Application and Other Explanatory Material

Special Purpose Frameworks (Ref: Para. 6)

A1. Examples of special purpose frameworks are:

• A tax basis of accounting for a set of financial statements that accompany

an entity’s tax return;

• The cash receipts and disbursements basis of accounting for cash flow

information that an entity may be requested to prepare for creditors;

• The financial reporting provisions established by a regulator to meet the

requirements of that regulator; or

• The financial reporting provisions of a contract, such as a bond indenture,

a loan agreement, or a project grant.

A2. There may be circumstances where a special purpose framework is based on a

financial reporting framework established by an authorized or recognized

standards setting organization or by law or regulation, but does not comply with

all the requirements of that framework. An example is a contract that requires

financial statements to be prepared in accordance with most, but not all, of the

Financial Reporting Standards of Jurisdiction X. When this is acceptable in the

circumstances of the engagement, it is inappropriate for the description of the

applicable financial reporting framework in the special purpose financial

statements to imply full compliance with the financial reporting framework

established by the authorized or recognized standards setting organization or by

law or regulation. In the above example of the contract, the description of the

applicable financial reporting framework may refer to the financial reporting

provisions of the contract, rather than make any reference to the Financial

Reporting Standards of Jurisdiction X.

A3. In the circumstances described in paragraph A2, the special purpose framework

may not be a fair presentation framework even if the financial reporting

framework on which it is based is a fair presentation framework. This is because

the special purpose framework may not comply with all the requirements of the

financial reporting framework established by the authorized or recognized

standards setting organization or by law or regulation that are necessary to achieve

fair presentation of the financial statements.

A4. Financial statements prepared in accordance with a special purpose framework

may be the only financial statements an entity prepares. In such circumstances,

those financial statements may be used by users other than those for whom the

financial reporting framework is designed. Despite the broad distribution of the

financial statements in those circumstances, the financial statements are still

considered to be special purpose financial statements for purposes of the PSAs.

PSA 800 (Revised and Redrafted)

The requirements in paragraphs 13-14 are designed to avoid misunderstandings

about the purpose for which the financial statements are prepared.

Considerations When Accepting the Engagement

Acceptability of the Financial Reporting Framework (Ref: Para. 8)

A5. In the case of special purpose financial statements, the financial information needs

of the intended users are a key factor in determining the acceptability of the

financial reporting framework applied in the preparation of the financial

statements.

A6. The applicable financial reporting framework may encompass the financial

reporting standards established by an organization that is authorized or recognized

to promulgate standards for special purpose financial statements. In that case,

those standards will be presumed acceptable for that purpose if the organization

follows an established and transparent process involving deliberation and

consideration of the views of relevant stakeholders. In some jurisdictions, law or

regulation may prescribe the financial reporting framework to be used by

management in the preparation of special purpose financial statements for a

certain type of entity. For example, a regulator may establish financial reporting

provisions to meet the requirements of that regulator. In the absence of indications

to the contrary, such a financial reporting framework is presumed acceptable for

special purpose financial statements prepared by such entity.

A7. Where the financial reporting standards referred to in paragraph A6 are

supplemented by legislative or regulatory requirements, PSA 210 (Redrafted)

requires the auditor to determine whether any conflicts between the financial

reporting standards and the additional requirements exist, and prescribes actions to

be taken by the auditor if such conflicts exist.9

A8. The applicable financial reporting framework may encompass the financial

reporting provisions of a contract, or sources other than those described in

paragraphs A6 and A7. In that case, the acceptability of the financial reporting

framework in the circumstances of the engagement is determined by considering

whether the framework exhibits attributes normally exhibited by acceptable

financial reporting frameworks as described in Appendix 2 of PSA 210

(Redrafted). In the case of a special purpose framework, the relative importance to

a particular engagement of each of the attributes normally exhibited by acceptable

financial reporting frameworks is a matter of professional judgment. For example,

for purposes of establishing the value of net assets of an entity at the date of its

sale, the vendor and the purchaser may have agreed that very prudent estimates of

allowances for uncollectible accounts receivable are appropriate for their needs,

even though such financial information is not neutral when compared with

financial information prepared in accordance with a general purpose framework.