NTR Financial Statements or Notice to Reader Financial Statements may ring a bell if you’re a business owner who’s ever applied for a bank loan, but to others, or to new business owners, the term “NTR” or “Notice to Reader” may sound foreign in the beginning.
We all know what financial statements are for a business – primarily comprised of Balance Sheet and Income Statement. We won’t get into the details of what these financial statements, but more so into what are NTR Financial Statements, some of its unique aspects and why they are needed.
Unique Qualities of NTR Financial Statements
- Prepared by an Independent External Accountant
NTR financial statements cannot be prepared internally the business owner or the in-house bookkeeper from the accounting system. They typically are prepared by a CPA who is external to the company. Note that this accountant can be the same accountant who does the business’ bookkeeping and year-end tax returns.
- Nature of work is Compilation
Preparation of NTR financial statements is typically called a “Compilation Engagement”. That is, the external accountant is required to “compile” the financial statements based on the raw information that is provided by the client. The accountant is not required to ensure that the transactions provided by the client exist. Better accountants will ask for the bank to be reconciled and perform a high-level reasonability of the trial balance, especially on any new material transactions during the year, but the standards do not require them to.
This is a very important for the readers of NTR financial statements to note because, at times, there is a misconception that just because NTR financial statements are prepared by an external accountant and presented on the accountant’s letterhead, these numbers must be “correct”. Apart from the universal ethical standards that all CPAs must adhere to (for e.g., being independent from the client and not participating in knowingly misstating facts just so that the client can get financing), the CPA body imposes pretty laxed performance standards when it comes to preparing NTR financial statements.
- Financial statements are not audited
This is an extension to the above point. Although NTR financial statements are prepared by an external accountant and is a “professional engagement”, it is very clearly noted on the cover letter to these financial statements that the accountant has prepared these financial statements based on the information provided by the management of the company, the financial figures have not been verified and that the accountant does not provide any assurance on the accuracy of the numbers.
To emphasize this, every page of NTR financial statements is required to be very cleared marked as “Unaudited”.
- Purpose of financial statements
It is also very clearly noted on the cover letter to these financial statements that “Readers are cautioned that these statements may not be appropriate for their purposes”.
This means that the Notice to Reader financial statements are usually prepared with a very specific purpose – for e.g. to obtain bank financing, for a potential buyer in a M&A transaction, for investors, and so on.
Financial statements prepared for specific purpose and to be used by one type of user does not mean that these financial statements may be appropriate for all types of users.
Why we need Notice to Reader Financial Statements
Although we’ve alluded to this above, here are some specific reasons for which NTR financial statements may be prepared:
- Annual Reporting to Owner – Although not “required” for any other purpose, the business owner may want these “formal” financial statements to be prepared for their own use and add them to their corporation binder along with board meeting minutes.
- Bank loans – This is a very common requirement by banks when evaluating the creditworthiness of a client. Banks typically make notes of specific questions that may need to be clarified with the accountants. As such, the better organized these financial statements are, the easier it is for the bank to use them.
- Investors – Smaller investments and/or investors may not require “Reviewed” or “Audited” financial statements and Notice to Reader financial statements may suffice. This is especially true for young startups when there are little tangible and intangible assets on the Balance Sheet and business does not have significant revenue.
- Selling a business – When a business owner decides to sell their business, prospective buyers will want to see at least NTR financial statements for prior 3 to 5 years for their due diligence. For larger businesses and deals above $5 million, the requirement will likely shift to “Reviewed” or “Audited” financial statements.
We hope the above gave you some basic insight into what are Notice to Reader Financial Statements and why we need them. At Think Accounting, this is one of the most popular engagements with our clients, who find it very useful as part of their annual reporting package. If you’d like to discuss NTR financial statements with us for your business, reach out to us at firstname.lastname@example.org or call us at 905-565-0095.