Assurance Engagements to Report on the Compilation of Pro Forma Financial Information Included in a Prospectus

Definitions

11. For purposes of this SAE, the following terms have the meanings attributed below:

Para. A4–A5)

Requirements

Framework for Assurance Engagements

12. The practitioner shall not represent compliance with this SAE unless the practitioner has complied with the requirements of both this SAE and the Framework for Assurance Engagements.

Engagement Acceptance

13. Before agreeing to accept an engagement to report on whether pro forma financial information included in a prospectus has been compiled, in all material respects, on the basis of the applicable criteria, the practitioner shall:

The unadjusted financial information be extracted from an appropriate source; (Ref: Para. A4–A5, A27)

Appropriate presentation be made and disclosures be provided to enable the intended users to understand the information conveyed. (Ref: Para.

A2–A3, A42)

15. In addition, the practitioner shall assess whether the applicable criteria are:

Materiality

16. When planning and performing the engagement, the practitioner shall consider materiality with respect to evaluating whether the pro forma financial 3 The Framework for Assurance Engagements, paragraph 16. information has been compiled, in all material respects, on the basis of the applicable criteria. (Ref: Para. A17– A18)

Obtaining an Understanding of How the Responsible Party Has Compiled the Pro Forma Financial Information and Other Engagement Circumstances

17. The practitioner shall obtain an understanding of: (Ref: Para. A19)

A22–A23)

A26)

Obtaining Evidence about the Appropriateness of the Source from Which the Unadjusted Financial Information Has Been Extracted

18. The practitioner shall determine whether the responsible party has extracted the unadjusted financial information from an appropriate source. (Ref:

Para. A27–A28)

19. If there is no audit or review report on the source from which the unadjusted financial information has been extracted, the practitioner shall perform procedures to be satisfied that the source is appropriate. (Ref: Para.

A29–A31)

20. The practitioner shall determine whether the responsible party has appropriately extracted the unadjusted financial information from the source.

Obtaining Evidence about the Appropriateness of the Pro Forma

Adjustments

21. In evaluating whether the pro forma adjustments are appropriate, the practitioner shall determine whether the responsible party has identified the pro forma adjustments necessary to illustrate the impact of the event or transaction at the date or for the period of the illustration. (Ref: Para. A32)

22. In determining whether the pro forma adjustments are in accordance with the applicable criteria, the practitioner shall determine whether they are:

Modified Audit Opinion or Review Conclusion, or Emphasis of Matter

Paragraph, with Respect to the Source from Which the Unadjusted

Financial Information Has Been Extracted or the Source from Which the

Acquiree or Divestee Financial Information Has Been Extracted

23. A modified audit opinion or review conclusion may have been expressed with respect to either the source from which the unadjusted financial information has been extracted or the source from which the acquiree or divestee financial information has been extracted, or a report containing an Emphasis of Matter paragraph may have been issued with respect to such source. In such circumstances, if the relevant law or regulation does not prohibit the use of such a source, the practitioner shall evaluate:

Source from Which the Unadjusted Financial Information Has Been

Extracted or Pro Forma Adjustments Not Appropriate

24. If, on the basis of the procedures performed, the practitioner identifies that the responsible party has:

Information

25. The practitioner shall determine whether the calculations within the pro forma financial information are arithmetically accurate.

Evaluating the Presentation of the Pro Forma Financial Information

26. The practitioner shall evaluate the presentation of the pro forma financial information. This shall include consideration of:

27. The practitioner shall read the other information included in the prospectus containing the pro forma financial information to identify material inconsistencies, if any, with the pro forma financial information. If, on reading the other information, the practitioner identifies a material inconsistency or becomes aware of a material misstatement of fact in that other information, the practitioner shall discuss the matter with the responsible party. If correction of the matter is necessary and the responsible party refuses to do so, the practitioner shall take further appropriate action. (Ref: Para. A44)

Written Representations

28. The practitioner shall request written representations from the responsible party that:

Forming the Opinion

29. The practitioner shall form an opinion on whether the pro forma financial information has been compiled, in all material respects, by the responsible party on the basis of the applicable criteria. (Ref: Para. A46–A48)

30. In order to form that opinion, the practitioner shall conclude whether the practitioner has obtained sufficient appropriate evidence about whether the compilation of the pro forma financial information is free from material omissions, or inappropriate use or application of a pro forma adjustment. That conclusion shall include an evaluation of whether the responsible party has adequately disclosed and described the applicable criteria to the extent that these are not publicly available. (Ref: Para. A49–A50)

Form of Opinion

Unmodified Opinion

31. The practitioner shall express an unmodified opinion when the practitioner concludes that the pro forma financial information has been compiled, in all material respects, by the responsible party on the basis of the applicable criteria.

