Estate Accounting and Financial Reporting

By Ratcliffe, Thomas A. | The National Public Accountant, November 1999 | Go to article overview

Estate Accounting and Financial Reporting


Ratcliffe, Thomas A., The National Public Accountant


For a variety of reasons, CPAs increasingly are being requested to prepare and/or report on financial statements of an estate. Typically, these financial statements are intended to meet the requirements of a probate court or the beneficiaries of the estate. When the CPA is engaged to prepare/report on financial statements of an estate, he/she quickly will become aware that estate accounting presentation, disclosure, and reporting issues do not parallel the requirements in these areas that exist for a typical corporate reporting entity. Very little authoritative guidance related to estate accounting and reporting issues is available.

The purpose of this article is to identify the presentation, disclosure, and reporting issues that the CPA is likely to encounter when preparing/reporting on financial statements of an estate. Questions that will be addressed in this article include:

* Do generally accepted accounting principles [GAAP] exist for financial statements of an estate?

* What are the unique aspects of an estate accounting?

* Are the Statements on Standards for Accounting and Review Services [SSARSs] applicable to estate accounting engagements?

* If the SSARSs reporting requirements are applicable to an estate accounting, what type compilation/review report should be issued as a result of these engagements?

Do GAAP Exist for Financial Statements of an Estate?

Since no authoritative rule-making body designated by the Council of the American Institute of Certified Public Accountants [AICPA] has issued any technical literature applicable to an estate accounting, and since the determination of how to account for an estate depends upon [or is subject to] a proper interpretation of a governing instrument [i.e., the will] and the laws of the state having jurisdiction over the estate, some CPAs argue that there are no GAAP related to an estate accounting. However, the fact that no AICPA Council-designated pronouncement addresses estate accounting and reporting issues does not necessarily mean that there are no GAAP for these engagements.

The basic accounting conventions included in The Uniform Principal and Income Act [the Act] of 1931 and/or the 1962 Revised Act have been adopted by forty-two states. Also, the Uniform Laws Commission has developed two new model statutes that, if/when adopted, will change the statutory responsibilities of trustees/fiduciaries. The Uniform Prudent Investor Act "raises the bar" of care for trustees/fiduciaries by requiring them to utilize modem portfolio theory in the development of investment management strategies. To date, thirty-six states have enacted this law. The new Uniform Principal and Income Act [1997] also was approved by the Commission in July 1997. However, to date, only one state [Oklahoma] has adopted the provisions of the 1997 Act. As such, this article utilizes the provisions of the more widely-used 1931 Act [as amended in 1962].

Section 2(a) of the 1962 Revised Act provides a hierarchy of accounting authority for the treatment of a fiduciary transaction [including transactions associated with an estate]. This GAAP hierarchy is as follows:

* First level -- the governing instrument [i.e., the will].

* Second level -- if the governing instrument is silent related to a particular transaction, the CPA should look next to state law.

* Third level -- if state law is silent about a particular transaction, the Act stipulates that the accounting for the transaction should be based on whatever is considered to be both reasonable and equitable.

The Act creates an interesting dilemma for CPAs. On the positive side of the issue, it establishes a body of accounting guidance that can be applied consistently in most states. On the negative side [by making the governing instrument the overriding authority for each estate accounting engagement], it creates an inconsistent set of circumstances where potentially no two estates are accounted for in the same manner. …

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