IAASB Exposure Draft - IFAC

For the attention of the Technical DirectorInternational Auditing and Assurance Standards Board545 Fifth Avenue, 14th FloorNew York, New York 10017USA

September 30, 2010

Dear Sir:

IAASB Exposure Draft - Proposed International Standard on AssuranceEngagements 3420, Assurance Reports on the Process to Compile Pro Forma FinancialInformation Included in a Prospectus

The Auditing and Assurance Standards Council (AASC) of the Philippines appreciates the opportunityto comment on the IAASB's Proposed International Standard on Assurance Engagements (ISAE) 3420,Assurance Reports on the Process to Compile Pro Forma Financial Information Included in aProspectus.

This response summarizes the views of the members of the AASC of the Philippines who commented onthis exposure draft based on the existing audit practice in the Philippines.

On IAASB's Request for Specific Comments No.1

In relation to respondents' role and responsibilities, would respondents adopt or apply the proposedISAE, or request an engagement in accordance therewith, if it became effective? If not, please explainwhy (in this regard, respondents are asked to also consider question 4 below)

Our Comment

The Philippines is committed to adopt international standards on auditing issued by the IAASB; and as aproactive approach, we are thoroughly reviewing and evaluating the relevance and impact of everyexposure draft of IAASB in relation to our business environment. As of to date, all the clarifiedInternational Standards on Auditing and standards issued by the IAASB ha~e been approved foradoption in the Philippines by the AASC.

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With respect to the reporting on the Pro Forma Financial Information (PFI), the Philippine Securitiesand Exchange Commission (Philippine SEC) issued last February 15, 2008, Memorandum CircularNo.2 Series of2008 the "Guidelines on Reporting and Attestation of Pro Forma Financial Information."The Circular requires an examination or review of the PFI by an independent auditor. There was noequivalent ISAE when the Philippine SEC issued the guidelines on pro forma financial information(PFI) in 2008. The Philippine SEC substantially based its Circular on the US Attestation Standards (AT401) Reporting on Pro Forma Financial Information. With the proposed ISAE 3420, the Philippine SECis concerned that the auditor's responsibility on the PFI will be reduced, hence will affect the reliabilityofthe PFI and the investors' interests because the auditor's assurance under the proposed standardwould be limited only on the process to compile the PFI and not on reporting on the PFI itself.


Do respondents believe that the work effort set out in the proposed ISAE is sufficient and appropriate toenable the practitioner to express an opinion as to whether the process to compile the PFI has, in allmaterial respects, been applied in accordance with the applicable criteria?

Our Comment

We believe that the work effort set out in the proposed ISAE 3420 is sufficient and appropriate to enablethe practitioner to express an opinion as to whether the process to compile the PFI has, in all materialrespects, been applied in accordance with the applicable criteria.


Do respondents believe that it is clear from the illustrative practitioner's report in the Appendix to theproposed ISAE that the practitioner is reporting on the process to compile the PFI and not on the PFIitself?

Our Comment

We believe it is clear from the illustrative practitioner's report in the Appendix to the proposed ISAE3420 that the practitioner is reporting on the process to compile the PFI and not on the PFI itself. Thetwo alternatives for the opinion in relation to the process are appropriate.

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As the proposed ISAE is designed to convey assurance on the process to compile the PFL dorespondents believe that it would be desirable for the IAASB to also develop a separate standard onreporting on the PFI itself?

It is desirable that the IAASB develop a separate standard on reporting on the PFI itself. If in certainjurisdiction, it is more relevant and appropriate for the practitioner to report on the process applied bythe responsible party to compile the pro forma financial information, then the proposed ISAE 3420 shallapply. If, however, where reporting on the PFI itself is more appropriate, an applicable standard, whichshould consider both reasonable assurance and limited assurance engagements to report on the PFI, shallapply.

The IAASB shall provide specific guidelines when ISAE 3420 or the separate standard on reporting onthe PFI itself shall apply.

We would be pleased to discuss our comments further with you. If you wish to do so, please contact me+63 2459 3004.

Respectfully yours,

uJf-/Ju ith V. Lopez

airmanAuditing and Assurance Standards Council of the Philippines

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ASSURANCE REPORTS ON THE PROCESS TOCOMPILE PRO FORMA FINANCIAL INFORMATIONINCLUDED IN A PROSPECTUSProposed International Standard on Assurance Engagements issued forcomment by the International Auditing and Assurance Standards Board of theInternational Federation of Accountants

Comments from ACCASeptember 2010

ACCA (the Association of Chartered Certified Accountants) is the global body forprofessional accountants. We aim to offer business-relevant, first-choicequalifications to people of application, ability and ambition around the worldwho seek a rewarding career in accountancy, finance and management.

We support our 140,000 members and 404,000 students throughout theircareers, providing services through a network of 83 offices and centres. Ourglobal infrastructure means that exams and support are delivered – andreputation and influence developed – at a local level, directly benefitingstakeholders wherever they are based, or plan to move to, in pursuit of newcareer opportunities.

www.accaglobal.com

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General Comments

ACCA welcomes the opportunity to comment on the proposed InternationalStandard on Assurance Engagements 3420 Assurance Reports on the Processto Compile Pro Forma Financial Information Included in a Prospectus (theproposed ISAE) issued by the International Auditing and Assurance StandardsBoard (IAASB) of the International Federation of Accountants.

In finalising the proposed ISAE it is necessary to take account of finalisation of arevision to International Standard on Assurance Engagements 3000 AssuranceEngagements Other Than Audits or Reviews of Historical FinancialInformation, in order to ensure that overlap and consequential duplication isminimised, or at least properly justified in relation to the needs of any particulartype of engagement. Subject to this, we are generally supportive of theproposed ISAE which we believe will be useful in many capital marketsalthough we recognise that, for pragmatic reasons, the IAASB has used theprospectus regime in the European Union (EU) as its basis.

We support the use, in the proposed ISAE, of the clarity drafting conventionsdeveloped for the International Standards on Auditing.

We agree with the decision to focus the proposed ISAE on the process ratherthan the pro forma financial information (PFI) itself, as there are considerableconceptual problems associated with assurance on what can be regarded ashypothetical figures.

We agree with the objectives of the practitioner at stated in the proposed ISAE.Alternative wording is provided for illustrative reports in order apparently toaddress the specific requirements in the EU. However, we are aware that someregulators may not accept anything other than the wording prescribed inEuropean legislation and would suggest, therefore, that the manner ofexpression of the assurance be left to be determined by law and regulationwhere that is necessary.

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We see no difficulty with using the term ‘compile’ (or ‘compilation’) in relationto two different engagements and believe, therefore, that the proposed ISAE iscorrect in its approach to terminology. We do not see a need for paragraph 3 ofthe introduction as its mention of International Standard on Related Services4410 Engagements to Compile Financial Statements may introduce useruncertainty where none was present.

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Matters on which Specific Questionsare Asked

In this section of our response we answer the questions posed in theexplanatory memorandum forming part of the exposure draft.

Question 1In relation to respondents’ roles and responsibilities, would respondents adoptor apply the proposed ISAE, or request an engagement in accordancetherewith, if it became effective? If not, please explain why (in this regard,respondents are asked to also consider question 4 below).

As an accountancy body, ACCA is not in a position to adopt, apply or requestan engagement in accordance with the proposed ISAE. Accordingly, we do notanswer this question.

Question 2Do respondents believe that the work effort set out in the proposed ISAE issufficient and appropriate to enable the practitioner to express an opinion asto whether the process to compile the PFI has, in all material respects, beenapplied in accordance with the applicable criteria?

We believe that the work effort set out in the proposed ISAE is sufficient andappropriate to allow the practitioner to achieve the objectives set out inparagraph 9 thereof.

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Question 3Do respondents believe that it is clear from the illustrative practitioner’s reportin the Appendix to the proposed ISAE that the practitioner is reporting on theprocess to compile the PFI and not on the PFI itself? Paragraph A52 of theproposed ISAE, in particular, provides two alternatives for the opinion inrelation to the process, i.e.

Whether the process to compile the PFI has, in all material respects,been applied in accordance with the applicable criteria; or

Whether the PFI has been properly compiled on the basis stated.

We find the illustrative practitioner’s report to be clear that no assurance isconveyed concerning the pro forma financial information itself. We suggest thatthe proposed ISAE should have added to it an explanation as to how theelements of an assurance engagement (as described in The AssuranceFramework), have been dealt with. This should, in particular explain how theproposed ISAE treats ‘subject matter information’ when management makes noexplicit assertion concerning the successful application of the process inaccordance with the applicable criteria. This is particularly important where thewritten representations from the responsible party (in paragraph 24) dealseparately with aspects of an assertion.

Question 4As the proposed ISAE is designed to convey assurance on the process tocompile the PFI, do respondents believe that it would be desirable for theIAASB to also develop a separate standard on reporting on the PFI itself? Ifyes:

(a) What do respondents believe would be the work effort implications inundertaking engagements to report on the PFI itself? In particular, howwould such work effort differ from that specified in the proposed ISAE?

(b) Should both reasonable assurance and limited assurance on the PFI beaddressed? If so, how should the nature and extent of the practitioner’swork effort be differentiated between a reasonable assuranceengagement and a limited assurance engagement to report on the PFI?

The need for a standard dealing with assurance on the pro forma financialinformation itself should be assessed by reference to the demands of regulatorsand others.

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Were such a demand to be identified, a jurisdiction may wish to have reportingon the PFI itself as an alternative to reporting on the process; alternatively,there may be a desire to have a report on both the process and the PFI. Suchcircumstances may give rise to duplication and inefficiency in the standards. If aseparate standard on reporting on the PFI is the only standard adopted in ajurisdiction, procedures relating to the process should be included in thatcontext rather than through modified application of the proposed ISAE.If the jurisdiction wanted to have assurance on the process and on the PFIitself, separate standards could be adopted but would likely result induplication. It would be better to have a standard dealing with both aspects ofassurance.

Other mattersThe IAASB has expressed interest in comments from the perspectives ofissuers, investors and regulators and comments in relation to:

any difficulties of application in a developing nation environment translation a planned effective date for the standard 18 months after its approval

We comment on two of these matters below.

ACCA members in developing nations where reporting on PFI is not fullydeveloped, have indicated that the proposed ISAE is a useful benchmark,notwithstanding its focus on the regime for issuers in the EU.

We are in agreement with the planned effective date being 18 months from thedate of approval of the resulting ISAE. Earlier adoption should not be forbidden.

TECH-CDR-943.DOC

September 8, 2010 Mr. James Gunn Technical Director International Audit and Assurance Standards Board 545 Fifth Avenue, 14th Floor New York, NY 10017 Re: Exposure Draft: Proposed International Standard on Assurance Engagements 3420, “Assurance Reports on the Process to Compile Pro Forma Financial Information Included in a Prospectus” Dear Mr. Gunn: The American Institute of Certified Public Accountants (AICPA) is pleased to comment on the International Auditing and Assurance Standards Board’s (IAASB) proposed International Standard on Assurance Engagements (ISAE) 3420, “Assurance Reports on the Process to Compile Pro Forma Financial Information Included in a Prospectus,” which deals with reasonable assurance engagements undertaken by a professional accountant in public practice to report on the process to compile pro forma financial information (PFI) included in a prospectus, where such reporting is required by securities law or the regulation of the securities exchange in the jurisdiction in which the prospectus is to be issued, or where this reporting is generally accepted practice in such jurisdiction. This letter provides our responses to the request for specific comments.

1. The AICPA’s Auditing Standards Board (ASB) does not intend to adopt or converge with this exposure draft (ED). Our current standard on reporting on PFI—Chapter 4, “Reporting on Pro Forma Financial Information,” of Statement on Standards for Attestation Engagements No. 10, Attestation Standards: Revision and Recodification (AICPA, Professional Standards, vol. 1, AT sec. 401)—which we intend to clarify, has served the U.S. environment well. A number of facets in the U.S. environment differ significantly from the prospectus regime in the European Union (EU) such that convergence simply is not possible. These facets include:

• The focus of the ED is to obtain reasonable assurance about the process to compile PFI and not on the PFI itself, whereas AT section 401 deals with obtaining assurance on the reasonableness of management’s assumptions and whether the PFI provides appropriate application and effect to those assumptions. Reporting only on the process to compile would be confusing to users who, at least in the U.S., expect an opinion on the PFI.

• The ED expands on how ISAE 3000, “Assurance Engagements Other than

Audits or Reviews of Historical Financial Information,” is to be applied in a reasonable assurance engagement to report on the process to compile PFI included in a prospectus, whereas the applicability of AT section 401 is not limited to PFI included only in a prospectus.

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I;

ts; and

.

• The ED describes an engagement whereby a practitioner plans and performs procedures designed to obtain reasonable assurance on the process to compile, which may be a higher level of assurance than that obtained by a practitioner on the underlying historical financial information. We do not believe such reporting should be permitted. Under AT section 401, the level of assurance obtained by a practitioner on the PFI, as of a particular date or for a particular period, is limited to the lowest level of assurance obtained on the historical financial statements.

2. We recognize that the objective of the engagement, subject to this ED, is to obtain reasonable assurance on the process to compile and not on the presentation of the result (that is, the PFI). Additionally, we recognize that in some regulatory jurisdictions, this type of reporting is required. Therefore, notwithstanding our concerns expressed in response to question 1, we believe that the work effort set forth in the ED is sufficient and appropriate to express an opinion on the process to compile. 3. We understand that the second alternative (whether the PFI has been properly compiled on the basis stated) has been provided to comply with the specific wording in the EU Prospectus Directive. This alternative may be confusing to users who are unfamiliar with the EU reporting regime because the word “process” is not included in this wording even though the ED, in its entirety, discusses the process to compile PFI. Users who are unfamiliar with the EU reporting regime may inappropriately assume or believe that the practitioner is reporting on the PFI itself rather than on the process to compile the PFI. Therefore, this reporting option should only be permitted where required by law or regulation. Furthermore, users may also misunderstand the two alternatives to believe that the practitioner is reporting on both the process to compile the PFI and on the PFI itself, notwithstanding the reporting language that states, “we have not performed an audit or review of the pro forma financial information and, accordingly, we do not express an opinion on the pro forma financial information.” To better highlight such cautionary language, we suggest that this language be set out in a separate paragraph within the practitioner’s responsibility section. 4. As stated above, this ED would not be responsive to the needs of U.S. users and, as a result, we do not intend to adopt or converge with this ED. We would support the development of an IAASB standard that is comparable to AT section 401 and that contains, at a minimum, requirements and guidance on the following:

• Evidence to support the reasonableness of management’s assumptions and the PF

• Underlying historical financial information that has been previously audited or reviewed;

• A reasonable or limited assurance engagement that limits the level of

assurance on the PFI to the lowest level of assurance obtained on the historical financial statemen

• Reporting on the PFI itself

The IAASB’s decision about whether it should undertake such a project should be based on the needs of the various countries that do not have such a standard. If the IAASB undertakes and issues such a standard, we would seriously consider converging to that IAASB standard, assuming it was comparable to AT section 401.