Modified Opinion

32. Where the relevant law or regulation precludes publication of a prospectus that contains a modified opinion with regard to whether the pro forma financial information has been compiled, in all material respects, on the basis of the applicable criteria and the practitioner concludes that a modified opinion is nevertheless appropriate in accordance with the Framework for Assurance Engagements, the practitioner shall discuss the matter with the responsible party. If the responsible party does not agree to make the necessary changes, the practitioner shall:

33. Where the relevant law or regulation may not preclude publication of a prospectus that contains a modified opinion with regard to whether the pro forma financial information has been compiled, in all material respects, on the basis of the applicable criteria and the practitioner determines that a modified opinion is appropriate in accordance with the Framework for Assurance Engagements, the practitioner shall apply the requirements in the Framework for Assurance Engagements regarding modified opinions.

Emphasis of Matter Paragraph

34. In some circumstances, the practitioner may consider it necessary to draw users’ attention to a matter presented or disclosed in the pro forma financial information or the accompanying explanatory notes. This would be the case when, in the practitioner’s opinion, the matter is of such importance that it is fundamental to users’ understanding of whether the pro forma financial information has been compiled, in all material respects, on the basis of the applicable criteria. In such circumstances, the practitioner shall include an Emphasis of Matter paragraph in the practitioner’s report provided that the practitioner has obtained sufficient appropriate evidence that the matter does not affect whether the pro forma financial information has been compiled, in all material respects, on the basis of the applicable criteria. Such a paragraph shall refer only to information presented or disclosed in the pro forma financial information or the accompanying explanatory notes.

Preparing the Assurance Report

35. The practitioner’s report shall include the following basic elements: (Ref:

Para. A57)

The date of the report; and

Application and Other Explanatory Material

Scope of this SAE (Ref: Para.1)

A1. This standard does not deal with circumstances where pro forma financial information is provided as part of the entity’s financial statements pursuant to the requirements of an applicable financial reporting framework.

Purpose of Pro Forma Financial Information Included in a

Prospectus (Ref: Para. 4, 11(c), 14(c), 26(a))

A2. Pro forma financial information is accompanied by related explanatory notes that often disclose the matters set out in paragraph A42.

A3. Different presentations of pro forma financial information may be included in the prospectus depending on the nature of the event or transaction and how the responsible party intends to illustrate the impact of such event or transaction on the unadjusted financial information of the entity. For example, the entity may acquire a number of businesses prior to an initial public offering. In such circumstances, the responsible party may choose to present a pro forma net asset statement to illustrate the impact of the acquisitions on the entity’s financial position and key ratios such as debt to equity as if the acquired businesses had been combined with the entity at an earlier date. The responsible party may also choose to present a pro forma income statement to illustrate what the results of operations might have been for the period ended on that date. In such cases, the nature of the pro forma financial information may be described by titles such as “Pro Forma Balance Sheet as at March 31, 20X1” and “Pro Forma Statement of profit and loss for the Year Ended March 31, 20X1.”

Compilation of Pro Forma Financial Information

Unadjusted Financial Information (Ref: Para. 5, 11(f), 14(a))

A4. In many cases, the source from which the unadjusted financial information has been extracted will be published financial information such as annual or interim financial statements.

A5. Depending on how the responsible party chooses to illustrate the impact of the event or transaction, the unadjusted financial information may comprise either:  One or more single financial statements, such as a statement of financial position and a statement of profit and loss; or  Financial information that is appropriately condensed from a complete set of financial statements, for example, a statement of net assets.

Nature of Reasonable Assurance Engagement (Ref: Para. 6)

A6. In this SAE, describing the pro forma financial information as being “properly compiled” means that the pro forma financial information has been compiled, in all material respects, by the responsible party on the basis of the applicable criteria.

Definitions

Applicable Criteria (Ref: Para. 11(a))

A7. Where established criteria for compiling the pro forma financial information do not exist, the responsible party will have developed the criteria based on, for example, practice in a particular industry or the criteria of a jurisdiction that has developed established criteria, and disclosed that fact.

A8. The applicable criteria for compiling the pro forma financial information will be suitable in the circumstances if they meet the benchmarks set out in paragraph 14.

A9. Accompanying explanatory notes may include appropriate additional detail about the criteria to describe how they illustrate the effects of the particular event or transaction. This may include, for example:  The date at which the event is assumed to have occurred or the transaction been undertaken.  The approach used for allocating income, overheads, assets and liabilities between relevant businesses in a divestment.

Engagement Acceptance

Capabilities and Competence to Perform the Engagement (Ref: Para. 13(a))

A10. The Code of Ethics, issued by the Institute of Chartered Accountants of India requires the practitioner to maintain appropriate professional knowledge and skill, including an awareness and understanding of relevant technical, professional and business developments, in order to provide competent professional service4. In the context of this requirement of the Code of Ethics, relevant capabilities and competence to perform the engagement also include matters such as the following:  Knowledge and experience of the industry in which the entity operates; 

An understanding of the relevant securities laws and regulations and related developments;  An understanding of the listing requirements of the relevant securities exchange and of capital market transactions such as mergers, acquisitions and securities offerings;  Familiarity with the process of preparing a prospectus and listing securities on the securities exchange; and 4 The Code of Ethics, paragraphs 130.1-130.3.  Knowledge of the financial reporting frameworks used in the preparation of the sources from which the unadjusted financial information and, if applicable, the acquiree’s financial information have been extracted.

