
ACCEPTING THE ENGAGEMENT
As with any potential client relationship, before accepting an
engagement involving personal financial statements, the CPA should
evaluate the potential client relationship.
Facts That Might Bear on the Integrity of the Prospective Client. The
character and reputation of the individual should be considered. The
goal is to minimize the possibility of involvement with a client who
Circumstances That Present Unusual Business Risk. Circumstances that
present an unusual business risk should be considered. Unusual business
risks might include an individual in serious financial difficulty.
The Ability to Serve the Prospective Client. Professional standards
require a certain level of knowledge of the client's financial
activities. Before accepting an engagement, the CPA should consider
whether an appropriate understanding can be obtained of the nature of
the client's financial activities and the specialized accounting
principles and practices related to the prospective client's financial
The Effect of the Lack of Independence on the Type of Report That May
Be Issued. Lack of independence precludes a CPA from issuing a review
report or audit opinion, but permits a CPA to issue a compilation
Whether Available Accounting Records or Other Data Provide Sufficient
Basis for Providing the Services Requested. Incomplete or inadequate
accounting records of a client's financial activities are sometimes
likely to lead to problems in compiling, reviewing, or auditing personal
Once an engagement is accepted, an understanding with the client
should be established regarding the services to be performed and the
terms and objectives of the engagement. Professional standards do not
require a written engagement letter. However, obtaining an engagement
letter is always advisable so no misunderstanding occurs as to the
individual's responsibility for the personal financial statements and
the estimates that are included therein.
Other accounting services may be rendered before providing audit,
review, or compilation services. Those services usually involve
gathering information by making inquiries of the client and reviewing
available financial records. In gathering data for inclusion in personal
financial statements, a CPA may consider the following documents. This
list is not necessarily all inclusive, but it provides examples of key
sources of information concerning the individual's assets and
- Checkbooks. The individual's checkbook may serve as the primary
record of cash receipts and disbursements and can provide information
concerning the addition or disposition of assets and the creation or
payment of liabilities.
- Broker's Statements. A broker's statement can be used as a source
of information regarding marketable securities and loans that might be
- Property Insurance Policies and Schedules. Insurance policies and
schedules can be used to identify assets for possible inclusion.
- Wills. Assets in bequests in an individual's will should be
considered for inclusion.
- Leases. Leases may be a source of information about assets and
- Listing of Vault or Safe Deposit Contents. A list of contents can
be used to consider whether all assets stored and owned are included in
the financial statements.
- Real Estate and Personal Property Tax Returns. Tax returns can be a
source for identifying assets and liabilities due the taxing
- Income Tax Returns. Income tax returns and revenue agents' reports
can be used to identify assets providing income and potential income tax
- Financial Records of Other Entities. Financial statements or tax
returns of separate entities, such as a closely held business, a trust,
or a profit-sharing or deferred compensation plan can be used as sources
of information regarding the individual's interest in the entities.
- Inquiries. Inquiries can be made of the individual and, with the
individual's authorization, of others who might have knowledge of the
individual's financial activities concerning possible unrecorded assets
HOW ARE PERSONAL FINANCIAL STATEMENTS PRESENTED?
Basis of Presentation
Users of personal financial statements rely on them for making
financial and economic decisions with the focus primarily on an
individual's assets and liabilities. They believe it is more relevant to
portray current values of assets and estimated current amounts of
liabilities rather than historical cost information. Lenders require the
use of estimated current value information to assess collateral.
Personal loan applications generally require current value information.
Estimated current values are required for estate, gift and income tax
planning, and estimated current value information about assets is often
required in federal and state filings of candidates for public office.
Recognizing this, the AICPA Accounting Standards Division, issued SOP
82-1, which states that personal financial statements should present all
assets at their estimated current value and liabilities at their
estimated current amounts.
Presentation of Personal Financial Statements
Presentation of assets and liabilities in personal financial
statements should be made in the most useful and readily understood
manner. Thus, assets and liabilities should be presented in order of
liquidity and maturity, without classification as to current and
noncurrent status because the working capital concept applied to
business entities is inappropriate.
Statement of Financial Condition. The statement of financial
condition is the basic personal financial statement that presents
estimated current values of assets, amounts of liabilities, income taxes
on the differences between the estimated current values of assets and
amounts of liabilities and their tax bases, and net worth at a specified
date. The term net worth is used in the statement of financial condition
to designate the difference between the total assets and total
Statement of Changes in Net Worth
This statement is not considered a basic financial statement; its
presentation is optional pursuant to SOP 82-1. The statement of changes
in net worth presents the major sources of changes in net worth as
- Income and expenses;
- Increases and decreases in estimated current values of assets;
- Increases and decreases in the estimated current amount of
- Changes in estimated income taxes on the differences between
estimated current values and amounts and tax bases.
