Financial statements for Red Deer corporations

For a one-owner Red Deer 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, and the instalments for the year ahead.

Who reads a Red Deer company’s statements

Red Deer’s economy, as the City describes it, leans on manufacturing, oil and gas services, construction and the health, retail and hospitality businesses that serve central Alberta. Almost all of those borrow. A fabrication shop finances its equipment, a contractor needs a bonding facility to bid public work, a clinic finances a fit-out, a retailer carries an operating line against inventory. In each case the lender or surety asks for annual financial statements, often within a fixed number of days after year end, and reads them for a small set of numbers.

Those numbers are usually the current ratio, the ratio of debt to earnings, debt service coverage and sometimes a tangible net worth floor. Each is calculated using definitions written into the credit agreement, and those definitions rarely match the statement captions exactly. 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 a term 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.

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.

Equipment, inventory and work in progress

For a Red Deer manufacturer or service company, the balance sheet is mostly equipment, inventory and receivables. Equipment is carried at cost less accounting amortization, which is not the same thing as capital cost allowance on the tax return, and the statements should say which policy is used. Where equipment sits idle through a sustained slowdown with no realistic redeployment, a write-down has to be considered rather than deferred. A balance sheet carrying stranded assets at full value is the kind of thing that costs credibility exactly when it is needed.

Inventory and work in progress need a count or a defensible estimate at the year-end date, and a costing method applied consistently from year to year. A shop with half-built units on the floor at year end has real value there, and leaving it off understates both the assets and the year’s profit. Year-end inventory counts covers how to do it without stopping work for a week.

Revenue that arrives in bursts

Construction and oilfield service work in central Alberta is concentrated into seasons and projects, and invoices often lag the work by weeks. Revenue and the costs that support it have to be matched into the period the work was done, not the period it was billed. The common traps are work completed just before year end and invoiced after it, which has to be accrued, and deposits or mobilization payments received before work begins, which remain obligations until the work is performed. Holdbacks on construction contracts have their own timing too. Each is a cut-off issue, and each distorts the year a lender is reading.

Compilation, review, audit, and what the agreement requires

A CSRS 4200 compilation engagement presents financial information the business supplies, 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 Red Deer corporations it is exactly what the bank asks for.

Some agreements specify more. Review-engagement statements within a stated number of days after year end are a common requirement above a certain facility size, and audited statements above a larger one. The obligation is contractual and applies whether or not it has been enforced before. Read the reporting covenant, not just the financial covenants, before deciding what kind of year end to commission. Where assurance is required, we will say so plainly rather than let you send something that will not satisfy the lender. What a compilation engagement is sets out the difference.

Alberta corporate tax and the year end

Alberta administers its own corporate income tax rather than having it collected federally, so a Red Deer corporation files the AT1 with Alberta Tax and Revenue Administration in addition to the federal T2. Both are built from the same statements. Preparing the statements and both returns as one exercise avoids reconciling separate versions of the same year, and means the figures the bank sees are the figures the CRA and Alberta see.

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

Working remotely

EverStone is a fully virtual, sole practitioner CPA firm with no Red Deer office and no office visits. Year-end engagements are delivered through secure document exchange, email and electronic signature, with a video call to walk through the draft statements before they are issued. This suits incorporated fabrication and oilfield service companies, trades and construction firms, equipment and rental operators, and professional corporations. Related pages: Red Deer energy services accounting and Red Deer trades accounting.

Covenant headroom is easier to manage quarterly than to discover annually. See fractional CFO support in Red Deer for forecasting and covenant tracking.