The Responsible Party’s Responsibilities (Ref: Para. 13(g))

A11. An engagement in accordance with this SAE is conducted on the premise that the responsible party has acknowledged and understands that it has the responsibilities set out in paragraph 13(g). In some jurisdictions, such responsibilities may be specified in the relevant law or regulation. In others, there may be little or no legal or regulatory definition of such responsibilities. An assurance engagement to report on whether pro forma financial information has been compiled, in all material respects, on the basis of the applicable criteria is based on the assumption that:

A12. If law or regulation prescribes in sufficient detail the terms of the engagement, the practitioner need only record the fact that such law or regulation applies and that the responsible party acknowledges and understands its responsibilities as set out in paragraph 13(g).

Planning and Performing the Engagement

Assessing the Suitability of the Applicable Criteria

Directly Attributable Adjustments (Ref: Para. 14(b)(i), 22(a))

A13. It is necessary that the pro forma adjustments be directly attributable to the event or transaction to avoid the pro forma financial information reflecting matters that do not arise solely as a result of the event or that are not an integral part of the transaction. Directly attributable adjustments exclude those that relate to future events or are dependent on actions to be taken once the transaction has been completed, even if such actions are key to the entity entering into the transaction (for example, closing of redundant production sites after an acquisition).

Factually Supportable Adjustments (Ref: Para. 14(b)(ii), 22(b))

A14. It is also necessary that the pro forma adjustments be factually supportable in order to provide a reliable basis for the pro forma financial information. Factually supportable adjustments are capable of objective determination. Sources of factual support for the pro forma adjustments include, for example:  Purchase and sale agreements. 

Financing documents for the event or transaction, such as debt agreements.  Independent valuation reports.  Other documents relating to the event or transaction.  Published financial statements.  Other financial information disclosed in the prospectus.  Relevant legal or regulatory actions, such as in the area of taxation.  Employment agreements.  Actions of those charged with governance. Adjustments Consistent with the Entity’s Applicable Financial Reporting Framework and Its Accounting Policies under that Framework (Ref: Para. 11(b)(ii), 14(b)(iii), 22(c))

A15. For the pro forma financial information to be meaningful, it is necessary that the pro forma adjustments be consistent with the entity’s applicable financial reporting framework and its accounting policies under that framework. In the context of a business combination, for example, compiling the pro forma financial information on the basis of the applicable criteria involves consideration of such matters as:  Whether differences exist between the acquiree’s accounting policies and those of the entity; and  Whether accounting policies for transactions undertaken by the acquiree that the entity has not previously entered into are policies that the entity would have adopted for such transactions under its applicable financial reporting framework, taking into account the entity’s particular circumstances.

A16. Consideration of the appropriateness of the entity’s accounting policies may also be necessary in some circumstances. For example, as part of the event or transaction, the entity may propose to issue complex financial instruments for the first time. If this is the case, it may be necessary to consider:  Whether the responsible party has selected appropriate accounting policies to be used in accounting for such financial instruments under its applicable financial reporting framework; and  Whether it has appropriately applied such policies in compiling the pro forma financial information.

Materiality (Ref: Para. 16)

A17. Materiality with regard to whether the pro forma financial information has been compiled, in all material respects, on the basis of the applicable criteria does not depend on a single quantitative measure. Instead, it depends on the size and nature of the omission or inappropriate application of an element of the compilation as described in paragraph A18, whether or not intentional. Judgment about these aspects of size and nature will, in turn, depend on such matters as:  The context of the event or transaction;  The purpose for which the pro forma financial information is being compiled; and  The related engagement circumstances. The determining factor could be the size or the nature of the matter, or a combination of both.

A18. The risk of the pro forma financial information not being considered compiled, in all material respects, on the basis of the applicable criteria may arise when there is evidence of, for example:  Use of an inappropriate source from which to extract the unadjusted financial information. 

Incorrect extraction of the unadjusted financial information from an appropriate source.  In relation to adjustments, the misapplication of accounting policies or the failure of the adjustments to be consistent with the entity’s accounting policies.  Failure to make an adjustment required by the applicable criteria.  Making an adjustment that is not in accordance with the applicable criteria.  A mathematical or clerical mistake in the calculations within the pro forma financial information.  Inadequate, incorrect or omitted disclosures.

Obtaining an Understanding of How the Responsible Party Has Compiled the Pro Forma Financial Information and Other Engagement Circumstances (Ref: Para. 17)

A19. The practitioner may obtain this understanding through a combination of procedures such as:  Inquiring of the responsible party and other entity personnel involved in compiling the pro forma financial information. 

Inquiring of other appropriate parties such as those charged with governance and the entity’s advisors. 

