Financial statements for Fort McMurray contractors and service companies

For a one-owner Fort McMurray corporation, monthly bookkeeping, payroll and the year-end financial statements with the T2 usually cost from $450 to $650 a month all-in. The year-end covers the T2 with Schedule 1 and Schedule 50, the CCA schedule, the small business deduction, T4 or T5 slips for the owner’s pay, the Alberta AT1 and the instalments for the year ahead.

Who actually reads the statements

A small corporation in most places produces statements mainly to support its tax return. A Fort McMurray contractor working for large operators usually has three other readers, each with a different question. The lender behind the equipment loans and the operating line wants to know whether the covenants in the credit agreement are met. A surety or bonding company wants to know whether the business has the working capital and net worth to finish a contract it is guaranteeing. And an operator’s contractor-qualification or vendor review wants evidence that a supplier is financially stable before it is approved for work.

All three ask for financial statements, and the form they need is not always the form you have. Knowing who will read the statements, and what each reader will calculate from them, is the first step of a year end here — not an afterthought once the T2 is filed.

The statements are an input to a covenant calculation

Most credit agreements for an established service company contain financial covenants: a minimum current ratio, a maximum ratio of debt to earnings before interest, tax, depreciation and amortization, a minimum debt service coverage, sometimes a tangible net worth floor. Each is calculated from the year-end statements using definitions written into the agreement.

Those definitions rarely match the statement captions exactly. What the agreement counts as debt, whether shareholder loans are excluded, whether earnings are adjusted for one-off items — all of it is set out in the document and none of it is obvious from the statements alone. Preparing a year end without reading the covenant definitions means finding out about a breach from the lender.

Classification decisions that move a ratio

A current ratio depends entirely on where the line between current and long-term is drawn, and several of those calls involve judgement. The portion of an equipment loan due within twelve months is current. A demand facility is generally current in full, however long it has actually been outstanding. A shareholder loan left in the business for years is current unless there is a written agreement postponing it, which is often the simplest improvement a Fort McMurray owner can make before year end.

None of those decisions changes the business by a dollar, and any of them can change whether a covenant is met. That is not an argument for choosing the convenient answer. It is an argument for making the calls correctly and early, and for knowing where the ratio sits before the statements are finalized rather than after they are sent.

Turnaround work and cut-off

Maintenance and turnaround work is concentrated into short, intense periods, and the invoice often lags the work by weeks while field tickets are approved in the operator’s system. Revenue and the costs that earned it have to be matched into the period when the work was done, not the period the invoice was approved.

The specific traps are work completed just before year end and billed afterwards, which has to be accrued as revenue and a receivable; and mobilization, standby or deposit amounts received before work begins, which are obligations until the work is performed. Both are cut-off issues, both are easy to get wrong in a busy season, and both distort the very year a lender or bonding company is assessing. Job-costed books make cut-off a reconciliation rather than a reconstruction.

Idle equipment in a slow year

When work slows, three things happen to a service company’s balance sheet at once. Receivables age as customers slow their own payments. Equipment sits idle, still carrying its book value and still depreciating. And the earnings figure in a leverage ratio shrinks, so leverage worsens even when the debt has not moved.

Where equipment is no longer expected to earn what its carrying value implies, a write-down has to be considered rather than deferred. That is an unwelcome entry in a bad year, and it is also the entry that keeps the statements honest. A balance sheet that carries stranded assets at full value through a downturn costs credibility exactly when the business needs it.

Compilation, review, audit, and what is required

A CSRS 4200 compilation engagement presents information supplied by management, with a compilation engagement report and a note describing the basis of accounting. It provides no assurance: nothing is verified, no opinion is expressed, and it is neither a review nor an audit. For most owner-managed businesses in Wood Buffalo it is what the CRA, the bank and many vendor reviews need.

Some readers need more. Credit agreements above a certain size, bonding programs and some operator requirements specify review-engagement or audited statements, sometimes within a stated number of days after year end. That obligation is contractual and applies whether or not it has been enforced before. Read the reporting requirement, not just the financial covenants, before deciding what kind of year end to commission. Where assurance is required, we say so directly rather than let you present something that will not satisfy the reader. See what a compilation engagement is.

Alberta corporate tax and the year end

Alberta administers its own corporate income tax, so an Alberta corporation files the AT1 in addition to the federal T2. Both are built from the same statements, with the CCA schedule, the small business deduction claim and the shareholder accounts taken from the same closed trial balance. Preparing the statements and both returns as one exercise avoids reconciling separate versions of the same year, and it means the figures a lender sees are the figures the CRA and Alberta see.

The current Alberta corporate rates and filing requirements are set out on the Alberta tax facts page. The corporate tax hub covers the federal side and the deadlines that follow a fiscal year end.

Working remotely

EverStone is a fully virtual, one-CPA firm with no Fort McMurray presence. Engagements are delivered entirely remotely through secure document exchange, email, video meetings and electronic signature. When a lender or bonding company needs the statements by a date, the work is quicker because the books have been reviewed through the year rather than opened for the first time at year end.

This suits incorporated site-services and maintenance contractors, equipment and rental operators, trades companies, hauling businesses and technical consultancies across Wood Buffalo. Related pages: the Fort McMurray small-business CPA page, Fort McMurray energy services accounting and Fort McMurray trades accounting.

Covenant headroom is easier to manage quarterly than to discover annually. See fractional CFO support in Fort McMurray for forecasting and capital decisions.

Remote financial statement work

All of it is prepared online. There is no Fort McMurray office and no staff based there. Because the books are looked at during the year, the covenant figures are rarely a surprise at year end.

An owner’s corporate and personal returns are decided together, and personal tax in Fort McMurray is the other half.

The year end this all feeds into is our Fort McMurray corporate tax page.

Where a lender or an agreement calls for assurance rather than a compilation, the next question is assembling the working papers through the year.