Additionally, we are concerned about the appropriateness of the IAASB undertaking projects that are jurisdictionally oriented. Although the explanatory memorandum of this ED states that “… the IAASB decided on 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,” we believe this ED could set an unintended precedent for the IAASB to undertake other jurisdictional projects, regardless of the perceived validity of the circumstances or need for immediate standards or guidance on a particular topic. Thank you for the opportunity to comment on this exposure draft. If you have any questions regarding the comments in this letter, please contact Andy Mrakovcic at +1-212-596-6094, [email protected]. Respectfully submitted,

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/s/ Darrel R. Schubert

Chair, Auditing Standards Board

mailto:[email protected]

The Financial Reporting Council Limited is a company limited by guarantee Registered in England number 2486368. Registered Office: As above

A part of the Financial Reporting Council

Auditing Practices Board Aldwych House, 71-91 Aldwych, London WC2B 4HN

Telephone: 020 7492 2300 Fax: 020 7492 2399 www.frc.org.uk/apb

Mr James Gunn Technical Director International Auditing and Assurance Standards Board 545 Fifth Avenue, 14th Floor New York, New York 10017 USA

31 August 2010 Dear Sir Exposure Draft ISAE 3420: Assurance Reports on the Process to Compile Pro Forma Financial Information Included in a Prospectus Introduction The Auditing Practices Board (APB), which is part of the United Kingdom’s Financial Reporting Council (FRC), welcomes the opportunity of commenting on the Exposure Draft of ISAE 3420 ‘Assurance Reports on the Process to Compile Pro Forma Financial Information Included in a Prospectus’ (the ED). The APB has, since 1991, been responsible for issuing standards and guidance for auditors in the United Kingdom and Ireland. Additionally, since 1997 the APB has issued standards and guidance for reporting accountants in connection with reports included in investment circulars, such as prospectuses. The APB issued its Standards for Investment Reporting (SIR) 4000 “Investment Reporting Standards Applicable to Public Reporting Engagements on Pro Forma Financial Information” in 2006. It is one of a suite of interlocking SIRs relating to the work of reporting accountants designed to meet the requirements of the Prospectus Regulation (issued by the European Commission) with respect to the obligations of reporting accountants under that Regulation. Need for the ISAE to focus on more than the “compilation process” In connection with pro forma financial information, the Prospectus Regulation requires the reporting accountant to report whether the pro forma financial information “has been properly compiled on the basis stated”.

http://www.frc.org.uk/apb



The APB believes that this opinion requires the reporting accountant to go further than just evaluating the compilation process. For example, the APB believes it requires an assessment of whether the pro forma financial information is free from material error in its compilation and an evaluation of whether the adjustments are appropriate and complete for the purpose for which the pro forma information is presented. Accordingly, these are specific requirements of SIR 4000. Furthermore, the APB is concerned that the implication of the ED (in particular paragraphs 5 and A52) is that the two forms of opinion are equivalent and, therefore, that a properly compiled opinion is only about the process. The APB believes this would be misleading in the context of the reporting requirements of European capital markets. The work effort required to underpin an opinion on “proper compilation on the basis stated” is well understood in European and other capital markets, such as those of Hong Kong and South Africa, which have similar requirements. Although the work effort set out in the ED is broadly the same as that of SIR 4000, the APB is of the view that the emphasis in the ED on “the process to compile” pro forma financial information does not fairly reflect the nature of engagements to report on pro forma financial information undertaken in the United Kingdom and Ireland. To make the ED relevant to the European and similar capital markets, the APB recommends that: • the ISAE be issued with the single opinion option of “the pro forma information

has been properly compiled on the basis stated”;

• the title and objectives paragraph are amended so that they do not over emphasise the process aspect of the engagement; and

• conforming amendments are made to paragraphs 31(f) and A52 regarding the description of the scope of the engagement in the practitioner’s report.

Promulgation of ISAE 3420 in the UK and Ireland The APB is of the view that the adoption of a common standard for capital markets would be beneficial and, if the changes outlined above were to be made, the APB would be supportive of the ED’s proposals. Indeed, when SIR 4000 is next revised the APB will consider whether it can be improved by incorporating certain elements of the ISAE’s requirements and guidance. However, the APB is unlikely to promulgate ISAE 3420 for use in the UK and Ireland until such time as the IAASB has developed a more complete suite of standards applicable to the work of reporting accountants on prospectuses given the difficulty of replacing the SIRs piecemeal.



Responses to specific questions Our responses to the specific questions raised in the ED are set out in the Appendix to this letter. Further clarification If you would like clarification of any of the matters raised in this letter please contact Steven Leonard on 020 7492 2412 or at [email protected] Yours faithfully (Original signed by Richard Fleck) Richard Fleck Chairman




Appendix

Responses to questions

1. In relation to respondents’ roles and responsibilities, would respondents adopt or apply the proposed ISAE, or request an engagement in accordance therewith, if it became effective? If not, please explain why (in this regard, respondents are asked to also consider question 4 below). Please see section of covering letter entitled “Need for the ISAE to focus on more than the “compilation process”. In addition, the APB is unlikely to promulgate ISAE 3420 for use in the UK and Ireland until such time as the IAASB has developed a more complete suite of standards applicable to the work of reporting accountants on prospectuses given the difficulties that would arise from replacing the SIRs piecemeal. 2. Do respondents believe that the work effort set out in the proposed ISAE is sufficient and appropriate to enable the practitioner to express an opinion as to whether the process to compile the PFI has, in all material respects, been applied in accordance with the applicable criteria? The APB is of the view that the work effort set out in the proposed ISAE is sufficient to express an opinion on whether “the pro forma financial information has been properly compiled on the basis stated”. In addition, the APB is of the view that the work effort goes further than that required to simply report on whether “the process to compile the PFI has, in all material respects, been applied in accordance with the applicable criteria”. In particular, the APB notes: • Paragraph 19 requires the practitioner to determine that the calculations are

arithmetically correct; • Paragraph 22 requires the practitioner to evaluate whether the presentation of the

pro forma financial information is in accordance with the applicable criteria; and • Paragraph 23 requires the practitioner to read the other information in the

prospectus to identify material inconsistencies, if any, with the pro forma financial information.

As set out in the covering letter the APB believes that the ISAE should only contemplate practitioners reporting on whether “the pro forma financial information has been properly compiled on the basis stated”. Furthermore the APB is concerned that there is an implication in the proposed ISAE that the two forms of opinion are equivalent and, therefore, that the second opinion is only about the process. The APB believes this would be misleading in the context of the reporting requirements of European capital markets. 3. Do respondents believe that it is clear from the illustrative practitioner’s report in the Appendix to the proposed ISAE that the practitioner is reporting on the process to compile the PFI and not on the PFI itself? Paragraph A52 of the proposed ISAE, in particular, provides two alternatives for the opinion in relation to the process, i.e. • Whether the process to compile the PFI has, in all material respects, been applied in accordance with the applicable criteria; or



• Whether the PFI has been properly compiled on the basis stated. As discussed in the covering letter and in other responses to questions the APB is of the view that the work effort prescribed by the proposed ISAE addresses more than the process to compile the pro forma financial information. From this question it is clear that the IAASB believes the standard is only designed to report on the process to compile and not to report on the PFI itself. The long standing practice in the UK and Ireland in reporting on whether the pro forma financial information has been properly compiled on the basis stated (as required by the Prospectus Regulation) is to provide assurance on more than the process of compilation. For these reasons we have recommended in the covering letter that the proposed ISAE should only contemplate the second form of opinion being given. 4. As the proposed ISAE is designed to convey assurance on the process to compile the PFI, do respondents believe that it would be desirable for the IAASB to also develop a separate standard on reporting on the PFI itself? If yes: (a) What do respondents believe would be the work effort implications in undertaking engagements to report on the PFI itself? In particular, how would such work effort differ from that specified in the proposed ISAE? (b) Should both reasonable assurance and limited assurance on the PFI be addressed? If so, how should the nature and extent of the practitioner’s work effort be differentiated between a reasonable assurance engagement and a limited assurance engagement to report on the PFI? The APB does not consider that the development of a further standard on reporting on the PFI itself is either necessary or desirable in a UK and Ireland context. In particular, the APB does not consider that either ISAE 3420 or any other ISAE on PFI needs to contemplate the provision of assurance concerning the unadjusted financial information. The IAASB is also interested in comments on matters set out below. • Issuers, Investors and Regulators—Recognizing that PFI included in a prospectus is of particular interest and relevance to issuers, investors (including sponsoring banks, lead managers, underwriters, analysts, and institutional and retail investors), and regulators (including securities exchanges), the IAASB invites respondents from these constituencies to comment on the proposed ISAE and, in particular: (a) The content of the illustrative practitioner’s report; and (b) Whether the proposed ISAE will contribute to enhancing user confidence in how the PFI is produced. In relation to (a), see our responses under 3 and 4 above. In relation to (b), the APB considers that SIR 4000 contributes to user confidence in how the PFI is produced and that users understand the limitations of the scope of the practitioner’s work. As the work effort proposed in the ISAE is broadly equivalent to that in SIR 4000 then the APB expects the ISAE to engender user confidence to the extent that it is clear from the report that the practitioner addressed more than the compilation process.



• Developing Nations—Recognizing that many developing nations have adopted or are in the process of adopting the International Standards, the IAASB invites respondents from these nations to comment, in particular, on any foreseeable difficulties in applying the proposed ISAE in a developing nation environment. No comment. • Translations—Recognizing that many respondents may intend to translate the final ISAE for adoption in their own environments, the IAASB welcomes comment on potential translation issues respondents may note in reviewing the proposed ISAE. As English is used in the UK and Ireland the APB will not encounter translation difficulties. However, as can be seen from our responses above there are subtle nuances to the meaning of the expression “properly compiled on the basis stated”. We recommend that IAASB has due regard to the translation difficulties that may arise. • Effective Date—Recognizing that the proposals in the proposed ISAE do not establish fundamentally new assurance principles and that the subject matter of the proposed ISAE does not represent a fundamentally new area of practice for the profession, and given the public interest need to harmonize inconsistent practice internationally as soon as practicable, the IAASB believes that an appropriate effective date for the standard would be 18 months after the date of final approval of the standard. The IAASB welcomes comment on whether this lead time relative to the effective date would provide a sufficient period to support effective implementation of the standard. No comment

Ladies and gentlemen, In pursuance of your kind invitation to comment on the exposure draft of ISAE 3420 “Assurance Reports on the Process to Compile Pro Forma Financial Information Included in a Prospectus” I would like to present certain specific comments on the questions included in your Explanatory Memorandum. Question 1: In relation to respondents’ roles and responsibilities, would respondents adopt or apply the proposed ISAE, or request an engagement in accordance therewith, if it became effective? If not, please explain why (in this regard, respondents are asked to also consider question 4 below). Comments: There is no accepted practice of reporting on the process to compile the PFI and no legislation or official regulation are in effect in Russia that could be applied to the preparation of PFI. So if this ISAE would be effective there may appear engagements to report on the PFI, including unaudited or not reviewed data. This would increase the risk of reporting sort of misleading information or even illegal transactions, for example, tax or currency irregularities especially between entities in business combinations. The risk also increases as the proposed ISAE sets forth the possibility of reporting on such PFI for a wide range of practitioners irrespective of functional qualification. This ISAE may hinder non-compliance with local laws and regularities and provoke scandals on the consequences concerning reporting practitioners. These circumstances would not strengthen users’ confidence to our profession. Question 2: Do respondents believe that the work effort set out in the proposed ISAE is sufficient and appropriate to enable the practitioner to express an opinion as to whether the process to compile the PFI has, in all material respects, been applied in accordance with the applicable criteria? Comments: Yes, except for the possibility of reporting irrespective of functional qualification, mentioned above. Question 3: Do respondents believe that it is clear from the illustrative practitioner’s report in the Appendix to the proposed ISAE that the practitioner is reporting on the process to compile the PFI and not on the PFI itself? Paragraph A52 of the proposed ISAE, in particular, provides for two alternatives for the opinion in relation to the process, i.e., • Whether the process to compile the PFI has, in all material respects, been applied in accordance with the applicable criteria; or • Whether the PFI has been properly compiled on the basis stated. Comments: No, the second alternative may mislead users and thus should be deleted (see below). Question 4: As the proposed ISAE is designed to convey assurance on the process to compile the PFI, do respondents believe that it would be desirable for the IAASB to also develop a separate standard on reporting on the PFI itself? If yes: (a) What do respondents believe would be the work effort implications in undertaking

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engagements to report on the PFI itself? In particular, how would such work effort differ from that specified in the proposed ISAE? (b) Should both reasonable assurance and limited assurance on the PFI be addressed? If so, how should the nature and extent of the practitioner’s work effort be differentiated between a reasonable assurance engagement and a limited assurance engagement to report on the PFI? Comments: (a) Yes, but it may be done in the same standard with due account for differences in jurisdictions where there are traditions and legislations for reporting on the process to compile PFI and those where not. (b) Yes, the work should be differentiated as audit and review of unadjusted financial information.

Detailed comments on the text of the Exposure Draft are performed in Table below.

Para Exposure draft Amendments Comments

1.

This International Standard on Assurance Engagement (ISAE) deals with reasonable assurance engagements undertaken by a professional accountant in public practice (for the purposes of this ISAE referred to as a “practitioner”) to report on the process to compile pro forma financial information included in prospectus, where such reporting is required by the securities law or the regulation of the securities exchange under the jurisdiction in which the prospectus is to be issued, or where this reporting is generally accepted practice in such jurisdiction.

This International Standard on Assurance Engagement (ISAE) deals with reasonable assurance engagements undertaken by a professional accountant in public practice (for purposes of this ISAE referred to as a “practitioner”) to report on the process to compile pro forma financial information included in prospectus, only if such reporting is required by the securities law or the regulation of the securities exchange under the jurisdiction in which the prospectus is to be issued, and this reporting has been generally accepted practice in such jurisdiction before the effective date for this ISAE.

The Scope of the ISAE should be limited rigidly. This ISAE may be applied only in jurisdictions which have such generally accepted practice for a long period of time. The ISAE should not allow its application in developing nations which do not have a history of such practice. The ISAE should not allow its application in jurisdictions, where reporting on unaudited or not reviewed information is prohibited. In such jurisdictions pro forma information must be audited or reviewed. (See comments above).

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31 (c) (ii), appendix

The source of the unadjusted financial information, and whether or not an audit or review report on such source has been published;

The source of the unadjusted financial information, and whether or not an audit or review report on such source has been published or issued, its date, type of the opinion (conclusion) and the reasons for modified opinion (conclusion);

Users should understand from this very document the character of the unadjusted financial information applying in the process of compilation.

A 33.

In the rare circumstances where the entity’s financial information has never been audited or reviewed…

The practitioner should be prohibited to express any opinion or conclusion on financial information prepared on unaudited or not reviewed data.

A 52.

The second alternative should be excluded as it may appear misleading for users.

Hope the comments above will be instrumental for improving the ISAs and ISAEs. Best regards, Vera F. Massarygina PhD (Economics) Deputy General Director on Audit Russia Moscow “Baker Tilly Russaudit”, Ltd [email protected]

COMMITTEE OF EUROPEAN SECURITIES REGULATORS

THE CHAIRMAN

CESR, 11-13 avenue de Friedland, 75008 Paris, France - Tel +33 (0)1 58 36 43 21, web site : www.cesr.eu

Technical Director

IAASB

545 Fifth Avenue, 14th Floor

New York 10017

Unites Stated of America

Date: 22 October 2010

Ref.: CESR/10-1158

RE: Consultation on the Exposure Draft on ISAE 3420, Assurance Reports on the Process

to Compile Pro Forma Financial Information Included in a Prospectus

The Committee of European Securities Regulators (CESR), through its Corporate Reporting

Standing Committee, has considered the consultation document issued by the IAASB on the

Exposure Draft (ED) on ISAE 3420 “Assurance Reports on the Process to Compile Pro Forma

Financial Information Included in a Prospectus”.

With regard to pro forma financial information, the EU Prospectus Regulation (Commission

Regulation (EC) No 809/2004) requires that the report prepared by the independent accountants or

auditors must state that in their opinion (a) the pro forma financial information has been properly

compiled on the basis stated and (b) that basis is consistent with the accounting policies of the

issuer. CESR believes that in order to give this opinion, the practitioner will be required to perform

procedures that go beyond the mere assessment of the compilation process.

This said, CESR does not believe that the focus on mere process in some parts of the ED (and indeed

very prominently in its title) is actually in accordance with the work effort that the ED, including the

application material within it, requires overall. In other words, CESR believes that the

requirements and application material set out in the ED reflect more than just a focus on mere

process and that as a result, and subject to the comments set out in this letter, the resulting work

effort is likely to be appropriate to support an opinion that is in accordance with the requirements of

the EU Prospectus Regulation.

On the basis of the above, CESR would like to highlight some key observations as set out below and

in greater detail in appendix 1.

Proper compilation and consistency with the issuer’s accounting policies

As noted above, subject to the comments in this letter, CESR believes that the work effort set out in

the ED as a whole is likely to be appropriate to support an opinion that the pro forma financial

information has been properly compiled on the basis stated and is consistent with the accounting

policies of the issuer. As such, CESR believes that:

(i) The objectives of the standard (as set out in paragraph 9 of the ED) should not focus only

on the process, but should also encompass proper compilation and the consistency with the

accounting policies of the issuer.

(ii) The practitioner’s opinion should explicitly state whether, in the practitioner’s view, the

pro forma financial information has been properly compiled on the basis stated (which, in

the EU, would be the Prospectus Regulation) and is in accordance with the issuer’s

2

accounting policies. In other words, the illustrative opinion as set out in the ED should

contain a single option stating that the pro forma financial information is properly

compiled on the basis stated and that the basis is consistent with the accounting policies of

the issuer.

(iii) The title of the practitioner’s report should remove the reference to process and the wording in the report should be amended accordingly.

With regard to item (ii) above, CESR is not persuaded that the two alternatives for the opinion

suggested in the ED (being “the process to compile the pro forma financial information has … been

applied in accordance with the applicable criteria” and “the pro forma financial information has been

properly compiled on the basis stated”) are equivalent, as seems to be suggested on page 6 of the ED.