Reading relevant supporting documentation such as contracts or agreements.  Reading minutes of meetings of those charged with governance. How the Responsible Party Has Compiled the Pro Forma Financial Information (Ref: Para. 17(b))

A20. The practitioner may obtain an understanding of how the responsible party has compiled the pro forma financial information by considering, for example: 

The source from which the unadjusted financial information has been extracted.  The steps taken by the responsible party to: o Extract the unadjusted financial information from the source. o Identify the appropriate pro forma adjustments, for example, how the responsible party has obtained acquiree financial information in compiling the pro forma financial information. 

The responsible party’s competence in compiling pro forma financial information.  The nature and extent of oversight by the responsible party of other entity personnel involved in compiling the pro forma financial information.  The responsible party’s approach to identifying appropriate disclosures to support the pro forma financial information.

A21. In a business combination or divestment, areas that may give rise to complexity in the compilation of the pro forma financial information include allocations of income, overheads, and assets and liabilities among or between the relevant businesses. Accordingly, it is important that the practitioner understand the responsible party’s approach and criteria for such allocations and that the explanatory notes accompanying the pro forma financial information disclose these matters. Nature of the Entity and Any Acquiree or Divestee (Ref: Para. 17(c))

A22. An acquiree may be an incorporated entity or a separately identifiable unincorporated operation within another entity such as a division, branch or line of business. A divestee may be an incorporated entity such as a subsidiary or joint venture, or a separately identifiable unincorporated operation within the entity such as a division, branch or line of business.

A23. The practitioner may have all or part of the required understanding of the entity and any acquiree or divestee, and their respective environments, if the practitioner has audited or reviewed their financial information. Relevant Industry, Legal and Regulatory, and Other External Factors (Ref: Para. 17(d))

A24. Relevant industry factors include industry conditions such as the competitive environment, supplier and customer relationships, and technological developments. Examples of matters the practitioner may consider include: 

The market and competition, including demand, capacity, and price competition.  Common business practices within the industry.  Cyclical or seasonal activity.  Product technology relating to the entity’s products.

A25. Relevant legal and regulatory factors include the legal and regulatory environment. This encompasses, among other matters, the applicable financial reporting framework in accordance with which the entity or, if applicable, the acquiree prepares its periodic financial information, and the legal and political environment. Examples of matters the practitioner may consider include:  Industry-specific accounting practices.  Legal and regulatory framework for a regulated industry.  Legislation and regulation that significantly affect the entity’s or, if applicable, the acquiree’s or divestee’s operations, including direct supervisory activities.  Taxation.  Government policies currently affecting the conduct of the entity’s or, if applicable, the acquiree’s or divestee’s business, such as monetary policies (including foreign exchange controls), fiscal policies, financial incentives (for example, government aid programs), and tariffs or trade restrictions policies.  Environmental requirements affecting the entity’s or acquiree’s or divestee’s industry and business.

A26. Examples of other external factors affecting the entity and, if applicable, the acquiree or divestee that the practitioner may consider include the general economic conditions, interest rates and availability of financing, and inflation or currency revaluation.

Obtaining Evidence about the Appropriateness of the Source from Which the Unadjusted Financial Information Has Been Extracted

Relevant Factors to Consider (Ref: Para. 14(a), 18)

A27. Factors that affect the appropriateness of the source from which the unadjusted financial information has been extracted include whether there is an audit or review report on the source and whether the source:  Is permitted or specifically prescribed by the relevant law or regulation, is permitted by the relevant securities exchange with which the prospectus is to be filed, or is used as such under normal market custom and practice.  Is clearly identifiable.  Represents a reasonable starting point for compiling the pro forma financial information in the context of the event or transaction, including whether it is consistent with the entity’s accounting policies and is at an appropriate date or covers an appropriate period.

A28. An audit or review report on the source from which the unadjusted financial information has been extracted may have been issued by another practitioner. In this situation, the need by the practitioner reporting under this SAE for an understanding of the entity and its accounting and financial reporting practices pursuant to the requirements of paragraphs 17(c) and (e), and to be satisfied that the source from which the unadjusted financial information has been extracted is appropriate, is not diminished.

No Audit or Review Report on the Source from Which the Unadjusted Financial

Information Has Been Extracted (Ref: Para. 19)

A29. When there is no audit or review report on the source from which the unadjusted financial information has been extracted, it is necessary for the practitioner to perform procedures in relation to the appropriateness of that source. Factors that may affect the nature and extent of these procedures include, for example:  Whether the practitioner has previously audited or reviewed the entity’s historical financial information, and the practitioner’s knowledge of the entity from such engagement.  How recently the entity’s historical financial information was audited or reviewed.  Whether the entity’s financial information is subject to periodic review by the practitioner, for example, for purposes of meeting regulatory filing requirements.

A30. The entity’s financial statements for the period immediately preceding that of the source from which the unadjusted financial information has been extracted are likely to have been audited or reviewed, even if the source from which the unadjusted financial information has been extracted itself is not. For example, the source from which the unadjusted financial information has been extracted may be interim financial statements that have not been audited or reviewed whereas the entity’s financial statements for the immediately preceding financial year may have been audited. In such a case, procedures that the practitioner may perform, having regard to the factors in paragraph A29, in relation to the appropriateness of the source from which the unadjusted financial information has been extracted include:  Inquiring of the responsible party about: ○ The process by which the source has been prepared and the reliability of the underlying accounting records to which the source is agreed or reconciled. ○ Whether all transactions have been recorded. ○ Whether the source has been prepared in accordance with the entity’s accounting policies. ○

Whether there have been any changes in accounting policies from the most recent audited or reviewed period and, if so, how such changes have been dealt with. ○ Its assessment of the risk that the source may be materially misstated as a result of fraud. ○

The effect of changes in the entity’s business activities and operations. 

