ISAE 3420

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

1Objective and scope

ISAE 3420 deals with reasonable assurance engagements undertaken by a practitioner to report on the responsible party's compilation of pro forma financial information included in a prospectus, where such reporting is required by securities law or regulation in the jurisdiction (the Capital Markets Authority's public offers regulations and the NSE listing rules require it for significant acquisitions and disposals) or is generally accepted practice. It applies only where the pro forma information is included in a prospectus; it does not apply to pro forma information in other documents, though it may be adapted. Pro forma information illustrates the impact of an event or transaction (an acquisition, a disposal, a share issue, a refinancing) on unadjusted historical financial information as if the event had occurred at an earlier date; it is hypothetical by nature, so the practitioner reports on whether it was properly compiled on the basis stated, not on whether the figures are achievable or the unadjusted information is fairly presented.

The objectives are to obtain reasonable assurance 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; and to report in accordance with the practitioner's findings.

2Key definitions

3Requirements

Acceptance and planning

• Accept only if the practitioner has the capabilities and competence (including knowledge of the securities regulation and of the industry), the criteria are suitable and the responsible party will make them available, the responsible party acknowledges its responsibility for the pro forma information and the criteria, the unadjusted information has been (or will be) audited or reviewed and the source is appropriate, and the practitioner will have access to the acquiree's information and, where relevant, to its auditors.
• Understand how the responsible party has compiled the pro forma information: the event or transaction, the pro forma date, the sources, the adjustments and their support, and the accounting policies applied, together with the requirements of the securities regulation.
• Determine materiality by reference to the nature of the pro forma information and its purpose, considering whether an omitted or wrongly applied adjustment would influence users' understanding of the illustration.

Procedures on the compilation

• Determine whether the source of the unadjusted information is appropriate: the entity's published financial statements or interim information for the period, audited or reviewed, or, where not, evaluate whether it is appropriate (the audit or review report on the source is read and any modification considered for its effect on the illustration).
• Agree the unadjusted financial information to the source, and check that any reclassifications or presentation changes are appropriate and disclosed.
• Determine whether the pro forma adjustments are appropriate: whether each is directly attributable to the event or transaction, factually supportable (a sale and purchase agreement, a financing term sheet, a valuation report, the acquiree's audited statements), and consistent with the entity's accounting policies and the framework; whether all adjustments the criteria require have been made and none that they prohibit (no adjustments for expected synergies or future cost savings, unless the criteria permit a clearly labelled illustration).
• For an acquiree's financial information used in the adjustments, determine whether it has been audited or reviewed and read the report; if not, perform procedures on it or, if unable, consider the effect on the conclusion. Consider whether the acquiree's accounting policies have been aligned with the entity's for the illustration.
• Check the arithmetic: that the adjustments are correctly applied to the unadjusted information, that the columns cast and cross-cast, and that the pro forma column follows.
• Evaluate the presentation: that the pro forma information is clearly labelled and distinguished from historical information, that the purpose and the pro forma date are stated, that the basis of preparation and the source of each adjustment are disclosed, that the illustration states that it is hypothetical and may not reflect what would have happened, and that it is not misleading in the light of the practitioner's understanding of the entity and the event.
• Obtain written representations from the responsible party that, in compiling the pro forma information, it has identified all appropriate adjustments, that they are factually supportable, and that the pro forma information is properly compiled on the basis of the applicable criteria.
• Read the other information in the prospectus to identify material inconsistencies with the pro forma information, and take action under ISAE 3000 where they exist.

4Documentation and reporting

The report contains: a title indicating an independent assurance report on the compilation of pro forma financial information included in a prospectus; an addressee; an introductory paragraph identifying the pro forma information, the source of the unadjusted information and whether it has been audited or reviewed, and the period or date covered; a statement that the practitioner is not responsible for the unadjusted information and has not audited or reviewed it for the purpose of the engagement; a description of the responsible party's responsibility for compiling the pro forma information on the basis of the applicable criteria; a description of the practitioner's responsibility, the standard applied (ISAE 3420), the ethical and quality requirements met, and the nature of the engagement (obtaining reasonable assurance that the information was properly compiled, involving evaluating whether the criteria provide a reasonable basis for presenting the significant effects of the event and obtaining evidence about the adjustments and their application; and stating explicitly that the practitioner provides no assurance about whether the actual outcome of the event would have been as presented, and that the purpose of the pro forma information is solely to illustrate the impact of a significant event on unadjusted information as if the event had occurred at the earlier date); the opinion, in positive form, that the pro forma financial information has been properly compiled on the basis stated (or 'in all material respects, on the basis of the applicable criteria'); and the signature, date and location. Where the practitioner concludes that the pro forma information is not properly compiled and the responsible party does not correct it, the opinion is qualified or adverse; where sufficient appropriate evidence cannot be obtained, the practitioner withdraws where possible or, where law or regulation prevents withdrawal, disclaims. Documentation records the understanding of the compilation, the procedures on the source, the adjustments and their support, the presentation evaluation, the representations, and the basis for the opinion.

5Examinable focus