The first mentioned wording focuses inappropriately on process and thus does not reflect the work

effort set out in the ED.

Status of application guidance

CESR believes that there may be a need for some of the application material to be reflected in the

requirements section of the standard itself, so that it has greater prominence and status. In the

answer to question 2 in Appendix 1, we have highlighted parts of the guidance that could be worth

considering for this aim, including some specific suggestions.

In addition to further strengthen the importance of the application material and to clarify the

interactions amongst objectives, requirements and application material CESR is of the view that it

would be helpful to include in the final standard an explicit reference that the standard is to be

interpreted in the same way as is explained in the context of ISAs in ISA 200.

Our detailed comments are set out in the Appendix to this letter.

We hope that you find our comments helpful and would be happy to discuss all or any of these issues

further with you.

Yours sincerely,

Carlos Tavares

3

Appendix 1 – CESR’s detailed responses to the questions asked in the exposure draft

Question 1

In relation to respondents’ roles and responsibilities, would respondents adopt or apply

the proposed ISAE, or request an engagement in accordance therewith, if it became

effective? If not, please explain why (in this regard, respondents are asked to also

consider question 4 below).

CESR is not in the position to address this matter, due to the nature of its organization. As securities

regulators we would be bound to accept any style of engagement that led to an appropriate opinion

being given by an accountant that complied with the Prospectus Directive. Nevertheless, as a forum

of the European Securities Regulators, CESR is considering the impact that this ED might have on

the entities which securities are listed on European markets. Subject to the observations set out in

this letter, CESR is supportive of the use of the second alternative proposed for the assurance

opinion, as long as it complies with the requirements under the EU Prospectus Regulation (i.e. that

it also makes reference to consistency with the issuers accounting policies).

Question 2

Do respondents believe that the work effort set out in the proposed ISAE is sufficient and

appropriate to enable the practitioner to express an opinion as to whether the process to

compile the PFI has, in all material respects, been applied in accordance with the

applicable criteria?

In Europe, with regard to pro forma financial information, the EU Prospectus Regulation

(Commission Regulation (EC) No 809/2004) requires that the report prepared by the independent

accountants or auditors must state that in their opinion (a) the pro forma financial information has

been properly compiled on the basis stated and (b) that basis is consistent with the accounting

policies of the issuer. CESR believes that this regulation requires the practitioner to perform work

that goes beyond concentrating merely on the compilation “process” and to express an opinion

accordingly.

In the ED, the practitioner is asked to report on the process to compile pro forma financial

information, and this focus on process is emphasized throughout the standard: in its title, in the

objectives set out in paragraph 9 which require the practitioner to obtain reasonable assurance on

the fact that the process of compilation has been applied in accordance with the applicable criteria

and in the wording used in the assurance report proposed in the Appendix to the ED.

This said, CESR does not believe that the apparent focus on process in the ED is actually in

accordance with the work effort that the ED requires overall (as included in the requirements . and

in the application material). The work effort indeed seems to reflect more than just work on the

compilation process.

For example, the practitioner is required to assess the suitability of the applicable criteria, and, as

part of this assessment, the practitioner is required, amongst other procedures, (as set out in

paragraph 13 (b) and then under paragraph 18 (b)), to determine whether the pro forma adjustments

are directly attributable to the transaction, factually supportable and consistent with the entity’s

applicable financial reporting framework and its accounting policies. These procedures are further

explained in the relevant application material. Overall the nature of work to be performed by the

practitioner (which requires specific knowledge of the transaction and its context, consideration of

the relevant accounting policies, exercise of judgement in evaluation matters, etc.) clearly suggests to

us that the ED requires the work effort of the reporting accountant or auditor to go beyond the mere

assessment of the compilation process. Specifically in our view the requirement to determine the

consistency of the pro forma adjustments with the entity’s accounting policies goes beyond the

compilation process.

4

This mismatch between the work effort that has to be undertaken by the practitioner and the

apparent focus on process can also be found with respect to other requirements and related

application material included in the ED ( e.g. requirements in paragraphs 17, 18, 20, 21 and 22). The

ED should be clearer in stating that the work effort encompasses work on the process and work on

other substantive aspects related, for example, to the accounting policies applied, the evaluations

made, the appropriateness of the unadjusted financial information, the presentation of the pro forma

financial information, etc.

CESR believes that this mismatch should be eliminated from the ED because it could lead to

inconsistent practices and it could create the risk of misinterpretations on requirements among

practitioners. The mismatch is also reflected in the wording used in the assurance report proposed in

the appendix, which refers to the process to compile, and could convey the wrong message to the

readers of the report. As far as the wording of this assurance report is concerned please see our

answer under question n.3.

Moreover, CESR believes that the objectives of the practitioner should be to obtain reasonable

assurance about whether the pro forma financial information has been properly compiled by the

responsible party in accordance with the applicable criteria and to report in accordance with the

practitioner’s findings, including on the consistency with the accounting policies of the issuer.

With respect to the specific requirements and Application Material related to the work effort to be

undertaken by the practitioner, we also believe that in order to report on the proper compilation of

the pro forma financial information in accordance to the EU regulation, some of the guidance from

the application material could be brought into the requirements section of the standard,

strengthening some of the current requirements and bringing clarity to the objectives and work

undertaken.

In this regard, we refer particularly to the procedures to be followed as part of evaluation of the

compilation process of the pro forma financial information as indicated in paragraphs 17 and 18 of

the ED, that are further explained in the application material (A 29 to A35) which provides guidance

on :

- Obtaining evidence on the factors to be considered in assessing whether the source

represents a reliable starting point and is clearly identifiable (paragraph A29).

- Performing procedures that may be appropriate where the unadjusted financial information

is not audited or reviewed (paragraph A31 – A33), including, to the extent that may be

necessary, inquiries of management, high-level analytical review, reconciliation to

ledgers/source documents, and corroboration of management explanations

- Assessing the appropriateness of the pro-forma adjustments by performing specific

procedures on the nature of those adjustments, and the way they were determined

(paragraph A34).

We believe that, for example, in order to determine whether a source of the unadjusted financial

information is appropriate, the practitioner should be required to determine whether he has

sufficient knowledge on the source and whether it would be necessary to perform procedures in order

to support the credibility of the source. Furthermore, in order to determine the appropriateness of

the pro forma adjustments, the practitioner should be required to evaluate the reasonableness of the

responsible party’s approach to identifying the adjustments.

Finally we believe that guidance in A21 could be expanded in order to include the possible need for

the practitioner to obtain an understanding of internal controls concerning information sources

relevant to the pro forma financial adjustments.

5

Status of application guidance

With regard to all these requirements and application material included, CESR is of the view that it

would be helpful to include in the final standard wording similar to that found in paragraph 19 of

ISA 200, “The auditor shall have an understanding of the entire text of an ISA, including its

application and other explanatory material, to understand its objectives and to apply its requirements

properly”. This requirement should effectively already exist with regard to this ISAE given

paragraph 6 and new paragraph 12(a) of the IAASB “Preface to the International Standards on

Quality Control, Auditing, Review, Other Assurance and Related Services” (2010 Edition Part I).

However, CESR believes that it is necessary for this requirement to be explicit in ISAE 3420 itself.

Linkage to other standards

The linkage to ISAE 3000 in paragraph 11 of the ED is not fully clear. Whereas this ED of ISAE

3420 is in the clarified format, and the practitioner as such should be required to comply with the

obligations set in ISA 200 (as clarified above), ISAE 3000 is still in the pre-clarity format, which only

consists of bold lettered and grey lettered requirements the exact nature of which is unclear. This

makes it difficult to fully understand the linkage between these two standards. We believe that for

the sake of clarity, this standard on pro forma should be a standalone standard. This would imply

the inclusion in ISAE 3420 of some parts of ISAE 3000 (in the clarity format) relevant to the

assurance engagement on pro-forma financial information.

Question 3

Do respondents believe that it is clear from the illustrative practitioner’s report in the

Appendix to the proposed ISAE that the practitioner is reporting on the process to

compile the PFI and not on the PFI itself? Paragraph A52 of the proposed ISAE, in

particular, provides two alternatives for the opinion in relation to the process, i.e.

• Whether the process to compile the PFI has, in all material respects, been applied in

accordance with the applicable criteria; or

• Whether the PFI has been properly compiled on the basis stated.

While CESR believes that the compilation is reflected in the opinion and that it is clear that the

practitioner is not reporting on the PFI, CESR is not persuaded that the two alternatives for the

opinion suggested in the ED (being “the process to compile the pro forma financial information has …

been applied in accordance with the applicable criteria” and “the pro forma financial information has

been properly compiled on the basis stated”) are equivalent, as seems to be suggested on page 6 of the

explanatory memorandum introducing the ED.

The wording of the first alternative focuses inappropriately on process and, as explained in our

answer to question 2, we believe it does not reflect the work effort set out in the ED, giving rise to

possible misunderstandings among the readers of the assurance report.

In addition to this, the focus on process in the assurance report could be read as being not in line

with the EU Prospectus Regulation which requires that the report prepared by the independent

accountants or auditors must state that in their opinion (a) the pro forma financial information has

been properly compiled on the basis stated and (b) that basis is consistent with the accounting

policies of the issuer.

The second alternative seems to be more in line with the work effort but does not refer to the

consistency with the accounting policies as explicitly required by the EU regulation.

In order to have an assurance report more in line with the European regulation, CESR believes that:

- the heading of the assurance report should refer to the “compilation” of the pro forma

financial information and not to the “process to compile” and that the wording throughout

the report should be amended accordingly;

6

- the illustrative opinion as set out in the appendix of the ED should contain a single option

stating that the pro forma financial information is properly compiled on the basis stated and

that the basis is consistent with the accounting policies of the issuer.

For the avoidance of doubt we would specifically like it understood that although supportive of the

work set out in the ED as a basis for producing the practitioner’s report on pro forma financial

information, as securities regulators we would find ourselves unable to accept an opinion in a

prospectus that did not fully comply with that set out in the Directive itself. .

Question 4

As the proposed ISAE is designed to convey assurance on the process to compile the PFI,

do respondents believe that it would be desirable for the IAASB to also develop a separate

standard on reporting on the PFI itself? If yes:

As indicated above, we believe that the work undertaken by the practitioner, as required under the

ED, amounts to more than simply .focusing on the process. As long as the objectives, the

requirements and the opinion are adjusted in the final standard such that it reflects the position

proposed in our comments to question 2 and 3, we believe that no expectation gap should arise

regarding the assurance provided by a pro forma opinion.

We believe that that in those cases where an issuer’s financial history is more complex, pro forma

financial information will need to be supplemented by other more complex financial information in

order to meet the requirements of the Prospectus Directive, and as such, we would not expect the

IAASB to develop a standard on reporting on the pro forma financial information itself..

(a) What do respondents believe would be the work effort implications in undertaking

engagements to report on the PFI itself? In particular, how would such work effort differ

from that specified in the proposed ISAE?

As mentioned above, we do not believe that a new standard on PFI should be developed.

(b) Should both reasonable assurance and limited assurance on the PFI be addressed? If

so, how should the nature and extent of the practitioner’s work effort be differentiated

between a reasonable assurance engagement and a limited assurance engagement to

report on the PFI?

As mentioned above, we do not believe that a new standard on PFI should be developed.

Comments required on other matters

(a) The content of the illustrative practitioner’s report

No comment.

(b) Whether the proposed ISAE will contribute to enhancing user confidence in how the

PFI is produced.

No comment

(c) Effective date

No comment

277 Wellington Street WestToronto, Ontario M5V 3H2 Phone: 416‐977‐3222 Fax 416‐204 ‐3408 www.aasbcanada.ca

277, rue Wellington OuestToronto, Ontario M5V 3H2 Tél: 416‐977‐3222 Télec: 416‐204‐3408 www.cnaccanada.ca

September 22, 2010 Mr. James Gunn Technical Director International Auditing and Assurance Standards Board International Federation of Accountants 545 Fifth Avenue, 14th Floor New York, NY 10017 USA

Dear Mr. Gunn:

Re: Proposed ISAE 3420, Assurance Reports on the Process to Compile Pro Forma Financial Information Included in a Prospectus

We are pleased to provide the views of the Canadian Auditing and Assurance Standards Board (AASB) on matters raised in IAASB’s Exposure Draft of proposed ISAE 3420, Assurance Reports on the Process to Compile Pro Forma Financial Information Included in a Prospectus. In developing this response, we considered comments provided to us by interested parties in Canada. Request for Specific Comments Our responses to the matters on which you specifically requested comments are set out below. 1. In relation to respondents’ roles and responsibilities, would respondents adopt

or apply the proposed ISAE, or request an engagement in accordance therewith, if it became effective? If not, please explain why (in this regard, respondents are asked to also consider question 4 below).

The AASB does not intend to adopt proposed ISAE 3420 as currently drafted for use in Canada. A key concern is that the proposed ISAE focuses on providing assurance on the process to compile pro forma financial information rather than on providing assurance on the pro forma financial information itself. In AASB’s view, an engagement to provide assurance on the process of compilation will not likely meet the needs of investors nor be clearly understood by stakeholders. A clearer approach, for example, would be for the practitioner to undertake an engagement to perform agreed-upon procedures focused on

Page 1 of 6

key aspects of the process for preparing the compiled information and the disclosure of that information. Such an engagement would be undertaken in accordance with ISRS 4400, Engagements to Perform Agreed-Upon Procedures Regarding Financial Information. 2. Do respondents believe that the work effort set out in the proposed ISAE is

sufficient and appropriate to enable the practitioner to express an opinion as to whether the process to compile the PFI has, in all material respects, been applied in accordance with the applicable criteria?

In AASB’s view, the work effort set out in the proposed ISAE is problematic. Matters to consider in this regard are set out below. Concept of materiality Paragraph A17 states:

“In an engagement to report on whether the process to compile pro forma financial information has been properly applied, an omission or the inappropriate application of an element of the process is material if it results in pro forma financial information that is misleading to the intended users of the information.”

If the guidance on materiality in paragraph A17 were truly process-focused, it would refer to an objective of identifying significant deficiencies in the compilation process. The current draft seems to approach the concept of materiality as if the practitioner was engaged to report on the compiled information itself, rather than the process. AASB acknowledges that this is a grey area (i.e., an indication of a significant deficiency in the process would result in misleading pro forma financial information). However, as currently drafted, some readers might interpret the engagement as requiring substantive procedures directed at determining whether the pro forma financial information itself is misleading, which would not seem consistent with a process-focused engagement. Applicable criteria The attributes of the applicable criteria referred to in paragraph 13 seem to be focused on the suitability of the pro forma financial information itself, rather than on the effectiveness of the compilation process. These concepts, of course, are linked. However, applicable criteria that are process-focused should focus on how effectively the responsible party carries out the process of gathering, classifying and summarizing relevant financial information in compiling the pro forma financial information. Other paragraphs with similar issues Paragraphs 15, 17, 18, 19 and 22, and related application and other explanatory material contain issues similar to those noted above relating to the confusion between assurance on the process to compile pro forma financial information and assurance on the pro forma financial information itself.

Page 2 of 6

3. Do respondents believe that it is clear from the illustrative practitioner’s report

in the Appendix to the proposed ISAE that the practitioner is reporting on the process to compile the PFI and not on the PFI itself? Paragraph A52 of the proposed ISAE, in particular, provides two alternatives for the opinion in relation to the process, i.e. • Whether the process to compile the PFI has, in all material respects, been

applied in accordance with the applicable criteria; or • Whether the PFI has been properly compiled on the basis stated.

It is not clear that the two alternatives for the opinion are equivalent. The second alternative, “…the PFI has been properly compiled…” seems to convey that the opinion applies to the information itself, rather than the compilation process. It is AASB’s understanding that the second alternative is currently used in the European Union (EU); therefore, prohibiting such wording may cause problems for auditors in the EU. However, AASB notes that the EU wording gives no consideration to two important elements of an assurance engagement: materiality (as “in all material respects” is not included) and the applicable framework/criteria under which the engagement was performed. In AASB’s view, the IAASB should consider taking an approach as set out paragraph A36 of ISA 210, Agreeing the Terms of Audit Engagement, which states that:

“When law or regulation prescribes the layout or wording of the auditor's report in a form or in terms that are significantly different from the requirements of ISAs and the auditor concludes that additional explanation in the auditor's report cannot mitigate possible misunderstanding, the auditor may consider including a statement in the auditor's report that the audit is not conducted in accordance with ISAs. The auditor is, however, encouraged to apply ISAs, including the ISAs that address the auditor's report, to the extent practicable, notwithstanding that the auditor is not permitted to refer to the audit being conducted in accordance with ISAs.”