If the practitioner has audited or reviewed the immediately preceding annual or interim financial information, considering the findings of such audit or review and whether these might indicate any issues with the preparation of the source from which the unadjusted financial information has been extracted.  Corroborating the information provided by the responsible party in response to the practitioner’s inquiries when the responses appear inconsistent with the practitioner’s understanding of the entity or the engagement circumstances. 

Comparing the source with the corresponding prior period financial information and, as applicable, the immediately preceding annual or interim financial information, and discussing significant changes with the responsible party. Historical financial information of the entity never audited or reviewed (Ref: Para. 13(e))

A31. Other than in the case of an entity formed for purposes of the transaction and which has never had any trading activity, it is unlikely that relevant law or regulation will permit an entity to issue a prospectus if its historical financial information has never been audited or reviewed.

Obtaining Evidence about the Appropriateness of the Pro Forma

Adjustments

Identification of Appropriate Pro Forma Adjustments (Ref: Para. 21)

A32. Informed by the practitioner’s understanding of how the responsible party has compiled the pro forma financial information and other engagement circumstances, the practitioner may obtain evidence regarding whether the responsible party has appropriately identified the necessary pro forma adjustments through a combination of procedures such as: 

Evaluating the reasonableness of the responsible party’s approach to identifying the appropriate pro forma adjustments, for example, the method used in identifying appropriate allocations of income, overheads, assets and liabilities among the relevant businesses.  Inquiring of relevant parties within an acquiree regarding the approach to extracting the acquiree financial information.  Evaluating specific aspects of the relevant contracts, agreements or other documents.  Inquiring of the entity’s advisors regarding specific aspects of the event or transaction and related contracts and agreements that are relevant to the identification of appropriate adjustments.  Evaluating relevant analyses and worksheets prepared by the responsible party and other entity personnel involved in compiling the pro forma financial information.  Obtaining evidence of the responsible party’s oversight of other entity personnel involved in compiling the pro forma financial information.  Performing analytical procedures.

Factual Support for Any Acquiree or Divestee Financial Information

Included in the Pro Forma Adjustments (Ref: Para. 22(b))

Divestee financial information

A33. In the case of a divestment, the divestee’s financial information will be derived from the source from which the unadjusted financial information has been extracted, which will often be audited or reviewed. The source from which the unadjusted financial information has been extracted will therefore provide the basis for the practitioner to determine whether there is factual support for the divestee financial information. In such a case, matters to consider include, for example, whether income and expenses attributable to the divestee that are recorded at the consolidated level have been appropriately reflected in the pro forma adjustments.

A34. Where the source from which the unadjusted financial information has been extracted has not been audited or reviewed, the practitioner may refer to the guidance in paragraphs A29–A30 in determining whether the divestee financial information is factually supportable.

Acquiree financial information

A35. The source from which the acquiree financial information has been extracted may have been audited or reviewed. Where the source from which the acquiree financial information has been extracted has been audited or reviewed by the practitioner, the acquiree financial information will, subject to any implications arising from the circumstances addressed in paragraph 23, be factually supportable.

A36. The source from which the acquiree financial information has been extracted may have been audited or reviewed by another practitioner. In this situation, the need by the practitioner reporting under this SAE for an understanding of the acquiree and its accounting and financial reporting practices pursuant to the requirements of paragraphs 17(c) and (e), and to be satisfied that the acquiree financial information is factually supportable, is not diminished.

A37. When the source from which the acquiree financial information has been extracted has not been audited or reviewed, it is necessary for the practitioner to perform procedures in relation to the appropriateness of that source. Factors that may affect the nature and extent of these procedures include, for example:  Whether the practitioner has previously audited or reviewed the acquiree’s historical financial information, and the practitioner’s knowledge of the acquiree from such engagement.  How recently the acquiree’s historical financial information was audited or reviewed.  Whether the acquiree’s financial information is subject to periodic review by the practitioner, for example, for purposes of meeting regulatory filing requirements.

A38. The acquiree’s financial statements for the period immediately preceding that of the source from which the acquiree financial information has been extracted often will have been audited or reviewed, even if the source from which the acquiree financial information has been extracted itself is not. In such a case, procedures that the practitioner may perform, having regard to the factors in paragraph A37, in relation to whether the acquiree financial information is factually supportable include:  Inquiring of the acquiree’s management about: o The process by which the source from which the acquiree financial information has been extracted has been prepared and the reliability of the underlying accounting records to which the source is agreed or reconciled. o Whether all transactions have been recorded. o Whether the source from which the acquiree financial information has been extracted has been prepared in accordance with the acquiree’s accounting policies. o Whether there have been any changes in accounting policies from the most recent audited or reviewed period and, if so, how such changes have been dealt with. o Its assessment of the risk that the source from which the acquiree financial information has been extracted may be materially misstated as a result of fraud. o The effect of changes in the acquiree’s business activities and operations. 