The presentation of comparative financial statements for the current
period and one or more prior periods may be desirable. SOP 82-1 states
that comparative financial statements can be more informative than the
presentation of financial statements for only one period. However, the
presentation of comparative financial statements is optional.
When personal financial statements are prepared for one individual
from a group of joint owners of assets, only that person's interest as a
beneficial owner--determined under the property laws of the state having
jurisdiction--should be included in personal financial statements. Legal
advice may be required to determined whether an interest in property
should be included as a person's asset, especially when property is held
in joint tenancy, as community property, or through a similar joint
If an individual's business interest constitutes a large part of
total assets, that interest should be shown separately from other
investments. The estimated current value of an investment in a separate
entity, such as a closely held corporation, a partnership, or a sole
proprietorship, should be shown in one amount as an investment if the
entity is marketable as a going concern. Assets and liabilities of the
separate entity should not be combined with similar personal items.
The estimated current values of assets and the estimated current
amounts of liabilities of limited business activities, such as an
investment in real estate and a related mortgage, should be presented as
separate amounts, especially if a large portion of the liabilities may
be satisfied from sources unrelated to the investment.
The Use of OCBOA
As for other entities, personal financial statements may be prepared
in conformity with a comprehensive basis of accounting other than GAAP.
For purposes of personal financial statements OCBOA includes, for
example, the tax return, historical cost, and cash receipts and
disbursements bases. Such statements should clearly state that the basis
of accounting used is not GAAP and the CPA's report would follow the
guidance in SAS 62, Special Reports and The Personal Financial
Guidelines for Determination of Current Values and Amounts
SOP 82-1 states the estimated current value of an asset in personal
financial statements is the amount at which the item could be exchanged
between a buyer and seller, each of who is well informed and willing,
and neither of whom is compelled to buy or sell. In determining
estimated current values, costs of disposal, such as commissions, if
material, should be considered.
Estimated current value is sometimes difficult to determine and the
cost of obtaining estimated current values of some assets directly may
exceed the benefits of doing so. SOP 82-1 recognizes those difficulties
and states judgment should be exercised in determining estimated current
Recent transactions involving similar assets and liabilities in
similar circumstances generally provide a statisfactory basis for the
determination of estimated current values of assets and estimated
current amounts of liabilities. However, if recent sales information is
unavailable, other methods may be used. Other methods might include the
capitalization of past or prospective earnings, the use of liquidation
values, the adjustment of historical cost based on changes in a specific
price index, the use of appraisals, or the use of the discounted amounts
of projected cash receipts and payments.
Specialists may need to be consulted for gathering information
necessary for determining estimate current values of some assets.
(Examples are works of art, jewelry, restricted securities, investments
in closely held businesses, and real estate). In deciding whether the
use of a specialist is necessary, the nature of the item and its
materiality with respect to the individual's financial condition should
be considered. Previous estimates may have been made by a specialist. If
so, consideration should be given to the date of the previous estimate,
the extent of changes in the circumstances since that date, and the
method of up-dating the estimate.
Methods to determine estimated current values of assets and the
estimated current amounts of liabilities should be consistently applied
from period to period, unless facts and circumstances dictate a change.
Significant changes in estimation methods should be disclosed.
FINANCIAL STATEMENT DISCLOSURES
Personal financial statements should include sufficient disclosures
to make the statements adequately informative. The disclosures may be
made within the body of the financial statements or in footnotes. Types
of information that ordinarily should be disclosed are:
- A clear indication of the individuals covered by the financial
- The methods used in determining the estimated current values of
major assets and the estimated current amounts of major liabilities or
major categories of assets and liabilities, since several methods are
available, and changes in methods from one period to the next;
- If assets held jointly by the individual and by others are included
in the statements, the nature of the joint ownership;
- If the individual's investment portfolio is material in relation to
his or her other assets and is concentrated in one or a few companies or
industries, the names of the companies or industries and the estimated
current values of the securities.
- If an individual has a material investment in a closely held
business, at least the following information:
a. The name of the company and the individual's percentage of
b. The nature of the business; and
c. Summarized financial information about assets, liabilities, and
results of operations for the most recent year based on the financial
statements of the business, including information about the basis of
presentation (for example, GAAP, income tax basis, or cash basis) and
any significant loss contingencies.