That is, the IAASB should not consider alternative 2 as being appropriate for the purposes of the ISAE. If the EU wording needs to be used to meet regulatory requirements, the practitioner should not refer to the engagement as being conducted in accordance with ISAE 3420 but would be encouraged to apply ISAE 3420 to the extent practicable.

Page 3 of 6

4. As the proposed ISAE is designed to convey assurance on the process to compile

the PFI, do respondents believe that it would be desirable for the IAASB to also develop a separate standard on reporting on the PFI itself? If yes: (a) What do respondents believe would be the work effort implications in

undertaking engagements to report on the PFI itself? In particular, how would such work effort differ from that specified in the proposed ISAE?

(b) Should both reasonable assurance and limited assurance on the PFI be addressed? If so, how should the nature and extent of the practitioner’s work effort be differentiated between a reasonable assurance engagement and a limited assurance engagement to report on the PFI?

Developing a truly global standard on assurance on PFI In AASB’s view, the IAASB should develop an ISAE only if it would be clearly applicable in the global environment. For example, ISAE 3420 could be drafted to establish a clear, high-quality standard that regulators around the world could subsequently incorporate into their regulations. In the case of the proposed draft, the opposite approach seems to have been taken. That is, the drafting of this ISAE seems to have been driven by securities regulations that exist only in a limited number of jurisdictions. We question the appropriateness of this approach. Reasonable and limited assurance The issue of whether the standard should deal with both reasonable and limited assurance depends on the needs of stakeholders and regulatory bodies. Inclusion in one standard of procedures and reporting for both levels of assurance will likely make the standard overly complex and difficult to understand. If the option of either reasonable or limited assurance is provided, AASB’s preliminary view is that this should be done by way of two separate standards. However, AASB also notes that the IAASB is currently developing other proposed ISAEs that may deal with both reasonable and limited assurance levels (e.g., ISAE 3410, Assurance on Greenhouse Gas Statement). A consistent approach to this matter should be taken in developing the various ISAEs. AASB is unable to comment on expected work effort at this time. The IAASB is still in the process of dealing with fundamental concepts relating to limited assurance (review) engagements. It is not clear how these might be applied to reviews related to pro forma information. Comments on other matters in which the IAASB is also interested Translations The AASB has not identified any potential translation issues. Effective Date The AASB agrees with the IAASB that an appropriate effective date for the standard would be 18 months after the date of final approval of the standard. This would provide a sufficient period to support effective implementation of the standard.

Page 4 of 6

Comments on Other Matters In AASB’s view, the IAASB should also address the following matters in finalizing the ISAE. Reference to ISAE 3000 Paragraph 7 refers to ISAE 3000, and the need to comply with the IFAC Code. This reference is outdated and not consistent with references to the Code in the ISAs and other proposed standards (such as the review engagement standard). In this case, AASB suggests that there should be no link to ISAE 3000. Instead, wording mirroring that in the ISAs should be used. Paragraph 7 may be reworded as follows:

Compliance with ISAE 3000 requires, among other things, that the practitioner comply with the independence and other requirements of the Code of Ethics for Professional Accountants developed by the International Ethics Standards Board for Accountants (“IESBA Code”), and implement quality control procedures that are applicable to the individual engagement. The practitioner is subject to relevant ethical requirements, including those pertaining to independence. Relevant ethical requirements ordinarily comprise Parts A and B of the International Federation of Accountant's Code of Ethics for Professional Accountants (the IFAC Code) related to assurance engagements together with national requirements that are more restrictive.

Inappropriate use of the word “determine” Paragraphs 17, 18, 19, et al. include the words “the practitioner shall determine…” The word “determine’ can imply steps for auditors that are unduly onerous and needs to be used carefully. Normally, “determine” is used only when there is a clear “yes” or “no” question to be answered, as opposed to the need to reach a conclusion based on obtaining reasonable assurance. Other paragraphs, such as paragraph 22, use the phrase “the practitioner shall evaluate…” In AASB’s view, use of “evaluate” would be more appropriate in the paragraphs referred to above and consistent with the subtitle above paragraph 17, which refers to “evaluating the process applied…” Accounting policies the entity would have adopted Paragraph A15 discusses accounting policies for transactions with which the entity has not previously had to deal and indicates that such policies should be consistent with policies that the entity “would have adopted for such types of transactions under its applicable financial reporting framework.” If there is more than one appropriate accounting policy, the procedure set out in paragraph A15 would seem to be impracticable as it would require the practitioner to read management’s mind. AASB suggests that the paragraph be reworded as follow:

“…Whether accounting policies for specific types of transactions in the acquiree’s financial information with which the entity has not previously had to deal are policies that would have been appropriate the entity would have adopted for such types of transactions under the entity’s its applicable financial reporting framework, taking into account the particular circumstances of the entity.”

Page 5 of 6

We hope that these comments will be useful to the IAASB in finalizing ISAE 3420. If you have any questions or require additional information, please contact Greg Shields at (416) 204-3287. Yours very truly,

Bruce Winter, FCA Chair, CICA Auditing and Assurance Standards Board

c.c. CICA Auditing and Assurance Standards Board Members Philip Cowperthwaite, FCA

Page 6 of 6

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Significant Comments: We are concerned about:

• The inclusion of multiple options for wording the practitioner’s report, which may cause confusion between an engagement to provide assurance on the process to compile versus an engagement to provide assurance on the PFFI itself.

• The potential that the unadjusted financial information may never have been audited or reviewed. In that circumstance, the proposed standard does not contain any requirements for the practitioner to perform any specific procedures on that information.

• Not explicitly recognizing in the proposed standard that there are other types of engagements performed related to this subject matter which the standard does not address.

We have elaborated the reasons for our concerns with these items in responding to the specific questions posed by the IAASB below. Responses to Request for Specific Comments: 1. In relation to respondents’ roles and responsibilities, would respondents adopt or apply the proposed ISAE, or request an engagement in accordance therewith, if it became effective? If not, please explain why (in this regard, respondents are asked to also consider question 4 below). The ability to adopt or apply the proposed ISAE would vary by jurisdiction and would depend on what was permitted by specific securities law or regulation in each jurisdiction. In those countries (for example, those belonging to the European Union) that have a requirement to report on the PFFI, but do not have specific standards governing the performance of engagements on PFFI and the practitioner’s involvement with such, a standard that provides a consistent approach to performing these engagements would have value. However, there are jurisdictions that do not allow for assurance engagements on the “process to compile” or where the current usual practice is to provide assurance on the pro forma financial information itself. Accordingly, it is unlikely that those jurisdictions would adopt this standard. 2. Do respondents believe that the work effort set out in the proposed ISAE is sufficient and appropriate to enable the practitioner to express an opinion as to whether the process to compile the PFFI has, in all material respects, been applied in accordance with the applicable criteria? One notable item missing from the description of the work effort is required procedures relating to the source of the unadjusted financial information.


Although the explanatory memo to the proposed standard notes that the IAASB did not feel it would be appropriate to require the UFI to be audited or reviewed as a precondition for expressing an opinion on the process (because the practitioner’s focus is on the process applied and not the PFFI itself), we believe that it would be appropriate to include some required procedures for the practitioner to perform when the entity’s financial information has never been audited or reviewed. This is to avoid the risk of being associated with misleading information. Accordingly, we recommend that paragraph A33 be made a requirement, and that additional application material be included in the proposed standard to provide guidance on the nature of inquires the practitioner would perform. Additionally, there are no required procedures on the source of financial information of an acquiree or divestee. We recommend that paragraph 18(a) revised as follows:

18. The practitioner shall determine whether (a) the responsible party has appropriately identified the pro forma adjustments, including whether the source of the acquiree or divestee financial information is appropriate; and (b) The pro form adjustments are in accordance with the applicable criteria.

3. Do respondents believe that it is clear from the illustrative practitioner’s report in the Appendix to the proposed ISAE that the practitioner is reporting on the process to compile the PFFI and not on the PFFI itself? Paragraph A52 of the proposed ISAE, in particular, provides two alternatives for the opinion in relation to the process, i.e.

A. Whether the process to compile the PFFI has, in all material respects, been applied in accordance with the applicable criteria; or

B. Whether the PFFI has been properly compiled on the basis stated.

Because of the fact that the second option (B) does not contain the word “process,” we believe that there is a significant risk that users may interpret it as providing assurance on the PFFI itself, despite the explanation to the contrary in the proposed standard. We have a responsibility to not confuse users or else we will increase the expectation gap between what we have performed and what users think we have performed. The entire proposed standard is written from the perspective of the “process”; therefore the example wording of the opinion in application material should not exclude such word. We understand that the wording of the second option is included in the EU’s Prospectus Directive and is required to be used in the report in that jurisdiction; however, we are concerned that practitioners who are not in the EU may see option B as an equal alternative to option A, without being required to use this alternative. We believe that the application material in paragraph A53 is sufficient to allow for the prescribed wording of the EU. For the reasons noted above, we recommend that option B be deleted from the proposed standard. We would strongly recommend that, if option B were to be included in the


final standard, that its use be restricted to only those jurisdictions where such language is mandated by law or regulation. 4. As the proposed ISAE is designed to convey assurance on the process to compile the PFFI, do respondents believe that it would be desirable for the IAASB to also develop a separate standard on reporting on the PFFI itself? If yes: (a) What do respondents believe would be the work effort implications in undertaking engagements to report on the PFFI itself? In particular, how would such work effort differ from that specified in the proposed ISAE? (b) Should both reasonable assurance and limited assurance on the PFFI be addressed? If so, how should the nature and extent of the practitioner’s work effort be differentiated between a reasonable assurance engagement and a limited assurance engagement to report on the PFFI? Due to the significant workload of the IAASB, we believe it would be appropriate to first consider which jurisdictions do not have their own standards in this area and what the need in those jurisdictions would be. • Effective Date— The IAASB believes that an appropriate effective date for the standard would be 18 months after the date of final approval of the standard. The IAASB welcomes comment on whether this lead time relative to the effective date would provide a sufficient period to support effective implementation of the standard. We believe that 18 months would be an appropriate implementation period. Comments on the Proposed Standard: Paragraph 1 We believe it is important to recognize in the proposed standard that there are other types of engagements performed related to this subject matter which the standard does not address. Accordingly, we strongly recommend that the proposed standard explicitly state that it does not deal with engagements to report on the pro forma financial information itself, by revising paragraph 1 as follows:

1. This International Standard on Assurance Engagements (ISAE) deals with reasonable assurance engagements undertaken by a professional accountant in public practice30 (for purposes of this ISAE referred to as a “practitioner”) to report on the process to compile pro forma financial information included in a prospectus, where such reporting is required by securities law or the regulation of the securities exchange (“relevant law or regulation”) in the jurisdiction in which the prospectus is to be issued, or where this reporting is generally accepted practice in such jurisdiction. In some jurisdictions, practitioners


report on the pro forma financial information itself, however, this ISAE does not deal with those types of engagements.

Scoping paragraphs: These paragraphs, along with the title of the standard, limit the scope of the proposed standard to pro forma financial information included in a prospectus. Would it be possible to also use the standard to provide assurance on pro forma financial information prepared for a separate purpose? We believe it would be helpful for the proposed standard to clarify whether or not it could be. Paragraph 10(d): There may be terms other than “prospectus” used in some jurisdictions, for example, offering memorandum. This should be noted in the definition, so as to cover all different terms that may be used. Paragraph 12(d): This paragraph describes situations where there may be an Emphasis of Matter paragraph on the source of the unadjusted financial information. We believe this also relates to the source of the financial information of the acquiree or divestee. As this information is not included in the definition of unadjusted financial information, we believe it should be explicitly included in this bullet. Paragraph 22: This paragraph should include a bullet on evaluating whether the date as of which the pro forma financial information was compiled is disclosed, similar to the requirement in paragraph 26 (c) of ISAE 3000. Paragraph 29: We recommend that this paragraph be revised to reflect the considerations in ISAE 3000 on both qualified opinions and reports that contain an emphasis of matter as follows:

29. In the rare circumstances where the relevant law or regulation permits publication of a prospectus that contains a modified opinion with regard to the process to compile the pro forma financial information and the practitioner determines that a modified opinion is appropriate, the practitioner shall apply the requirements in ISAE 3000 regarding modified qualified opinions or reports that contain an emphasis of matter paragraph.

Paragraph 31(c)(ii): This bullet requires that the practitioner state in its report whether or not an audit or review report has been published/issued on the source of the unadjusted financial information. We strongly believe the report should also state whether the audit or review report had been modified, or included an Emphasis of Matter paragraph. This would mitigate the risk of the practitioner being associated with misleading information. In addition, the PFFI itself should be accompanied by appropriate disclosures to enable the intended users to understand the appropriateness and the limits of the sources of


unadjusted financial information (both for the reporting entity and the acquiree/divestee). We believe it would be appropriate for the proposed standard to include something in this respect. Paragraph 31(d): This bullet requires that the description of the responsible party’s responsibilities include “applying the process to compile.” We recommend that the report also add that they are responsible for the PFFI itself. Paragraph A8: It is unclear in this paragraph whether the proposed standard requires both UFI and pro forma adjustments to be factually supportable, as the third sentence seems to state that only “adjustments” that are related to profit forecasts would not be factually supportable. We recommend that the IAASB make it clear that profit forecasts should not be used for either UFI or pro forma adjustments. Paragraph A47: While it is not necessary to repeat publicly available criteria in the explanatory notes accompanying PFFI, we believe it is still appropriate to include a reference in the notes to such criteria. Accordingly, we recommend that the IAASB re-consider the wording of this paragraph, and consider whether it is appropriate to include a requirement to such effect. Paragraph A40: To avoid association with misleading information, we believe the guidance in paragraph A40 should be elevated to a requirement, as follows:

In order to become aware of significant events subsequent to the date of the source of the unadjusted financial information that may materially affect the unadjusted financial information and cause the pro forma financial information to be misleading, the practitioner shall make inquiries of the responsible party regarding significant subsequent events and the responsible party’s process to identify subsequent events that impact the pro forma financial information.

Practitioner’s Report – Second paragraph: As the PFFI illustrates a hypothetical scenario that may have taken place as of a specified date, we recommend that the illustrative report be revised to reflect such assumption, as follows:

The pro formal financial information has been compiled by management to illustrate the impact of the [event or transaction] set out in [Note Y] on the [company’s financial position as at that date] [and its financial performance [and cash flows] for the period then ended] as if the [event or transaction] had taken place at [date]. As part of this process, information about the company’s…


Practitioner’s Report – Restriction on Use: As PFFI is, by its nature, special purpose information that is prepared in a specific context (e.g., for the filing of the prospectus with a given securities commission), we believe that the restriction on use should be addressed in the proposed standard and included in the practitioner’s report similar to ISA 800, paragraph 141. Our recommended language, which would follow the opinion paragraph in the report, is as follows:

Restriction on Use Without modifying our opinion, we draw attention to Note X to the pro forma financial information, which explains that the pro forma financial information is issued for of the purpose of inclusion in the prospectus filed with [Securities Commission XX] and may not be suitable for another purpose.

Practitioner’s Report – Additional Examples: Paragraph 20 requires the practitioner to evaluate whether there is any effect on the practitioner’s report when a modified audit opinion or review conclusion has been expressed on the UFI or there is an Emphasis of Matter paragraph in a report related to the UFI. Paragraph A38 states that the practitioner may consider making reference in the practitioner’s report to such matters. We recommend that an example of such wording included in the proposed standard to enable practitioners to better communicate such matters. We would be pleased to discuss our letter with you or your staff at your convenience. If you have any questions, please contact Jens Simonsen, Director of Global Audit Services at + 1 212 492 3689. Very truly yours, Jens Simonsen

1 ISA 800, paragraph 14: The auditor’s report on special purpose financial statements include an Emphasis of Matter paragraph alerting users of the auditor’s report that the financial statements are prepared in accordance with a special purpose framework and that, as a result, the financial statements may not be suitable for another purpose. The auditor shall include this paragraph under an appropriate heading.

Ernst & Young Global LimitedBecket House 1 Lambeth Palace Road London SE1 7EU Tel: +44 [0]20 7980 0000 Fax: +44 [0]20 7980 0275 www.ey.com

Mr. James Gunn Technical Director International Auditing and Assurance Standards Board 545 Fifth Avenue, 14th Floor New York, New York 10017 USA

30 September 2010

Dear Mr. Gunn:

Proposed ISAE 3420 – Assurance Reports on the Process to Compile Pro Forma Financial Information Included in a Prospectus

Ernst & Young Global Limited, the central entity of the Ernst & Young organization, welcomes the opportunity to offer its views on the proposed International Standard on Assurance Engagements (ISAE) 3420 Assurance Reports on the Process to Compile Pro Forma Financial Information Included in a Prospectus. Responses to the specific questions on which the IAASB is seeking feedback are set out in Section 1 below. Our other comments, including general editorial comments, are set out in Section 2.