If the practitioner has audited or reviewed the immediately preceding annual or interim financial information, considering the findings of such audit or review and whether these might indicate any issues with the preparation of the source from which the acquiree financial information has been extracted. 

Corroborating the information provided by the acquiree’s management in response to the practitioner’s inquiries when the responses appear inconsistent with the practitioner’s understanding of the acquiree or the engagement circumstances. 

Comparing the source from which the acquiree financial information has been extracted with the corresponding prior period financial information and, as applicable, the immediately preceding annual or interim financial information, and discussing significant changes with the acquiree’s management.

Modified Audit Opinion or Review Conclusion, or Emphasis of Matter

Paragraph, with Respect to the Source from Which the Unadjusted

Financial Information Has Been Extracted or the Source from Which the

Acquiree or Divestee Financial Information Has Been Extracted

Potential Consequence (Ref: Para. 23(a))

A39. Not all modified audit opinions, review conclusions or Emphasis of Matter paragraphs with respect to either the source from which the unadjusted financial information has been extracted or the source from which the acquiree or divestee financial information has been extracted may necessarily affect whether the pro forma financial information can be compiled, in all material respects, on the basis of the applicable criteria. For example, a qualified audit opinion may have been expressed on the entity’s financial statements because of the non-disclosure of remuneration for those charged with governance as required by the applicable financial reporting framework. If this is the case and these financial statements are used as the source from which the unadjusted financial information has been extracted, such qualification may have no consequence on whether pro forma net asset and income statements can be compiled, in all material respects, on the basis of the applicable criteria.

Further Appropriate Action (Ref: Para. 23(b), 24)

A40. Further appropriate action that the practitioner may take includes, for example:  In relation to the requirement in paragraph 23(b): ○ Discussing the matter with the responsible party. ○ Where possible under relevant law or regulation, making a reference in the practitioner’s report to the modified audit opinion, review conclusion, or the Emphasis of Matter paragraph, if, in the practitioner’s professional judgment, the matter is of sufficient relevance and importance to users’ understanding of the pro forma financial information.  In relation to the requirement in paragraph 24, where possible under relevant law or regulation, modifying the practitioner’s opinion. 

Where possible under relevant law or regulation, withdrawing from the engagement.  Seeking legal advice.

Evaluating the Presentation of the Pro Forma Financial Information

Avoiding Association with Misleading Financial Information (Ref: Para. 26(b))

A41. The Code of Ethics issued by the Institute of Chartered Accountants of India requires that a practitioner should not be associated with reports, returns, communications or other information where he believes that the information5:

Disclosures Accompanying the Pro Forma Financial Information

(Ref: Para. 14(c), 26(c))

A42. Appropriate disclosures may include matters such as:  The nature and purpose of the pro forma financial information, including the nature of the event or transaction, and the date at which such event is assumed to have occurred or transaction been undertaken; 

The source from which the unadjusted financial information has been extracted, and whether or not an audit or review report on such a source has been published;  The pro forma adjustments, including a description and explanation of each adjustment. This includes, in the case of acquiree or divestee financial information, the source from which such information has been extracted and whether or not an audit or review report on such a source has been published; 5 The Code of Ethics, paragraph 110.2.  If not publicly available, a description of the applicable criteria on the basis of which the pro forma financial information has been compiled; and  A statement to the effect that the pro forma financial information has been compiled for illustrative purposes only and that, because of its nature, it does not represent the entity’s actual financial position, financial performance, or cash flows. Relevant law or regulation may require these or other specific disclosures

Consideration of Significant Subsequent Events (Ref: Para. 26(d))

A43. As the practitioner is not reporting on the source from which the unadjusted financial information has been extracted, there is no requirement for the practitioner to perform procedures to identify events after the date of the source that require adjustment of, or disclosure in, such source. Nevertheless, it is necessary for the practitioner to consider whether any significant events subsequent to the date of the source from which the unadjusted financial information has been extracted have come to the practitioner’s attention that may require reference to, or disclosure in, the explanatory notes to the pro forma financial information to avoid the latter being misleading. Such consideration is based on performing the procedures under this SAE or the practitioner’s knowledge of the entity and the engagement circumstances. For example, after the date of the source from which the unadjusted financial information has been extracted, the entity may have entered into a capital transaction involving the conversion of its convertible debt into equity, non-disclosure of which could result in the pro forma financial information being misleading.

Material Inconsistency with Other Information (Ref: Para. 27)

A44. Further appropriate action that the practitioner may take if the responsible party refuses to revise the pro forma financial information or the other information as appropriate includes, for example:  Where possible under relevant law or regulation: ○ Describing the material inconsistency in the practitioner’s report. ○ Modifying the practitioner’s opinion. ○ withdrawing from the engagement.  Seeking legal advice.