- Descriptions of intangible assets and their estimated useful lives;
- The face amount of life insurance the individual owns
- Non-forfeitable rights that do not have certain characteristics,
for example, pensions based on life expectancy;
- The following tax information:
a. The methods and assumptions used to compute the estimated income
taxes on the differences between the estimated current values of assets
and the estimated current amounts of liabilities and their tax bases and
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 effect at the time;
b. Unused operating loss and capital loss carryforwards;
c. Other unused deductions and credits, with their expiration
periods, if applicable; and
d. The differences between the estimated current values of major
assets and the estimated current amounts of major liabilities or
categories of assets and liabilities and their tax bases.
- Maturities, interest rates, collateral, and other pertinent details
relating to receivable and debt; and
- Non-cancelable commitments for example, operating leases.
GAAP other than those discussed in SOP 82-1 may apply to personal
financial statements. SFAS 57, Related Party Disclosures, provides
guidance on related party disclosures, and SFAS 5, Accounting for
Contingencies, and related amendments and interpretations, provides
guidance on accounting for contingencies and are examples of such GAAP
REPORTING ON PERSONAL FINANCIAL STATEMENTS
A CPA may be asked to audit, review or compile personal financial
statements. Standards for compilations, reviews, and audits are
prescribed by SSARS 1 and GAAS, and are applicable for personal
financial statements as for other financial statements.
SSARS 1 states that the CPA should posses a general understanding of
the nature of the individual's financial transactions, the form of
available accounting records, the stated qualifications of accounting
personnel, the accounting basis on which the financial statements are to
be presented, and the form and content of the financial statements. The
CPA ordinarily obtains knowledge of these matters through experience
with the individual or inquiry of the individual whose financial
statements are being compiled.
Ordinarily a CPA can compile personal financial statements based on
the individual's representation of the estimated current values of
assets and the estimated current amounts of liabilities. At a minimum,
however, the CPA should obtain an understanding of the methods by which
the individual determined the estimated current values of major assets
and current amounts of significant liabilities and consider whether the
methods are appropriate in light of the nature of each asset or
The CPA is not required to make inquiries or perform other procedures
to verify, corroborate, or review information supplied by the
individual. However, the CPA should obtain additional or revised
information if he or she becomes aware information supplied by the
individual is incorrect, incomplete, or otherwise unsatisfactory.
The CPA should posses a level of knowledge of the accounting
principles and practices applicable to personal financial statements and
an understanding of the individual's financial activities and financial
position that will provide him, through the performance of inquiry and
analytical procedures, with a reasonable basis for expressing limited
assurance that there are no material modifications that should be made
to the financial statements for the statements to be in conformity with
GAAP. The CPA's understanding of financial activities should include a
general understanding of the nature of assets and liabilities, sources
of income, and the nature of significant expenditures and material
transactions with related parties.
The scope of the audit should enable the independent auditor to
conclude that he or she has a reasonable basis for expressing an opinion
on whether the statements are presented fairly, in all material
respects, in conformity with GAAP. GAAS include gaining and documenting
an understanding of the internal control structure, assessing control
risk, testing accounting records, and obtaining responses to inquiries
and other procedures considered necessary. Because of the nature of
personal financial records, obtaining evidential matter may sometimes be
difficult. As a result, it may be impracticable to conduct an audit of
personal financial statements in accordance with GAAS and express an
During an engagement, the client makes many representations to the
CPA, oral and written, in response to specific inquiries or through the
financial statements. Such representations from the client are an
important part of the information gathered. Written representations from
the client to confirm oral representations given to the CPA indicate and
document the continuing appropriateness of those representations and
reduce the possibility of misunderstanding.
GAAS require that the independent auditor obtain certain written
representations as part of every engagement. Review and compilation
engagements do not contemplate tests of accounting records and 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 representations from the client to confirm
the oral representations made in all personal financial statement
Written representations should be addressed to the CPA. Because the
CPA is concerned with events occurring through the date of the report
that may require adjustment to or disclosure in the financial
statements, the representation letter should be dated as of that date
and signed by the individual whose financial condition is being
AN INTELLECTUAL HURDLE
The preparation of personal financial statements for the high net
worth individual can be a major undertaking. Having a CPA provide
assurances about the reliability of the information in the financial
statements is an additional significant task. In an article in the
Journal of Commercial Bank Lending, May 1991, "Making Something of a
Personal Financial Statement," Dev Strischek stated, "For the small
business borrower, the middle market guarantor, and the private bank
customer, a CPA-prepared personal financial statement is still a luxury
as well as an intellectual hurdle."
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