We support the need for a standard on this topic, and believe that the proposed ISAE 3420 will help to promote increased consistency of reporting on the process of compiling pro forma information included in a prospectus. Although the Prospectus Regime in the European Union (EU) was used as the starting point for the preparation of the proposed IASE 3420, we believe that the resulting standard will also be useful in other jurisdictions.

1. Specific questions on which IAASB is seeking responses

1. In relation to respondents’ roles and responsibilities, would respondents adopt or apply the proposed ISAE, or request an engagement in accordance therewith, if it became effective? If not, please explain why (in this regard, respondents are asked to also consider question 4 below).

We would apply the proposed standard in jurisdictions where it is acceptable to do so, such as for engagements in the EU that are required to follow the Prospectus Directive, or other jurisdictions where providing assurance on the process to compile pro forma financial information is either required or a generally accepted practice. We believe that it will assist practitioners in reporting on the process of compiling pro forma financial information for inclusion in a prospectus, as well as explaining to users of the pro forma information the scope of our work. In this regard, we believe that it will help to promote consistency of reporting across jurisdictions.

Ernst & Young Global Limited is a company limited by guarantee registered in England and Wales - registered number 4328808. Its registered office is Becket House, 1 Lambeth Palace Road, London, SE1 7EU, England.

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2. Do respondents believe that the work effort set out in the proposed ISAE is sufficient and appropriate to enable the practitioner to express an opinion as to whether the process to compile the PFI has, in all material respects, been applied in accordance with the applicable criteria?

In most respects, we believe that the work effort set out in the proposed standard is sufficient and appropriate.

However, we have some concerns about the work effort suggested by the proposed standard in circumstances when the source of the unadjusted financial information has not been audited or reviewed. In our view, the proposed work effort in these circumstances may be insufficient to give the practitioner sufficient evidence on which to make the determination that the source is appropriate.

Paragraph 17 requires the practitioner to determine whether the responsible party has used an appropriate source for the unadjusted financial information, and the application material (paragraph A32) suggests procedures that the practitioner may consider when making this determination. These procedures are:

► Inquiries of the responsible party and

► Comparison of the source with the corresponding period financial information and, as appropriate, immediately preceding annual or interim financial information, and discussing significant changes with the responsible party

Comparison of the source with other information, and discussion of significant changes with the responsible party suggests that the practitioner will perform some level of analytical procedures. However, by not using the same terminology as the ISAs, it is unclear whether the practitioner would be expected to perform procedures on the underlying data or perform procedures to corroborate the responses given by the responsible party for significant changes that the practitioner identifies and discusses with the responsible party. It would be helpful to clarify the minimum extent of inquiries and analytical (or other) procedures expected, perhaps by way of an example.

In addition, the implication in paragraph A32 of the use of “may” when describing the procedures that the practitioner may perform is that, although these procedures are to be considered, the practitioner may choose not to perform them. In our view, however, these procedures represent less than the minimum work effort that we would typically expect to be undertaken.

We believe that, in addition to the above suggested procedures, the practitioner should have regard to the findings of the immediately preceding annual or interim financial information, and whether these might indicate any issues with the process that the responsible party has applied in compiling the financial information. For example, if the practitioner had identified deficiencies in internal control during the previous audit engagement, the practitioner would need to consider whether these would affect the reliability and credibility of the source of the unadjusted financial information.

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In addition, we believe that it will often be necessary to perform procedures to corroborate some or all of the information provided by the responsible party in response to the practitioner’s inquiries, for example, if the responses are inconsistent with the practitioner’s understanding of the entity or the external factors that influence the markets in which the entity operates.

3. Do respondents believe that it is clear from the illustrative practitioner’s report in the Appendix to the proposed ISAE that the practitioner is reporting on the process to compile the PFI and not on the PFI itself? Paragraph A52 of the proposed ISAE, in particular, provides two alternatives for the opinion in relation to the process, i.e.

► Whether the process to compile the PFI has, in all material respects, been applied in accordance with the applicable criteria; or

► Whether the PFI has been properly compiled on the basis stated.

Yes, we believe that it is clear. However, because the two forms of the acceptable opinion are worded differently – and could therefore be interpreted by users as implying different levels of assurance – we believe that it is necessary to state explicitly within ISAE 3420 that the two phrases are regarded as being equivalent, similar to the explicit statement in paragraph 35 of ISA 700 Forming an Opinion and Reporting on Financial Statements.

4. As the proposed ISAE is designed to convey assurance on the process to compile the PFI, do respondents believe that it would be desirable for the IAASB to also develop a separate standard on reporting on the PFI itself? If yes:

(a) What do respondents believe would be the work effort implications in undertaking engagements to report on the PFI itself? In particular, how would such work effort differ from that specified in the proposed ISAE?


We believe that the development of a separate standard on reporting on the pro forma information itself should be driven by a clear demand for such an assurance service by users of the pro forma information, securities regulators or other stakeholders.

2. Other comments

2.1 Engagement acceptance

We believe that when profit forecasts are used as the basis of the pro forma adjustments, it would not be appropriate to accept the engagement to report on the process to compile the pro forma information. In these situations, the criteria would not be suitable or acceptable because the profit forecasts are not factually supportable. It should be made clear that such an engagement does not comply with this ISAE. Accordingly, we propose the following wording:

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Requirement: “This ISAE requires that the pro forma adjustments are capable of being factually supported. Therefore, the practitioner shall not accept an engagement to report on the process to compile pro forma information included in a prospectus where the proposed adjustments are based on future anticipated outcomes related to profit forecasts.”

Related application material: “If profit forecasts are used as the basis for making the pro forma adjustments, such adjustments are not factually supportable. Such an engagement does not comply with this ISAE. Accordingly, the practitioner’s report on the process to compile pro forma financial information included in a prospectus does not include any reference to the engagement having been conducted in accordance with this ISAE.”

2.2 Clarity drafting conventions

We support the use of the clarity drafting conventions in the proposed ISAE 3420. However, we note a number of areas where we believe that the clarity of the drafting could be further improved.

2.2.1 Length and complexity of sentences

We note that a number of sentences within the proposed standard are long, and therefore may be difficult to understand. To improve the overall clarity of the standard, we suggest that these sentences be reworded and/or split into one or more shorter sentences. Examples of sentences longer than 45 words, along with our suggested changes to the wording, are set out in the annex to this letter.

There are also some instances of wording that we found to be complex. We believe that the proposed standard would benefit from simplification of the following wording:

► Paragraph 10(a): Applicable criteria – The criteria in accordance with which the process to compile the pro forma financial information is to be applied by the responsible party. We suggest amending this to read “Applicable criteria – The criteria used by the responsible party when applying the process to compile the pro forma information.”

► Paragraph A27, fifth bullet: We suggest simplifying the sentence, as follows “… such as monetary policies (including foreign exchange controls), fiscal policies, …”

2.2.2 “Hidden” definitions

We note that the terms “properly compiled” (paragraph 5), “practitioner” (paragraph 1) and “professional accountant” (paragraph 1) are defined within the Introduction to the proposed ISAE 3420, whereas terms such as “pro forma financial information,” which are also used in the Introduction, are included within the Definitions section. In addition, “IESBA Code” (paragraph 7) has already been referred to in full in footnote 30, which could be confusing. For consistency, we believe that it would be helpful if the definitions for all defined terms were located within the Definitions section.

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2.2.3 Inconsistent wording

In paragraph 12(b), the practitioner is required to “determine” that the applicable criteria are suitable. However, the sub-heading preceding paragraph 13 and paragraphs 13 and 14 require the practitioner to “assess” whether the applicable criteria are suitable. We suggest using “assess” in paragraph 12(b), for consistency.

In addition, the proposed standard refers to the “audit” report. This is inconsistent with ISA 700 Forming an Opinion and Reporting on Financial Statements, which refers to the “auditor’s report.” We suggest aligning the wording in the proposed standard with that used in ISA 700.

2.3 The practitioner’s report

The illustrative report is helpful, and we support its inclusion in the proposed standard. However, we have a number of comments regarding the drafting of the report.

Paragraph 31(g) requires that the practitioner include a summary of the practitioner’s procedures. The illustrative report addresses this requirement by presenting a listing of procedures that can be mapped to several of the requirements within the proposed standard. However, as the listing is a summary and states that “our procedures included”, users of the report may assume that the practitioner has also performed other procedures. This assumption, coupled with the use of similar wording to that of an auditor’s report in other parts of the practitioner’s report (including the use of “reasonable assurance”) may lead the user of the practitioner’s report to believe that the opinion is on the pro forma information, rather than on the process to compile the pro forma financial information, despite wording to the contrary in the practitioner’s report.

The description of procedures set out in the auditor’s responsibilities section of an auditor’s report emphasizes the need for the auditor to exercise judgment as to the procedures, within the framework of the ISAs. We suggest that the illustrative report in the proposed standard should follow a similar approach, namely that the report should provide a brief summary of the nature of the engagement and explain that the procedures performed by the practitioner depend on the practitioner’s judgment, exercised within the context of ISAE 3420.

If, however, the requirement in paragraph 31(g) is retained as currently drafted, we note that:

► The second and third procedures set out in the illustrative report (i.e., “evaluating whether management has used…” and “checking whether management has appropriately…”) do not align with the requirement set out in paragraph 17, which requires that the practitioner “shall determine whether the responsible party has …”. We suggest aligning the terminology, using “determine” within the illustrative report.

► The requirement in paragraph 18 uses different wording to express the procedures performed compared with the wording of bullets 4 and 5 of the procedures in the illustrative report. We suggest that these should be more closely aligned to the requirements in paragraph 18, using consistent wording to make it clearer that the practitioner’s report addresses these requirements. In addition, bullet 4 addresses procedures to evaluate the consistency of the compilation of the pro forma information

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with the entity’s financial reporting framework and its accounting policies. This concept is important, but is not addressed explicitly within paragraph 18(b). We suggest that the wording of the first sentence of paragraph A15, which refers to the necessity of consistency between the pro forma adjustments and the entity’s applicable financial reporting framework and its accounting policies, be incorporated into the requirement in paragraph 18.

If the unadjusted financial information or financial information of the aquiree/divestee used in the pro forma adjustments is unaudited, the practitioner may wish to refer to this fact in his/her report. Therefore, guidance on the wording and placement within the practitioner’s report would be helpful.

The proposed standard allows for the possible inclusion of an emphasis of matter paragraph in the practitioner’s report. We believe that, in this type of engagement, the circumstances where such an emphasis of matter paragraph would be appropriate are difficult to distinguish from circumstances that require modification of the practitioner’s report. We believe that the inclusion of examples would be very helpful to assist the practitioner in determining whether a modification to the opinion or an emphasis of matter paragraph is appropriate in the circumstances.

In addition, in some cases, the practitioner may have expressed a modified opinion on financial statements that are used to derive the unadjusted financial information, or included an emphasis of matter paragraph in the auditor’s report on that financial information. We believe that it would be helpful for ISAE 3420 to provide guidance on how the practitioner would address such a modification or emphasis of matter paragraph in the practitioner’s report on the process to compile the pro forma financial information.

2.4 Specific drafting suggestions

Paragraph 2 – It is not clear what “other underlying financial information” might be in relation to the pro forma information, and we suggest including an example to clarify this.

Footnote 30 – The Code of Ethics is defined in paragraph 7 of the proposed standard. We suggest using the defined term (i.e., IESBA Code) or referencing the definition within this footnote, as not doing so may imply that this is a different document from the one referenced in paragraph 7.

Paragraph 5, third bullet – We suggest modifying the wording of the bullet to read “…pro forma information with appropriate accompanying disclosures …” for consistency with paragraph 22(c). Paragraph 5, last sentence – The term “properly compiled” appears to be included only in reference to paragraph A52 and the related opinion in the illustrative report. It is not generally used within the proposed standard. We therefore suggest that the proposed standard acknowledge that, in some jurisdictions, the practitioner is required to express an opinion that the pro forma information is “properly compiled”. This provides a context for the definition and the related material in paragraph A52.

Paragraph 10(g) – When the definition of “unadjusted financial information” is read in the context of the definition of “pro forma adjustments” (paragraph 10(b)), it appears to be a

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“circular” definition, in that each term is defined only in the context of the other term. We believe that the definition of “unadjusted financial information” would benefit from being amended to recognize that it is the starting point for the process to compile the pro forma information. We suggest wording such as, “historical financial information extracted from an appropriate source and used by the responsible party as the starting point for compiling the pro forma information, i.e., the financial information prior to any pro forma adjustments being applied.”

Paragraphs 12(b) and 14(b) – As presently drafted, the requirements in these two paragraphs relating to the applicable criteria are similar but may imply different actions by a practitioner. If the intention is that the assessment of the applicable criteria is at a more detailed level in paragraph 14(b) than the determination of suitability using preliminary knowledge required in paragraph 12(b), we suggest that:

► The sub-section entitled Assessing the Suitability of the Applicable Criteria be moved to the Planning and Performing the Engagement section.

► Paragraph 13 be amended to also refer to paragraph 12(b), as follows: “As part of assessing whether the applicable criteria are suitable, as required by ISAE 3000 and paragraph 12(b), …”.

Alternatively, the apparent duplication could be resolved by deleting the requirement from paragraph 12(b).

Paragraph 13 – We suggest that “encompass” be changed to “include” in the introductory sentence, to read “… the practitioner shall determine that they include, at a minimum, that:”

Paragraph 13(b)(ii) and related application material – The proposed standard uses the term “factually supportable” when describing the pro forma adjustments. We believe that it would be helpful to provide a definition of this term, given that it is used consistently throughout the proposed standard, but is not a term used elsewhere within the other standards developed by the IAASB. We suggest the following definition: Factually supportable – providing objective information or evidence to support or corroborate a pro forma adjustment.

Paragraph 24 – We suggest including an additional written representation that the responsible party acknowledges its responsibility for compiling the pro forma financial information. In addition, we suggest adding application material that the practitioner may consider obtaining written representations from the responsible party that:

► Confirm that the adjustments are factually supportable

► The accounting policies and financial reporting framework have been applied consistently

► Subsequent events have been adequately disclosed or the effects of such events have been appropriately reflected through adjustments to the underlying financial information

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Paragraphs 26 and A47 – Although criteria that are publicly available are implicit to the process to compile the pro forma financial information, we would nonetheless expect that the fact that such criteria have been used would be disclosed in the pro forma financial information. This could be done, for example, by naming the law or regulation containing the criteria, so that users of the pro forma financial information could refer to them if necessary. We suggest adding wording to paragraph 26 or A47 to make this explicit.

Paragraph 31(h) – This paragraph introduces the concept of “proper application” of the process to compile the pro forma financial information. We suggest that paragraph 31(h) should instead reflect the wording used in paragraph A52, since the practitioner is not required to express an opinion on the “proper application” of the process but rather whether the process has “been applied in accordance with the applicable criteria” or has “been properly compiled on the basis stated.”

Paragraph A3 – We suggest changing “In most cases, …” to “In many cases, …”

Paragraph A4 – This paragraph uses the terms “unabridged financial statements” and “unabridged single financial statements”. We are uncertain as to whether these terms mean the same as a “complete set of financial statements” as used within the ISAs If so, we suggest that this be stated; if not, we suggest that the terms be defined.

Paragraph A6 – The wording of paragraph A6 reads as a requirement, even though it does not contain the words “the practitioner shall”. We suggest that this paragraph be reworded as a requirement and moved to form part of paragraph 13.

Paragraph A10(b) – We suggest deleting “insofar as the responsible party is able to provide or procure it.” The requirement in paragraph 12(e)(iii) requires the responsible party to acknowledge responsibility for providing relevant information and access to appropriate individuals.

Paragraph A11 – We suggest amending this paragraph to clarify that, where law or regulation prescribes the terms of the engagement in sufficient detail, the written agreement would only need to state that such law or regulation applies and that the responsible party acknowledges and understands its responsibilities. We suggest wording such as “If law or regulation prescribes in sufficient detail the terms of the engagement, the practitioner need not record them in a written agreement. In this case, the written agreement would state that such law or regulation applies and that the responsible party acknowledges and understands its responsibilities as set out in paragraph 12(e).”