Written Representations (Ref: Para. 28(a))

A45. In some circumstances, the types of transactions involved may require the responsible party to select accounting policies for the pro forma adjustments that the entity has not previously had to articulate because it had no relevant transactions. In such a case, the practitioner may request the responsible party to expand the written representations to include confirmation that the selected accounting policies constitute the entity’s adopted policies for such types of transactions.

Forming the Opinion

Assurance on Further Matters Required by the Relevant Law or Regulation (Ref: Para. 29)

A46. Relevant law or regulation may require the practitioner to express an opinion on matters other than whether the pro forma financial information has been compiled, in all material respects, on the basis of the applicable criteria. In some of these circumstances, it may not be necessary for the practitioner to perform additional procedures. For example, the relevant law or regulation may require the practitioner to express an opinion about whether the basis on which the responsible party has compiled the pro forma financial information is consistent with the entity’s accounting policies. Compliance with the requirements in paragraphs 18 and 22(c) of this SAE provides a basis for expressing such an opinion.

A47. In other circumstances, the practitioner may need to perform additional procedures. The nature and extent of such additional procedures will vary with the nature of the other matters on which the relevant law or regulation requires the practitioner to express an opinion.

Statement of the Practitioner’s Responsibility for the Report

A48. The relevant law or regulation may require the practitioner to include in the practitioner’s report an explicit statement asserting or confirming the practitioner’s responsibility for the report. The inclusion of such an additional legal or regulatory statement in the practitioner’s report is not incompatible with the requirements of this SAE.

Disclosure of the Applicable Criteria (Ref: Para. 30)

A49. The responsible party need not repeat in the explanatory notes accompanying the pro forma financial information any criteria that are prescribed by the relevant law or regulation, or promulgated by an authorized or recognized standard-setting organization. Such criteria will be publicly available as part of the reporting regime and are therefore implicit in the responsible party’s compilation of the pro forma financial information.

A50. Where the responsible party has developed any specific criteria, it is necessary that those criteria be disclosed so that users may obtain a proper understanding of how the pro forma financial information has been compiled by the responsible party.

Preparing the Assurance Report

Title (Ref: Para. 35(a))

A51. A title indicating that the report is the report of an independent practitioner, for example, “Independent Practitioner’s Assurance Report on the Compilation of Pro Forma Financial Information Included in a Prospectus,” affirms that the practitioner has met all of the relevant ethical requirements regarding independence as required by the Framework for Assurance Engagements6. This distinguishes the report of the independent practitioner from reports issued by others.

Addressee(s) (Ref: Para. 35(b))

A52. The relevant law or regulation may specify the addressee(s) of the report. Alternatively, the practitioner may agree with the entity who the addressee(s) will be as part of the terms of the engagement.

Introductory Paragraphs (Ref: Para. 35(c))

A53. As the pro forma financial information will be included in a prospectus that contains other information, the practitioner may consider, if the form of presentation allows, including a reference that identifies the section where the pro forma financial information is presented. This helps readers identify the pro forma financial information to which the practitioner’s report relates.

Opinion (Ref: Para. 13(c), 35(h))

A54. Whether the phrase “pro forma financial information has been compiled, in all material respects, on the basis of the [applicable criteria],” or the phrase “pro forma financial information has been properly compiled on the basis stated” is used to express the opinion in any particular jurisdiction is determined by the law or regulation governing reporting on pro forma financial information in that jurisdiction, or by generally accepted practice in that jurisdiction.

A55. The relevant law or regulation in some jurisdictions may prescribe the wording of the practitioner’s opinion in terms other than those specified above. Where this is the case, it may be necessary for the practitioner to exercise judgment to determine whether performing the procedures set out in this SAE would enable the practitioner to express the opinion in the wording prescribed by law or regulation, or whether further procedures would be necessary.

A56. When the practitioner concludes that performing the procedures set out in this SAE would be sufficient to enable the practitioner to express the opinion in the wording prescribed by law or regulation, it may be appropriate to regard that 6 The Framework for Assurance Engagements, paragraph 16. wording as being equivalent to the two alternative wordings of the opinion specified in this SAE.

Illustrative Report (Ref: Para. 35)

A57. A practitioner’s report with an unmodified opinion is set out in the Appendix.

Material Modifications vis-à-vis ISAE 3420, “Assurance

Engagements to Report on the Compilation of Pro Forma

Financial Information Included in a Prospectus"

Deletions

1 Paragraph 32 of ISAE 3420 (Paragraph 32 of SAE 3420) deals with circumstances where the relevant law or regulation precludes publication of a prospectus that contains a modified opinion with regard to whether the pro forma financial information has been compiled, in all material respects, on the basis of the applicable criteria and the practitioner concludes that a modified opinion is nevertheless appropriate, the practitioner shall discuss the matter with the responsible party and if the responsible party does not agree to make the necessary changes, the practitioner shall withhold the report or withdraw from the engagement or consider seeking legal advice. Since in India, the practice of withholding the report is not in vogue, the option of withholding the report by the practitioner has been deleted. Similarly in paragraph A40 and paragraph A44, the option of withholding the report by the practitioner has been deleted.

