Assurance Engagements to Report on the Compilation of Pro Forma Financial Information Included in a Prospectus
David Swanney, Chair, IAASB Member
Ashif Kassam, IAASB Member
Dan Montgomery, IAASB Member
David Cattermole, External Member (KPMG, UK)
Kevin Desmond, External Member (PwC, UK)
Dr. Christian Feldmueller, External Member (PwC, Germany)
Victoria O'Leary, External Member (Ernst & Young, UK)
Lee Piller/Roxana Damianov (European Securities and Market Authority)
Sue Nyman (Grant Thornton, UK)
Steve Ong (Hong Kong Institute of CPAs)
David Simmonds (Ernst & Young, Australia)
Sandy van Esch (Independent Regulatory Board for Auditors, South Africa)
Bob Widdowson (KPMG, Poland)
Objective(s) of project
To develop a new International Standard on Assurance Engagements (ISAE) 3420 to deal with reasonable assurance engagements undertaken by professional accountants to report on the compilation of pro forma financial information by entities for inclusion in their prospectuses.
The cross-border nature of transactions has created a desire for common standards of reporting in relation to pro forma and prospective financial information included in prospectuses that can be consistently applied internationally. In response to this need, the IAASB commissioned a working group in February 2007 to:
- Explore the feasibility of developing appropriate international standards, focusing in the first instance on reporting with respect to pro forma financial information;and
- If warranted, to consider an appropriate approach to such a project.
The working group presented a project proposal at the March 2008 IAASB meeting. Recognizing that there may be potential difficulties in developing an international standard with respect to pro forma financial information because of differences in legal and regulatory frameworks around the world, the working group's proposal recommended an approach focused initially on identifying and understanding the reporting issues that arise in the context of one jurisdiction that already has a recognized and established framework, and thereafter expanding the consideration of the issues to other jurisdictions. The working group identified the European Union (EU) and its prospectus regime, represented by the Prospectuses Directive and Prospectus Regulation, as an appropriate starting point.
The IAASB supported the working group's recommendation. Nevertheless, recognizing the importance of the project to be regarded as one that goes beyond Europe, the IAASB agreed that further research should be done as to how such a standard would be used in other jurisdictions.
Accordingly, the IAASB approved the project proposal with the following remit:
"The ultimate goal of the project is to develop an internationally accepted standard for assurance engagements on pro forma financial information in prospectuses. The development approach is to use an international task force to focus on a single market model (EU), and: (a) identify principal issues for this market; (b) obtain input on the applicability and relevance of these issues and a project standard on the subject in a more global context; and (c) determine steps in progressing the development of the standard.
Because of the nature of the subject, the task force will consider specifically whether a consultation paper would be appropriate to obtain necessary input before issue of the draft ISAE.
In progressing the project, the task force is to present to the IAASB its proposals for: (a) a consultation paper, for approval prior to public dissemination; and (b) specific recommendations on relevance and feasibility in a global context."
Task Force progress / Board discussions to date
At its March 2008 IAASB meeting, the IAASB considered a project proposal.
The IAASB Consultative Advisory Group (CAG) also discussed the project proposal at its March 2008 meeting.
At its March 2009 meeting, the IAASB considered issues to be addressed in this project, including:
- Definitional characteristics of "pro forma financial information" and related scope considerations
- Meaning of the term "properly compiled"
- Nature and level of assurance provided in an engagement to report on pro forma financial information
- Acceptability of the framework for compilation
- Work effort regarding the unadjusted financial information
- Obtaining an understanding of the subject matter and engagement circumstances
- Nature and extent of work effort on pro forma adjustments
- Subsequent events
- Reporting considerations
The IAASB CAG discussed a number of these issues at its March 2009 meeting.
At its September 2009 meeting, the IAASB discussed a number of issues in the context of a first draft of the proposed ISAE, including:
- The use of profit forecasts as the unadjusted financial information in the compilation of the pro forma financial information
- The meaning of the term "properly compiled"
- Whether the practitioner should be required to report on whether the unadjusted and any other underlying financial information has been audited
- The nature and extent of work effort on the unadjusted financial information
- Modified opinions
- The interaction with ISAE 3000, Assurance Engagements Other than Audits or Reviews of Historical Financial Information
- Scope of the proposed ISAE
- Nature of an engagement to report on proper compilation of pro forma financial information, including the distinction between reporting on the process of compilation versus reporting on the pro forma financial information itself
- Work effort on the unadjusted financial information
- The use of terminology, including the wording of the practitioner's opinion
- Written representations
- Emphases of matter in the practitioner's report
To allow more time for IAASB members to consider the overall draft as a result of the changes arising from the deliberations, the IAASB deferred a vote on issuing the proposed ISAE as an exposure draft until it's March 2010 meeting.
At its March 2010 meeting, the IAASB considered a revised draft of the proposed ISAE. Issues discussed included:
- Engagement acceptance considerations
- Materiality in relation to reporting on the process to compile the pro forma financial information
- Wording of the practitioner's opinion
- The interrelationship between the proposed ISAE and the proposed revised ISAE 3000
The IAASB approved the proposed ISAE for exposure with a comment deadline of September 30, 2010.
At its March 2011 meeting, the IAASB considered significant comments received on the exposure draft. Issues discussed included:
- The objective and focus of the proposed standard, including the wording of the opinion
- The extent of work effort on unaudited or unreviewed unadjusted financial information ("column 1") or acquiree or divestee financial information
- The reference to "published" vs. audited source of column 1
- The distinction between applicable criteria and basis stated
- The use of profit forecasts as the basis for column 1
- The level of description of work effort in the illustrative report
- Restriction on distribution or use of the report
- The linkage with ISAE 3000
The IAASB CAG discussed a number of these issues at its March 2011 meeting.
The IAASB approved ISAE 3420, Assurance Engagements to Report on the Compilation of Pro Forma Financial Information Included in a Prospectus, at its September 2011 meeting. The ISAE is effective for assurance reports dated on or after March 31, 2013. A Basis for Conclusions provides background to the project, main comments received on the exposure draft, and the IAASB’s conclusions regarding these comments in developing the final standard. A staff-prepared At-A-Glance document provides an overview of the final standard.