Paragraph A12 – “Pro forma financial information” is drafted in the singular in this sentence, but it is compared with “general purpose financial statements,” which seem to be plural. To remove this inconsistency, we suggest amending the wording to read “... by its nature does not comprise a complete set of general purpose financial statements…”

Paragraph A32 – There is a typographical error in the introductory sentence – delete either “that” or “the” in “… credibility of that the source …”

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Paragraph A33 – We believe that, where the entity’s financial information has never been audited or reviewed, it would always be appropriate to perform some additional procedures to determine whether that information is appropriate and fit for purpose. However, in our view, paragraph A33 leaves the impression that, in these circumstances, the practitioner may decide to perform no additional procedures. We therefore suggest that ISAE 3420 include a requirement for the practitioner to perform additional procedures in all circumstances when the entity’s financial information has never been audited or reviewed. The application material currently in paragraph A33 could then provide the examples of the additional procedures, but within the context that some procedures would always be appropriate.

Paragraph A44 – We suggest adding a new sentence to paragraph A44, as follows: “Relevant law or regulation may require the practitioner to express an opinion on matters other than whether the process to compile the pro forma financial information has, in all material respects, been applied by the responsible party in accordance with the applicable criteria. In these circumstances, it may not be necessary for the practitioner to perform additional procedures. The relevant law or regulation may, for example …”

Paragraph A46 – We find this paragraph confusing. We suggest amending it to clarify that the practitioner may have additional responsibilities as a result of the requirements of law or regulation, and that, in this case, including a description of such additional responsibilities in the practitioner’s report is acceptable. If this is not the intent of this paragraph, we suggest the addition of an example to clarify the intent.

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We would be pleased to discuss our comments with members of the International Auditing and Assurance Standards Board or its staff. If you wish to do so, please contact Dan Montgomery (+1 216 583 2949) or Denise Esdon (+ 1 416 943 2982).

Yours sincerely,

Ernst & Young Global Limited

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Annex – Sentences longer than 45 words

Sentence in proposed ISAE 3420

Suggested alternative wording

Paragraph 1 (80+ words)

This International Standard on Assurance Engagements (ISAE) deals with reasonable assurance engagements undertaken by a professional accountant in public practice (for purposes of this ISAE referred to as a “practitioner”) to report on the process to compile pro forma financial information included in a prospectus, where:

► Such reporting is required by securities law or the regulation of the securities exchange (“relevant law or regulation”) in the jurisdiction in which the prospectus is to be issued; or

► This reporting is generally accepted practice in such jurisdiction.

Paragraph 7 (45+ words)

Compliance with ISAE 3000 requires, among other things, that the practitioner:

► Comply with the independence and other requirements of the Code of Ethics for Professional Accountants issued by the International Ethics Standards Board for Accountants (IESBA Code) and

► Implement quality control procedures that are applicable to the individual engagement.

Introduction to paragraph 20 (60+ words)

The practitioner or another auditor may have expressed a modified audit opinion or review conclusion with respect to either the source of the unadjusted financial information or the source of the acquiree or divestee financial information, or may have issued a report containing an Emphasis of Matter paragraph with respect to such source. In this case, and if the relevant law or regulation does not prohibit the use of such a source, the practitioner shall evaluate:

Paragraph 29 (50+words)

The relevant law or regulation may permit publication of a prospectus that contains a modified opinion with regard to the process to compile the pro forma financial information. In such circumstances, if the practitioner determines that a modified opinion is appropriate, the practitioner shall apply the requirements in ISAE 3000 regarding modified opinions.

First sentence of paragraph 30 (50+ words)

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 the process to compile the pro forma financial information.

Second sentence of paragraph 30

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 cause the

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(45+words) pro forma financial information to not be properly compiled on the basis stated.

Point (f) of paragraph 31 (60+ words)

(f) A statement that:

► The engagement was performed in accordance with ISAE 3420, Assurance Reports on the Process to Compile Pro Forma Financial Information Included in a Prospectus

► ISAE 3420 requires that the practitioner comply with ethical requirements and plan and perform procedures to obtain reasonable assurance about whether the responsible party has applied the process to compile the pro forma financial information in accordance with the applicable criteria;

Second sentence in paragraph A2 (60+ words)

For example, where the entity is acquiring a number of businesses prior to an initial public offering, the responsible party may choose to present a pro forma net asset statement. The pro forma net asset statement illustrates the impact of the acquisitions on the entity’s financial position and key ratios such as debt to equity had the businesses been combined with the entity at an earlier date.

Paragraph A4 (50+ words)

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 unabridged single financial statements, such as a statement of financial position and a statement of comprehensive income, or

► Financial information that is appropriately condensed from unabridged financial statements, such as a statement of net assets.

Second sentence of paragraph A16 (60+ words)

For example, as part of the event or transaction, the entity proposes to issue complex financial instruments for the first time. In this case, it may be necessary to consider:

► Whether the responsible party has adopted appropriate accounting policies to account for such financial instruments under its applicable financial reporting framework, and

► Whether it has appropriately applied such policies in the process to compile the pro forma financial information.


Instead, it depends on the size and nature of the omission or inappropriate application of an element of the process as described in paragraph A18, whether or not intentional. This may be judged in the context of the event or transaction, the purpose for which the pro forma financial information is being

12



compiled, and the related engagement circumstances.


In determining whether the source used by the responsible party is appropriate, the practitioner is obtaining evidence to determine whether this criterion has been satisfied by the responsible party in applying the process. The practitioner is not obtaining evidence for the purpose of reporting on the source or on the pro forma financial information itself.

First sentence of paragraph A37(45+ words)

Not all modified audit opinions, review conclusions or Emphasis of Matter paragraphs with respect to either the source of the unadjusted financial information or the source of the acquiree or divestee financial information necessarily affect the process to compile the pro forma financial information.


For example, the auditor may have expressed a qualified audit opinion on the entity’s financial statements relating to the non-disclosure of remuneration for those charged with governance, as required by the applicable financial reporting framework. When the financial statements are the source for the unadjusted financial information, the qualified opinion may have no consequence on the process to compile pro forma net asset and income statements.


Nevertheless, when evaluating the presentation of the pro forma financial information, the practitioner considers whether the practitioner has become aware, through performing the procedures under this ISAE or otherwise, of any significant events subsequent to the date of the source of the unadjusted financial information. If so, the practitioner considers whether such events may require reference to, or disclosure in, the explanatory notes to the pro forma financial information to avoid the latter being misleading.


In some cases, the circumstances involve types of transactions that require the responsible party to use accounting policies for the pro forma adjustments that the entity has not previously had to articulate because it had no relevant transactions. In such cases, the practitioner may request the responsible party to expand the written representation to include confirmation that such accounting policies constitute the entity’s adopted policies for such types of transactions.


The practitioner may conclude that performing the procedures set out in this ISAE would be sufficient to enable the practitioner to express the opinion in the prescribed wording. In this case, it may be appropriate to regard this wording as being generally equivalent to the wording of the opinion in the terms specified in paragraph A52.

Proposed International Standard on Assurance Engagements ISAE 3420, Assurance Reports on the Process to Compile Pro Forma Financial Information Included in a Prospectus Request for Specific Comments The IAASB would welcome views on the following: 1.In relation to respondents’ roles and responsibilities, would respondents adopt or apply the proposed ISAE, or request an engagement in accordance therewith, if it became effective? If not, please explain why (in this regard, respondents are asked to also consider question 4 below). Answer: From a professional point of view, YES

2. Do respondents believe that the work effort set out in the proposed ISAE is sufficient and appropriate to enable the practitioner to express an opinion as to whether the process to compile the PFI has, in all material respects, been applied in accordance with the applicable criteria? 3. Do respondents believe that it is clear from the illustrative practitioner’s report in the Appendix to the proposed ISAE that the practitioner is reporting on the process to compile the PFI and not on the PFI itself? Paragraph A52 of the proposed ISAE, in particular, provides two alternatives for the opinion in relation to the process, i.e. Answer: YES. Of the two alternatives for opinion that A52 offers paragraph, we preferr the one that expresses “the PFI appropriately has been compiled on the indicated base”

• Whether the process to compile the PFI has, in all material respects, been applied inaccordance with the applicable criteria; or • Whether the PFI has been properly compiled on the basis stated.

4. As the proposed ISAE is designed to convey assurance on the process to compile the PFI, do respondents believe that it would be desirable for the IAASB to also develop a separate standard on reporting on the PFI itself? If yes: (a) What do respondents believe would be the work effort implications in undertaking engagements to report on the PFI itself? In particular, how would such work effort differ from that specified in the proposed ISAE? (b) Should both reasonable assurance and limited assurance on the PFI be addressed? If so, how should the nature and extent of the practitioner’s work effort be differentiated between a reasonable assurance engagement and a limited assurance engagement to report on the PFI? Answer: NO The IAASB is also interested in comments on matters set out below. • Issuers, Investors and Regulators—Recognizing that PFI included in a prospectus is of particular interest and relevance to issuers, investors (including sponsoring banks, lead managers, underwriters, analysts, and institutional and retail investors), and regulators (including securities exchanges), the IAASB invites respondents from these constituencies to comment on the proposed ISAE and, in particular: (a) The content of the illustrative practitioner’s report; and (b) Whether the proposed ISAE will contribute to enhancing user confidence in how the PFI is produced. • Developing Nations—Recognizing that many developing nations have adopted or are in the process of adopting the International Standards, the IAASB invites respondents from these nations to comment, in particular, on any foreseeable difficulties in applying the proposed ISAE in a developing nation environment. EXPLANATORY MEMORANDUM Translations—Recognizing that many respondents may intend to translate the final ISAE for adoption in their own environments, the IAASB welcomes comment on potential translation issues respondents may note in reviewing the proposed ISAE. • Effective Date—Recognizing that the proposals in the proposed ISAE do not establish fundamentally new assurance principles and that the subject matter of the proposed ISAE does not represent a fundamentally new area of practice for the profession, and given the public interest need to harmonize inconsistent practice internationally as soon as practicable, the IAASB believes that an appropriate effective date for the standard would be 18 months after the date of final approval of the standard. The IAASB welcomes comment on whether this lead time relative to the effective date would provide a sufficient period to support effective implementation of the standard.

Proposals

a) To change the term “to compile” by the one “to prepare”, to avoid any possible confusion with the term “compilation” that involves the service regulated by ISRS 4410, Engagements to Compile Financial Statements.

b) To add the possibility of offering a limited assurance engagement

c) The process would have been I decipher like a sensor.

Stockholm 1st October 2010

Mr. James Gunn Technical Director IAASB 545 Fifth Avenue, 14th Floor New York New York 10017 USA

ED ISAE 3420, Assurance Reports on the Process to Compile Pro Forma Financial Information Included in a Prospectus

Far, the Institute for the Accountancy Profession in Sweden is responding to your invitation to comment on the exposure draft ISAE 3420, Assurance Reports on the Process to Compile Pro Forma Financial Information Included in a Prospectus.

Far supports in substance the responses made by FEE, the Federation of European Accountants, to this exposure draft. In addition, Far wishes to make the following remarks:

Question 2 – regarding paragraph 31 (g) and the example assurance report

Far would like to emphasize, in line with what FEE states, that we do not find it meaningful to include a list of specific procedures in the assurance report. It is better to make a reference to the applied standard to ensure that all aspects of the assurance assignment are reflected. This is also what is being done in other international audit and assurance standards.

Question 4 – regarding the development on a separate standard on reporting on the pro forma financial information itself (i.e. the output)

Since internationally accepted guidelines on how to produce and present proforma figures do not exist, Far sees no reason to try to develop a standard for providing assurance on the proforma financial information itself. One of the objectives of an assurance engagement should be to confirm that the accounts are presented in accordance with generally accepted accounting standards. For proforma financial information no such standards exist. For the same reason Far thinks it would be difficult to develop an assurance standard with different levels of assurance. Far has difficulty in understanding how a review of the process of compiling proforma financial information would be performed compared to an assurance engagement of the process. A limited assurance engagement would be of limited interest to the potential user.

Far

Bo Hjalmarsson Chairman Far Auditing Policy Group

1(1)

Avenue d’Auderghem 22-28 • B-1040 Brussels • Tel: +32 (0)2 285 40 85 • Fax: +32 (0)2 231 11 12 • [email protected] • www.fee.be Association Internationale reconnue par Arrêté Royal en date du 30 décembre 1986

Mr. James Gunn Technical Director IAASB 545 Fifth Avenue, 14th Floor New York New York 10017 USA 16 September 2010 Ref.: AUD/HB/LA/SH

Dear Mr. Gunn, Re: FEE Comments on IAASB Proposed ISAE 3420, Assurance Reports on the

Process to Compile Pro Forma Financial Information Included in a Prospectus FEE (the Federation of European Accountants) is pleased to provide you with its comments on the IAASB Proposed ISAE 3420, Assurance Reports on the Process to Compile Pro Forma Financial Information included in a Prospectus (hereafter referred to as the Exposure Draft or ED). FEE welcomes the initiative taken by the IAASB to develop this proposed standard as this issue has been a priority for practitioners in Europe working with prospectuses since the new EU Prospectus Regime came into force in Europe in 2005. FEE, in its Analysis of Responses to the FEE Discussion Paper on the Auditors Involvement with the new EU Prospectus Regime published in 20051, recommended the development of an assurance standard in this area. FEE is therefore very supportive of the IAASB initiative that will assist practitioners to achieve a level playing field in this area. Furthermore, the initial IAASB research shows that certain jurisdictions outside the EU also need a common standard that can be consistently applied. Therefore, the proposed standard is a move in the right direction taking into account the various legal bases for prospectuses in the different jurisdictions. Responses to the specific questions raised in the Consultation Paper are set out below.

1 http://www.fee.be/fileupload/upload/Analysis%20of%20Responses%20DP%20Auditor%20s%20Involvement%20with%20the%20New%20Prospectus%20Directive%20051021102005321453.pdf

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1. In relation to respondents’ roles and responsibilities, would respondents adopt or apply the proposed ISAE, or request an engagement in accordance therewith, if it became effective? If not, please explain why (in this regard, respondents are asked to also consider question 4 below).

FEE expects that the standard will be extensively applied in Europe as it is closely related to the EU Prospectus Regime. Such a standard on assurance on pro forma financial information has been requested by practitioners in Europe since the Prospectus Regime came into force in 2005. In addition, FEE appreciates that practitioners in Europe will now have a standard that will assist them to achieve a level playing field for reporting on pro forma financial information in prospectuses in accordance with the EU Prospectus Regime. FEE also appreciates the approach chosen by the IAASB in the proposed standard as it is consistent with the recommendations that FEE made in its Analysis of Responses to the FEE Discussion Paper on the Auditor’s Involvement with the New EU Prospectus Directive published in 2005. 2. Do respondents believe that the work effort set out in the proposed ISAE is


Assurance on process or output – ED paragraph 9 The approach chosen by the IAASB for assurance on pro forma financial information draws a clear distinction between the process to compile and the output (the pro forma financial information). It is proposed that assurance is given on the process and not on the output. This approach derives from commonly applied practice in relation to the auditor’s involvement with pro forma financial information in prospectuses and the interpretation of the EU Prospectus Regulation as requiring a report on process rather than output. FEE supports this approach. However, the ED might mislead users to believe that the assurance report issued by the practitioner deals with the process as well as the output, for instance when applying paragraph 13. Therefore, the objectives in paragraph 9 should clarify that this ED deals with the auditor’s involvement with the process applied by management of the company to properly compile pro forma financial information in the prospectus they prepare and not with the auditor performing a compilation engagement. Linkage with other standards, including ISAE 3000 – ED paragraph 11 Paragraph 6 of the ED requires that the practitioner complies with ISAE 30002. ISAE 3000 includes requirements in relation to generic topics such as engagement acceptance, planning, evidence, and documentation that apply to all assurance engagements, including those on pro forma financial information in a prospectus. It is important that ISAE 3000 and

2 ISAE 3000, Assurance Engagements Other than Audits or Reviews of Historical Financial Information

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this ED on pro forma financial information are not duplicative. Therefore, this standard should only contain requirements that are specifically relevant to assurance work on pro forma financial information. Furthermore, as ISAE 3000 is intended to be an umbrella standard for all assurance standards, it is essential that all its sub-standards are drafted in a consistent manner. This entails that the sub-standards3 should have a similar level of detail, leaving generally applicable issues to the umbrella standard of ISAE 3000. Therefore, FEE recommends that the IAASB in its active project on revising ISAE 3000 and the projects on ISAEs on Assurance on a Greenhouse Gas Statement and on Pro Forma Financial Information included in a prospectus deal with inherent inconsistencies, where arising. There may be merit in comparing this ED, ISAE 3000 and the suggested content of the new standards on Review and Compilation currently being developed in active IAASB projects. When considering the ED on Pro Forma Financial Information, FEE would encourage the IAASB to assess whether the requirements in the ED on independence (paragraph 7), materiality (paragraph 15) and procedures (paragraphs 16-24) and the example assurance report are at an appropriate level of detail with respect to ISAE 3000 and to other sub-standards. In addition, it appears that parts of paragraph 12 on Engagement Acceptance could be duplicative of ISAE 3000. FEE would encourage the IAASB to review this paragraph. Reference to ethical requirements – ED paragraph 12 A reference to the IESBA Code of Ethics is included in paragraph 7 of the ED highlighting that the IESBA Code applies with reference to ISAE 3000. This reference is, however, not part of the requirements of the standard and therefore not directly applicable. No specific paragraph addressing ethical requirements is included under the requirements in the exposure draft. Ethical issues are addressed in a separate paragraph within the requirements section of other IAASB (proposed) assurance standards. For example, in ISAE 3402 on Service Organisations a headline and paragraph 11 refer to relevant ethical requirements. In addition, the application material makes reference to the IESBA Code. The proposed ED 3410 on Greenhouse Gas Statements, although not containing a specific headline, includes a reference to relevant ethical requirements in paragraph 13 under the headline “Competency, Quality Control and Ethical Requirements” with additional application material referring to the IESBA Code.

