Financial statements for Ottawa consultants and government suppliers

Unbilled time at the year-end date

Work delivered under a task authorization is typically billed in arrears, and approval of the invoice can trail the work by weeks. On the last day of the fiscal year there is almost always time that has been worked, is recoverable, and has not been invoiced. Under accrual accounting that is revenue and a receivable at the year-end date.

Where the corporation subcontracts individuals, the matching cost has to be accrued in the same period even if the subcontractor’s own invoice arrives later. Picking up the cost and the revenue in different periods is the single most common distortion on a consulting year end, and it makes any comparison between two years unreliable.

Firm-price and time-based work behave differently

On time-and-materials work, revenue tracks recorded hours at the contracted rate, and the accounting follows the timesheet. On firm-fixed-price or milestone-based work it does not: the amount earned by the year-end date depends on how much of the deliverable has been produced, which is an estimate rather than a record.

A corporation running both simultaneously needs to keep them distinguishable in the ledger. Where a fixed-price engagement is running long, the effort already sunk does not increase the revenue — and if the engagement is heading for a loss overall, that loss is recognized once it is foreseeable rather than absorbed quietly across the remaining milestones.

Concentration, prime contractors and the payment chain

Public-sector consulting revenue is often concentrated in a small number of contracting authorities, and frequently arrives through a prime contractor rather than directly. Both facts belong in the statements. Concentration in a single customer or a single contract is disclosed because it is central to how anyone should read the business.

Working through a prime also lengthens the payment chain: the prime is generally paid first and the subcontractor afterwards, so receivable days stretch even where the ultimate payer is entirely reliable. That produces a business that is profitable on paper and short of cash in practice, and receivable aging is what explains the gap to a reader.

Personal services business exposure

A corporation whose work looks like employment — one client, integrated into their team, working set hours under direction, with no other engagements — may be treated as a personal services business. The consequences are severe: the small business deduction is unavailable, a higher rate of tax applies, and most ordinary business expenses become non-deductible.

This is not primarily a statement presentation issue, but it belongs in the year-end conversation because the year end is when the pattern becomes visible: a single revenue source, one worker, minimal other costs. Identifying the exposure while there is still time to change how engagements are structured is far more useful than confirming it after an assessment. The personal services business guide sets out the tests.

Vacation, bench time and liabilities that accrue quietly

Where the corporation employs consultants rather than engaging them as contractors, vacation earned but not taken at the year-end date is a liability, as is any unpaid statutory entitlement. Neither appears unless someone calculates it, and both are genuine obligations rather than accounting formalities.

Bench time — paid staff between assignments — is the other item that shows up at year end, as an expense with no matching revenue. It is not something the statements can smooth away, and seeing it clearly is the point: a consulting corporation that cannot quantify its bench cost cannot price its rate card properly. See the vacation pay rules for the entitlement side.

What a compilation gives you, and when to ask for more

A CSRS 4200 compilation engagement presents information the corporation supplies. It is not an audit and it is not a review: nothing is verified, no opinion or conclusion is expressed, and the statements carry a notice to that effect. For an owner-managed consulting corporation that is ordinarily the appropriate product.

The situations that call for more are specific and predictable. Some prime contractors vet subcontractor financial capacity before awarding significant work and specify a level. A shareholders’ agreement may require it where there is more than one owner. A sale of the practice will bring a buyer who wants assurance over the revenue recognition judgements a compilation does not examine. Any of these is worth establishing ahead of the year end rather than after it closes.

Ontario filings and how the engagement runs

Ontario corporate income tax is administered federally for most corporations, so an Ontario consulting corporation files the federal T2 with the provincial tax calculated within it, alongside the annual corporate information return. The Ontario tax facts page covers the current rates.

EverStone is a sole practitioner CPA firm with a single office in Abbotsford, British Columbia, and no Ottawa office. Engagements run entirely remotely through secure document exchange, video calls and electronic signature. This suits incorporated management, technical and IT consultants, engineering and policy advisory corporations, and independent professionals contracting into the public sector. Related pages: the Ottawa small-business CPA page and Ottawa consultant accounting.

For the forward-looking side — pipeline and renewal risk, bench cost, prime versus subcontract economics — see fractional CFO support for Ottawa consultancies and government suppliers.