Appendix

(Ref: Para. A57)

Illustrative Practitioner’s Report with an Unmodified

Opinion

INDEPENDENT

PRACTITIONER’S

ASSURANCE

REPORT

ON

THE

COMPILATION OF PRO FORMA FINANCIAL INFORMATION INCLUDED IN A

PROSPECTUS

[Appropriate Addressee(s)] Report on the Compilation of Pro Forma Financial Information Included in a

Prospectus

We have completed our assurance engagement to report on the compilation of pro forma financial information of ABC Company by [the responsible party]. The pro forma financial information consists of [the pro forma balance sheet as at [date]], [the pro forma statement of profit and loss for the period ended [date]], [the pro forma cash flow statement for the period ended [date],] and related notes [as set out on pages xx–xx of the prospectus issued by the company]. The applicable criteria on the basis of which [the responsible party] has compiled the pro forma financial information are [specified in [Securities Regulation XX] and described in [Note X]]/[described in [Note X]]. The pro forma financial information has been compiled by [the responsible party] to illustrate the impact of the [event or transaction] [set out in Note X] on the [company’s financial position as at specify date] [and] [the company’s/its financial performance [and cash flows] for the period ended specify date] as if the [event or transaction] had taken place at [specify date] [and specify date respectively]. As part of this process, information about the company’s [financial position], [financial performance] [and cash flows] has been extracted by [the responsible party] from the company’s financial statements [for the period ended [date]], on which [[an audit]/[a review] report]/[no audit or review report] has been published.7 [The Responsible Party’s] Responsibility for the Pro Forma Financial Information [The responsible party] is responsible for compiling the pro forma financial information on the basis of the [applicable criteria]. This responsibility includes the responsibility for designing, implementing and maintaining internal control relevant for compiling the pro forma financial information on the basis of the 7 Where the audit or review report has been modified, reference may be made to where the modification has been described in the prospectus. [applicable criteria] that is free from material misstatement, whether due to fraud or error. The ……………….. {Responsible party} is also responsible for identifying and ensuring that the Company complies with the laws and regulations applicable to its activities, including compliance with the provisions of the laws and regulations for the compilation of Pro Forma Financial Information.

Practitioner’s Responsibilities

Our responsibility is to express an opinion, as required by ……………..[Reference to the relevant law or regulation], about whether the pro forma financial information has been compiled, in all material respects, by ………………. [the responsible party] on the basis of the ……………………[applicable criteria].

We conducted our engagement in accordance with Standard on Assurance

Engagements (SAE) 3420, Assurance Engagements to Report on the

Compilation of Pro Forma Financial Information Included in a Prospectus, issued by the Institute of Chartered Accountants of India. This Standard requires that the practitioner comply with ethical requirements and plan and perform procedures to obtain reasonable assurance about whether …………….. [the responsible party] has compiled, in all material respects, the pro forma financial information on the basis of the ……………………[applicable criteria]. For purposes of this engagement, we are not responsible for updating or reissuing any reports or opinions on any historical financial information used in compiling the pro forma financial information, nor have we, in the course of this engagement, performed an audit or review of the financial information used in compiling the pro forma financial information. The purpose of pro forma financial information included in a prospectus is solely to illustrate the impact of a significant event or transaction on unadjusted financial information of the entity as if the event had occurred or the transaction had been undertaken at an earlier date selected for purposes of the illustration. Accordingly, we do not provide any assurance that the actual outcome of the event or transaction at ……………..[specify date] would have been as presented. A reasonable assurance engagement to report on whether the pro forma financial information has been compiled, in all material respects, on the basis of the applicable criteria involves performing procedures to assess whether the applicable criteria used by [the responsible party] in the compilation of the pro forma financial information provide a reasonable basis for presenting the significant effects directly attributable to the event or transaction, and to obtain sufficient appropriate evidence about whether:  The related pro forma adjustments give appropriate effect to those criteria; and  The pro forma financial information reflects the proper application of those adjustments to the unadjusted financial information. The procedures selected depend on the practitioner’s judgment, having regard to the practitioner’s understanding of the nature of the company, the event or transaction in respect of which the pro forma financial information has been compiled, and other relevant engagement circumstances. The engagement also involves evaluating the overall presentation of the pro forma financial information. We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Opinion

In our opinion, [the pro forma financial information has been compiled, in all material respects, on the basis of the ………………………. [applicable criteria]]/[the pro forma financial information has been properly compiled on the basis stated].

Report on Other Legal or Regulatory Requirements

[Relevant law or regulation may require the practitioner to express an opinion on other matters (see paragraphs A46–A47). The form and content of this section of the practitioner’s report will vary with the nature of such other reporting responsibilities.] For XYZ and Co.

Chartered Accountants

Firm Registration number

Signature

(Name of the Member Signing the Report) (Designation)

Membership Number

Place of Signature

Date