3 The sub-standards under the umbrella standard ISAE 3000 currently issued or being developed under active IAASB projects are: - ISAE 3400 The examination of Prospective Financial Information (Previously ISA 810) (Effective standard.

Project proposal to revise scheduled for December 2010) - ISAE 3402 Assurance Reports on Controls at a Service Organisation (Effective 15 June 2011) - ISAE 3410 Assurance on a Greenhouse Gas Statement (being developed) - ISAE 3420 Assurance Reports on the Process to Compile Pro Forma Financial Information included in a

Prospectus (being developed. )

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Considering these two different alternatives FEE supports the solution chosen for ISAE 3402 on Service Organisations adding a headline and a specific paragraph under requirements referring to relevant ethical requirements with application material referring to the IESBA Code. This solution underlines to a greater extent the importance of the ethical requirements and seems preferable in the context of pro forma financial information. The additional paragraph could be added as a new paragraph 12 in the ED. Reference to integrity – ED paragraph 22-23 The second half of paragraph 12 (b) refers to considerations by the practitioner before accepting an engagement and highlights that “… it is unlikely that the pro forma financial information will be misleading …”. This part of the paragraph seems to stem from the IESBA Code, paragraph 110.24, although only reproduced partly in paragraph 12 (b). Paragraph 110.2 of the IESBA Code highlights that the considerations are not only related to “…misleading …” information, but also to “… materially false…” information. In addition, the paragraph in the IESBA Code is referring to these considerations throughout the entire process and not just related to the phase of the assurance process that addresses engagement acceptance, as currently included in this ED on Pro Forma Financial Information. As this standard on pro forma financial information deals with assurance on the process and not the output, there may be merit in emphasising that the practitioner should not knowingly be associated with information that contains a materially false or misleading statement throughout the assurance work performed on the management’s process. Therefore, FEE would recommend that specifically for this standard, under the umbrella standard of ISAE 3000, a reference to the integrity requirements of the IESBA Code is included, more specifically, to the entire paragraph 110.2 of the IESBA Code and not only to parts of it. FEE suggests that this reference is included as a separate paragraph under the “Planning and Performing the Engagement” section, more specifically under “Evaluating the Presentation of the Pro Forma Financial Information” (paragraphs 22-23 of the ED). This would highlight that considerations related to Integrity are relevant throughout the process and not just as part of accepting the engagement in the beginning of the work to be performed by the practitioner.

4 Paragraph 110.2 of the IESBA Code requires as follows: A professional accountant shall not knowingly be associated with reports, returns, communications or other information where the professional accountant believes that the information:

(a) Contains a materially false or misleading statement; (b) Contains statements or information furnished recklessly; or (c) Omits or obscures information required to be included where such omission or obscurity would be

misleading. When a professional accountant becomes aware that the accountant has been associated with such information, the accountant shall take steps to be disassociated from that information.

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Materiality – ED paragraph 15 The ED contains requirements and application material dealing with materiality. Materiality is one of the issues that is expected to be dealt with in general terms in the umbrella standard ISAE 3000. FEE encourages the IAASB to ensure that this standard covers only the aspects of materiality specifically addressing assurance on management’s process to compile pro forma financial information to avoid that it is duplicative of generic requirements and any related application material in the future ISAE 3000. This will aid the practitioners in applying both standards at the same time and reduce the risk of different interpretations by practitioners of the requirements of the same concept in the two standards. Procedures included as requirements – ED paragraphs 17-19 and 22 The procedures to be carried out, referred to in the example assurance report, are consistent with the requirements in paragraph 31 (g). In FEE’s opinion, a practitioner would have to perform each of these procedures in virtually all circumstances for this type of assurance engagement. Therefore, taking account of the IAASB’s clarity drafting conventions, the procedures should constitute requirements. However, FEE notes that not all of the procedures listed in the example assurance report are clearly identifiable as requirements within the draft standard, but can, to some extent, be derived from paragraphs 17-19 and 22. FEE is of the view that all these procedures, as they appear in the example assurance report, should be included in a clear and identifiable way as part of the requirements in the standard (paragraphs 15-24) so that they can be clearly mapped to specific requirements in the standard. In particular, paragraph 18(b) could be extended to state the following:

“This includes an evaluation of whether management has compiled the pro forma financial information on a basis consistent with the company’s financial reporting framework and its accounting policies under the framework.”

FEE also questions the use of wording of certain bullet points within the list included in the example assurance report, since IAASB Standards do not generally use terms such as “checking”. When including the procedures in the standard itself FEE therefore suggests using appropriate terminology in accordance with the drafting conventions, such as “evaluate” or “consider”. In addition, application material as to whether the list of procedures are considered as exhaustive or whether more procedures could be relevant, would be desirable when considering consistent application of the standard in practice. Unaudited or unreviewed unadjusted financial information - ED paragraph 17 (a) and A31 – A33 The application material in A31-A33 sets out guidance on the work to be carried out in relation to the credibility of the source where the unadjusted financial information has not been audited or reviewed. This is to be dealt with using practitioners’ professional judgement under the specific circumstances.

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Although unaudited or unreviewed information might only occur in rare circumstances, the work to be carried out to ensure a proper base for the assurance work on the compilation of the pro forma information appears quite limited. In addition, it could be questioned whether this work would be sufficient in practice. FEE acknowledges that these requirements are set out to be minimum requirements and more detailed guidance to be applied in such situations could therefore be desirable to avoid inconsistent application of the proposed paragraphs A31-A33 in practice. In addition, FEE recommends that paragraph 17 (a) in the standard itself is expanded and explains in greater detail the considerations related to unaudited or unreviewed unadjusted financial information. This would address the situation of unaudited or unreviewed unadjusted financial information more clearly than the current text, where this situation, although rare, is addressed only in the application material. Inclusion of application material in the first part of paragraph 12 (b) on “… preliminary knowledge of the engagement circumstances and discussion with the responsible party, determine that the applicable criteria are suitable…“ would be beneficial as this will be specific in situations where the unadjusted financial information has not been audited or reviewed by the practitioner that is intended to give assurance on the pro forma financial information. Application material on disclosures – ED paragraph A41 The application material in paragraph A41 sets out guidance on what kind of disclosures may accompany the pro forma information. On balance, FEE believes that the guidance in paragraph A41 may be helpful to practitioners, but appreciates that this material is merely guidance for practitioners and is not intended as a statement by the IAASB on a preferred presentation of pro forma financial information in any way. In addition, consequential amendments would be needed to paragraph A1 where a reference to paragraph A41 is included. In many jurisdictions specific disclosure requirements are established by relevant law or regulation. Therefore, FEE recommends that the reference to relevant law or regulation is added in paragraph A41, similar to the approach taken in paragraph A44 which would make the approach to legislation in the various paragraphs consistent. This reference could be included by amending paragraph A41 as follows:

“A41. Relevant law or regulation may require specific disclosures accompanying the Pro Forma Financial Information. If this is not the case aAppropriate disclosures may include matters such as …”.

Use of application material – ED Application and Other Explanatory Material The proposed standard has substantive application material, consistent with the clarity drafting convention used for ISAs, which clearly will be appreciated by practitioners when applying the standard. However, the cross-referencing to the application material is quite complex from time to time, as the same requirement refers to different parts of the application material and the paragraphs in the application material often refer to various paragraphs in the standard

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itself. To enhance the clarity and practical application as well as the understandability of the standard the IAASB could consider making the cross-references less complex. In addition, the reference to the application material in paragraph 5 of the proposed standard, would be more appropriate if it referred to paragraphs A12-A16 instead of A17-A19. 3. Do respondents believe that it is clear from the illustrative practitioner’s report

in the Appendix to the proposed ISAE that the practitioner is reporting on the process to compile the PFI and not on the PFI itself? Paragraph A52 of the proposed ISAE, in particular, provides two alternatives for the opinion in relation to the process, i.e.

Whether the process to compile the PFI has, in all material respects, been applied

in accordance with the applicable criteria; or Whether the PFI has been properly compiled on the basis stated. Procedures included in the assurance report – ED paragraph 31 (g) and example assurance report According to paragraph 31 (g) of the ED a summary of the practitioner’s procedures should be included in the example assurance report. In the example assurance report a list of seven procedures is included and as such the list appears to be exhaustive for the work to be carried out in this regard. FEE questions whether it is appropriate to include such a list of procedures, especially when compared to other example audit or assurance reports issued by the IAASB. Other IAASB standards use the following approaches to this particular issue: Paragraph 31 of ISA 7005 requires that the audit report describes an audit by

stating that it involves performing procedures to obtain audit evidence about the amounts and disclosures and that the procedures selected depend on the auditor’s judgement. Therefore, the example audit report includes only a brief summary of the procedures involved.

Paragraph 49 (i) of the current ISAE 30006 requires that the assurance report should include a summary of the work performed which will help the intended users understand the nature of the assurance conveyed. ISAE 3000 does not contain an example assurance report.

Paragraph 53 (i) of ISAE 34027 states that “The example assurance report should include a summary of the service auditor’s procedures to obtain reasonable assurance …”. The example assurance report includes a section titled “Description of Test of Controls” following the opinion that refers to the specific controls tested and the nature, timing and results of those tests listed on pages [yy-zz].

5 ISA 700 Forming an opinion and reporting on financial statements 6 ISAE 3000 Assurance Engagements 7 ISAE 3402 Assurance Reports on Controls at a Service Organisation (effective for assurance reports covering periods ending on or after 15 June 2011)

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In the active IAASB projects to revise ISAE 3000 and on Assurance on a Greenhouse Gas Statement the work of the Board has, currently, resulted in the following approaches: In the current project to revise ISAE 3000 a requirement (as in the current ISAE

3000) to include a summary of the work performed in the assurance report is included in paragraph 51 (k) and A112 (i) in the latest ED discussed at the IAASB Board meeting in June 2010. No example assurance report is included in this draft ED.

Paragraph 111 (h) (ii) of the Consultation Paper on ISAE 3410 on Assurance on a Greenhouse Gas Statement issued in October 2009 requires that the assurance report contains a summary of the practitioner’s procedures. The example assurance report in that paper includes a high-level summary covering the main procedures performed by the practitioners stating “Our engagement also included…”.

Based on these examples, inclusion of a list of procedures in the assurance report that appears to be exhaustive seems to be a new approach. As this ED on Pro Forma Financial Information is intended to be a sub-standard under the umbrella standard ISAE 3000, consistency between the various standards in the 3000-series is of great importance. Noting that the new ISAE 3402 and the draft example assurance report on greenhouse gas statements have different approaches in this area, FEE would prefer the approach chosen in ISAE 3410 on Greenhouse Gas Statements, i.e. an example assurance report containing a high-level summary of the main procedures. This indicates that the list of procedures is not exhaustive, permitting the exercise of professional judgement by the practitioner when carrying out the work which is consistent with the approach for audit reports. In our view, a high-level description in the assurance report is just as useful for users to be assured that the practitioner has carried out the work required by the standard applied and referred to in the report. FEE would encourage the IAASB to develop a consistent policy for the various examples of audit and assurance reports in its standards regarding the nature and extent of disclosure of engagement procedures. To avoid creating more inconsistencies in this area, FEE would therefore recommend that the IAASB addresses this issue now rather than at a later stage when more standards have been finalised. Therefore, in FEE’s opinion, no changes are necessary in the draft standard itself, (paragraph 31 (g)), but the example assurance report should be amended to ensure its consistency with the example assurance report included in the Consultation Paper for Assurance on a Greenhouse Gas Statement.

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Use of the wording “compile” – ED paragraph 2-3 and example assurance report Reporting by a practitioner should, according to the IAASB, be clear and understandable. “Compile” will now be used with two different meanings: In ISAE 3420 to express a reasonable assurance opinion on the process applied by

management to properly compile pro forma financial information in a prospectus; In ISRS 44108 for the practitioners to compile historical financial statements with no

assurance, which also appears to be the approach chosen for the latest draft of ISRE 4410 ED discussed in the IAASB Board meeting in June 2010.

The ED specifies in paragraphs 2 and 3 that this standard addresses assurance services whilst non-assurance services are addressed in ISRS 4410. On pages 6 and 7 in the explanatory memorandum the distinction between this ED and ISRS 4410 and the potential confusion with using the word “compile” in both cases is explained in more detail. FEE agrees with the IAASB that there is a significant risk that the distinction between the two standards will not be understandable for users as “compilation” is used differently in two different standards and FEE believes that the risk will persist despite the inclusion of paragraphs 2 and 3 in the ED. Therefore, FEE recommends that more detailed explanations are added in paragraphs 2 and 3 in the ED. They could usefully clarify the main difference between these two engagements which is that in a compilation engagement under ISRS 4410 the practitioner performs the compilation of financial information while in an engagement under ISAE 3420 management performs the compilation of the pro forma financial information. In the latter case the practitioners (only) give reasonable assurance on the process which management followed to perform its compilation. Additionally, the IAASB should consider to refer to the ‘process to compile pro forma financial information included in a prospectus’ as ‘management’s process to compile pro forma financial information included in a prospectus’, both in the title and the detailed wording of ISAE 3420. Wording of the opinion – ED paragraph 31 (h), A52 and example assurance report The example assurance report of the ED contains two alternatives for the wording of the opinion. Neither of these options are identical to the wording of the EU Prospectus Regulation which requires that the report prepared by the independent accountant or auditors must state that in their opinion: a) the pro forma financial information has been properly compiled on the basis

stated; b) basis is consistent with the accounting policies of the issuer. The Committee of European Securities Regulators has analysed this issue in further detail and has confirmed that the auditor’s report should state the exact wording of the

8 ISRS 4410 Engagements to Compile Financial Statements

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Regulation and no other wording of the statement is accepted9. This situation is explained in paragraph A44 of the ED that clarifies that 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. In the FEE 2004 Discussion Paper10 an illustrative example of an auditor’s report on Pro Forma Financial Information suggested that the wording of the opinion should be in line with the exact wording of the Prospectus Regulation. Although options generally do not further a level playing field, FEE considers that a third option could be added in paragraph A52 of the ED and in the example assurance report, containing the wording of the opinion practitioners in Europe will be required to use. Reporting on material inconsistency in the assurance report – ED paragraph 23, 28 and A42 Paragraph 23 of the ED requires the practitioner to take further appropriate action if the responsible party refuses to correct material inconsistencies or material misstatements. In the application material in paragraph A42, it is explained that appropriate action can include: describing the material inconsistency in the practitioner’s report; modifying the opinion; withdrawing from the engagement where this is possible under the relevant law or

regulation. FEE supports the wording of both paragraph 23 and A42, but would like to highlight that under the EU Prospectus Regulation there might be situations where the practitioner will not be allowed to describe material inconsistencies in the assurance report or modify the opinion. This particular issue has been analysed by CESR11 stating that qualifications may not be included as they would undermine the statement given by the auditor. Also, CESR questions the use of emphasis of matter paragraphs. As a consequence, FEE would recommend that the caveat stating “if possible under relevant law or regulation” is made applicable to all examples in paragraph A42, not solely to withdrawing from the engagement. This situation is clearly reflected in paragraph 28 of the ED. Therefore, FEE recommends making paragraph A42 consistent with paragraph 28.

9 CESR Frequently Asked Questions regarding Prospectuses: Common positions agreed by CESR Members, 10th updated version, December 2009, question 55 http://www.cesr.eu/popup2.php?id=6472 10 FEE Discussion Paper on The Auditor’s Involvement with the new EU Prospectus Directive, November 2004 http://www.fee.be/fileupload/upload/DP%20Auditor%20s%20Involvement%20with%20the%20New%20EU%20Prospectus%20Directive%200411153200591131.pdf 11 CESR Q&A, question 55

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Practitioner’s Responsibilities – ED paragraph 31 (e) and example assurance report FEE supports the inclusion of a disclaimer in the assurance report stating that neither an audit nor review on the pro forma financial information has been performed. However, to draw users’ attention to this fact, as has been done in ISREs 2400 and 2410, and ISRSs 4400 and 4410, FEE recommends that this disclaimer should be moved closer to the opinion, so that it follows the reference to the assurance standard used. Secondly, FEE would recommend that the reference to not updating or reissuing any reports or opinions on any financial information used in compiling the pro forma financial information is given a more prominent place in the assurance report. These suggestions would cause the paragraph on “Practitioner’s Responsibilities“ to be worded as follows:

“Practitioner’s Responsibilities We conducted our engagement in accordance with International Standard on Assurance Engagements (ISAE) 3420, Assurance Reports on the Process to Compile Pro Forma Financial Information Included in a Prospectus, issued by the International Auditing and Assurance Standards Board. This standard requires that we comply with ethical requirements and plan and perform our procedures to obtain reasonable assurance about whether the responsible party has applied the process to compile the pro forma financial information in accordance with the applicable criteria.” Our responsibility is to express an opinion [, as required by [Securities Regulation XX],] about whether the process to compile the pro forma financial information has been applied by management in accordance with the applicable criteria. We are not responsible for updating or reissuing any reports or opinions on any financial information used in compiling the pro forma financial information. In addition, we have not performed an audit or review of the pro forma financial information and, accordingly, we do not express an opinion on the pro forma financial information”.

4. As the proposed ISAE is designed to convey assurance on the process to

compile the PFI, do respondents believe that it would be desirable for the IAASB to also develop a separate standard on reporting on the PFI itself? If yes:

(a) What do respondents believe would be the work effort implications in undertaking engagements to report on the PFI itself? In particular, how would such work effort differ from that specified in the proposed ISAE?


In its 2005 Discussion Paper referred to above, FEE described the relevant procedures to be carried out by the practitioner in order to report on pro forma financial information being “properly compiled”. Based on this FEE has not seen a need for specific objectives and requirements to be set to report on the pro forma financial information itself, but rather on the process. However, FEE finds it important that a

Page 12 of 12


standard on this subject matter is not prohibiting or is not perceived as prohibiting assurance on the pro forma financial information itself. Whether an assurance standard on the compiled pro forma financial information included in a prospectus would be needed depends therefore on demand from other regions outside Europe and the request by regulators. Were such other constituents to request such a standard based on this consultation, the IAASB should assess these suggestions and consider how to deal with them in due course. For further information on this FEE12 letter, please contact Mrs. Hilde Blomme at +32 2 285 40 77 or via email at [email protected] or Lotte Andersen at +32 2 285 40 80 or via email at [email protected] from the FEE Secretariat. Yours sincerely,

Hans van Damme President

12 FEE is the Fédération des Experts comptables Européens (Federation of European Accountants). It represents 43 professional institutes of accountants and auditors from 32 European countries, including all of the 27 European Union (EU) Member States. In representing the European accountancy profession, FEE recognises the public interest. It has a combined membership of more than 500.000 professional accountants, working in different capacities in public practice, small and big firms, government and education, who all contribute to a more efficient, transparent and sustainable European economy. FEE’s objectives are:

To promote and advance the interests of the European accountancy profession in the broadest sense recognising the public interest in the work of the profession;

To work towards the enhancement, harmonisation and liberalisation of the practice and regulation of accountancy, statutory audit and financial reporting in Europe in both the public and private sector, taking account of developments at a worldwide level and, where necessary, promoting and defending specific European interests;

To promote co-operation among the professional accountancy bodies in Europe in relation to issues of common interest in both the public and private sector;

To identify developments that may have an impact on the practice of accountancy, statutory audit and financial reporting at an early stage, to advise Member Bodies of such developments and, in conjunction with Member Bodies, to seek to influence the outcome;

To be the sole representative and consultative organisation of the European accountancy profession in relation to the EU institutions;

To represent the European accountancy profession at the international level.

Foreningen af Statsautoriserede Revisorer

Kronprinsessegade 8, 1306 København K. Telefon 33 93 91 91

Telefax nr. 33 11 09 13 e-mail: [email protected] Internet: www.fsr.dk

Mr James Gunn

Technical Director

International Auditing and Assurance Standards Board

545 Fifth Avenue, 14th Floor

New York, New York 10017

USA

5 October 2010 lik/lsj (X:\Udvalg\REVU.ORI\IAASB-møder\ISAE 3420.doc)

Dear Sir,

IAASB Proposed ISAE 3420, Assurance Reports on the Process to Compile Pro Forma

Financial Information (PFI) Included in a Prospectus.

FSR (Foreningen af Statsautoriserede Revisorer) is pleased to provide you with its comments

on the IAASB Proposed ISAE 3420, Assurance Reports on the Process to Compile Pro Forma

Financial Information Included in a Prospectus.

Responses to specific questions Our responses to the specific questions raised in the ED are set out in the Appendix to

this letter. Further clarification If you would like clarification of any of the matters raised in this letter please contact Judith Skou

[email protected]

Yours sincerely

Judith Skou

2

Responses to specific questions raised in the Consultation Paper:

1) In Relation to respondents’ roles and responsibilities, would respondents adopt or apply

the proposed ISAE, or request an engagement in accordance therewith, if it became effective?

If not please explain why (in this regard, respondents are asked to also consider questions 4

below).

Comment:

FSR welcomes the development of a standard as this issue has high priority for the auditors’ involve-

ment with the EU Prospectus Directive from 2005.However it cannot been adopted in Denmark as it is

not in accordance with the Danish regulation relating to prospectus.

Despite the lack of conformity to Danish regulation we would recommend that consistency was

established between the standard and the Prospectus Directive cf. the Annex II in the EU Commissions

Regulation (EC) No. 809/2004 of 29. April 2004. As a minimum the standard should deal with the

special issues relating to PFI as included in the EU regulation.

Of specific items in relation hereto should be mentioned:

• The presentation of information

Annex II paragraph 3; PFI must normally be presented in columnar format composed of:

(a) The historical unadjusted information

(b) The pro forma adjustments; and

(c) The resulting PFI in the final column.

The sources of the PFI have to be stated and, if applicable, the financial statements of the

acquired business or entities must be included in the prospectus

• Criteria for preparation of PFI

Annex II paragraph 4; PFI must be prepared in a manner consistent with the accounting

policies adopted by the issuer in its last or next financial statements and shall identify the

following:

(a) The basis upon which it is prepared;

(b) The source of each item of information and adjustment

• The independent auditors report on PFI

Annex II paragraph 7; the report prepared by the independent auditor must state in their

opinion:

(a) The PFI has been properly compiled on the basis stated

(b) The basis is consistent with the accounting policies of the issuer

The lack of consistency obviously, this stems from the lack of clarity around this topic in rela-

tion to the Prospectus directive. E.g. how pro forma adjustments should be consistent with the

accounting framework (also not having any accounting standard around pro forma financial

information) is hard to see from a practical point of view.

Obviously, what the Prospectus Directive seek to establish is that pro forma adjustments

needs to be made to e.g. the Acquired Business in order to assure that when adding the figures

for the Acquired Business these figures "reflects" accounting policies in respect of recognition

and measurement and relevant classification as adopted by the Issuer.

3

Whether, such opinion can be rendered in the form the Prospectus Directive requires (a posi-

tive statement) without the practitioner auditing the Acquired Business (e.g. the acquire is

often audited by a third party accountant) could be questionable, but nevertheless reflect

established practice as enforced by the Regulators in several EU countries. Accordingly, this

issue is around actually evaluating a semi-restatement of e.g. the Acquired Business to the

accounting policies of the issuer.

Based on the above it seems that more effort needs to be put into the description of this issue

and how to deal with it.

2) Do respondents believe that the work effort set out in the proposed ISAE is sufficient and

appropriate to enable the practitioner to express an opinion as to whether the process to

compile the PFI has, in all material respects, been applied in accordance with the applicable

criteria?

Comment:

Yes please note detailed comments below. Also it could be questioned whether the list of pro-

cedures is considered to be exhaustive as well as it could be questioned whether they are al-

ways relevant.

Within the present IFAC’s scope of assurance engagement the lack of professional judgement

together with prescribed procedures make the standard to seem more like an agreed upon pro-

cedure engagement than an assurance engagement.

3) Do the respondents believe that it is clear from the illustrative practitioner’s report in the

Appendix to the proposed ISAE that the practitioner is reporting on the process to compile the

PFI and not the PFI it self? Paragraph A52 of the proposed ISAE, in particular, provides two

alternatives for the opinion in relation to the process, i.e.

• Whether the process to compile the PFI has, in all material respects, been applied in

accordance with the applicable criteria

• Whether the PFI has been properly compiled on the basis stated

Comment:

We believe it is relatively clear, however, we do have some suggestions for improvement.

Please note detailed comments below

4) As the proposed ISAE is designed to convey assurance on the process to compile the PFI,

do respondents believe, that it would be desirable for the IAASB to also develop a separate

standard on reporting on the PFI itself? IF yes

(a) What does respondents believe would be the work effort implications in undertaking

engagement to report on the PFI it self? In particular, how would such work effort dif-

fer from that specified in the proposed ISAE?

(b) Should both reasonable assurance and limited assurance on the PFI be addressed? If

so how should the nature and extent of the practitioner’s work effort be differentiated

between a reasonable assurance engagement and a limited assurance engagement to

report on the PFI?

Comment:

There is no urgent need for such a standard as long as no accounting standard around pro

forma financial information is available.

4

General remarks to the standard

The standard refers to ISAE 3000, which includes requirements in relation to generic topics

such as engagement acceptance, planning etc that apply to all assurance engagements, inclu-

ding those on PFS. It is important that ISAE 3000 and all sub standards are drafted in a con-

sistent manner and additional requirements or changes in the sub standards only are caused by

the specific nature of the subject matter or subject matter information.

In this connection we also recommend consistency is established between the ISA’s and ISAE

concerning the use of “Emphasis of Matter Paragraphs” and “Other Matter Paragraphs” in the

practitioners report. The illustrative report in ISAE 3000 would be much clearer, if the matters

relating to the users understanding of the PFI as well as matters relating to the users un-

derstanding of the assurance engagement were presented separately in separate as lined out in

ISA 706.

Comments to individual paragraphs in the proposed ISAE 3420

Paragraph 23

This paragraph is very unclear. The practitioner's responsibility under the standard should

only relate to the direct object for the opinion, i.e. the pro forma section. Obviously, a practi-

tioner should take into consideration all available information, however it is the practitioners

own responsibility to evaluate relevant sources. As formulated in the present draft the practi-

tioner might be imposed by a responsibility for wording, descriptions, analysis in the main

body of the prospectus and not solely for the content of the opinion. The work on pro forma

information should not extent to information beyond what is presented separately together

with the opinion.

Paragraph A1, A2

We believe that it is relevant to require a reference to the accounting policies applied, e.g. The

basis of compilation of the pro forma financial information including a reference to accoun-

ting policies applied.

Paragraph A8

This paragraph explains that unadjusted financial information in most cases will be historical

in nature but some jurisdictions may permit the use of profit forecast as unadjusted financial

information. This paragraph requires, however, pro forma adjustments to be capable for being

factually supported. We do not see the link between unadjusted financial information and pro

forma adjustments as indicated by dealing with both UFI and PFA in the same paragraph.

Does the ISAE require both unadjusted financial information and pro forma adjustments to be

historical in nature/factually supported?

Paragraph A29

The third bullet of this paragraph provides an example that states, that” a “published” audit or

review report on the source is credible... We believe that an audit report need not be publis-

hed to be credible, as long as the practitioner is able to obtain such report. We suggest the

word published changed with issued.

Paragraph A47

While we agree that applicable criteria publicly available need not to be repeated by the re-

sponsible party, we believe that a reference to those publicly available applicable criteria

should be required, which does not appear from the current draft.

5

Practitioner’s Report

• The auditors report could preferably be more easily readable for the users of the PFI. Un-

necessary use of technical wordings should be avoided. Where there is no urgent need for

changing the structure and the wording used in the auditor’s report cf. ISA 700, and ISA

705 -706 don’t change. Also consider to include paragraphs that refers to matters ap-

propriately presented or disclosed in the PFI’s, that is fundamental to users understanding

of the PFI, s in a Emphasis of Matter Paragraph and to include paragraphs in the practitio-

ners’ report that refers to matters other than those presented or disclosed in the PFI that

are relevant for the users understanding of the practitioners’ responsibility in a Other Mat-

ter paragraph.(The corresponding updating should preferably be included made ISAE

3000.)

• There should be a restriction of the use of the practitioners report.

• Paragraph 20 requires the practitioners to evaluate whether there is any effect on the prac-

titioner’s report when a modified audit opinion or review has been expressed on the UFI

or there is an Emphasis of Matter paragraph in report related to the UFI. Paragraph 38 sta-

tes that the practitioner may consider making reference in the practitioners report to such

matters. We would like to see such an example of such wording included in the standard,

as we are concerned that users may be mislead in these situations without proper and suf-

ficient disclosures in the practitioner’s report.

• Comments to the illustrative audit report in ISAE 3420:

INDEPENDENT PRACTITIONER’S ASSURANCE REPORT ON THE PROCESS TO

COMPILE PRO FORMA FINANCIAL INFORMATION

[Appropriate Addressee(s)]

We have completed our assurance engagement to report on the process applied by ABC

Company (the company) to compile the pro forma financial information, consisting of [the

pro forma net asset statement as at [date]], [the pro forma income statement for the period

ended [date]] [and the pro forma cash flow statement for the period ended [date]] [as set

out on pages xx–xx of the prospectus issued by the company]. The applicable criteria in

accordance with which this process has been applied are [specified in [Securities Regula-

tion XX]/described in [Note X]].

The pro forma financial information has been compiled by management to illustrate the

impact of the [event or transaction] set out in [Note Y] on the [company’s financial positi-

on as at that date] [and its financial performance [and cash flows] for the period then en-

ded]. As part of this process, information about the company’s [financial position], [finan-

cial performance] [and cash flows] has been extracted from the company’s financial sta-

tements [for the period ended [date]], on which [[an audit]/ [a review] report]/ [no audit or

review report] has been published. Because of its nature, the pro forma financial informa-

tion does not represent the company’s actual [financial position], [financial performance],

[or cash flows].

Management’s Responsibility for the Pro Forma Financial Information

Management of ABC Company is responsible for applying the process to compile the pro

forma financial information in accordance with the applicable criteria [specified in [Secu-

rities Regulation XX]]/ [set out in [Note X]].

Practitioner’s Responsibilities

Our responsibility is to express an opinion [, as required by [Securities Regulation XX],]

about whether the process to compile the pro forma financial information has been applied

by management in accordance with the applicable criteria. We are not responsible for up-

Kommentar: Suggestion: We have examined the process applied by ABC Company to com

pile the pro forma financial infor-

mation ….. etc

Kommentar: In the introduction after "…[the pro forma net asset

statement as at [date]], [the pro

forma income statement for the

period ended [date]] [and the pro

forma cash flow statement for the

period ended [date]] [as set out on

pages xx–xx of the prospectus

issued by the company]" - referen-ce should be extended as follows”

…as well as the description of the

basis, methodology and assump-tions applied in the preparation of

such.”

Kommentar: Should be in-cluded in the PFI.

Kommentar: Based on our examination – should be added.

Kommentar: Issuing, necessary as a lot of PFI is based on financial

information on which a opinion

has not been issued by the practi-

tioner.

6

dating or reissuing any reports or opinions on any financial information used in compiling

the pro forma financial information. In addition, we have not performed an audit or review

of the pro forma financial information and, accordingly, we do not express an opinion on

the pro forma financial information. We conducted our engagement in accordance with In-

ternational Standard on Assurance Engagements (ISAE) 3420, Assurance Reports on the

Process to Compile Pro Forma Financial Information Included in a Prospectus, issued by

the International Auditing and Assurance Standards Board. This standard requires that we

comply with ethical requirements and plan and perform our procedures to obtain reaso-

nable assurance about whether the responsible party has applied the process to compile the

pro forma financial information in accordance with the applicable criteria.

Our procedures included:

• Making inquiries of management regarding the process management has applied to

compile the pro forma financial information;

• Evaluating whether management has used an appropriate source of the unadjusted fi-

nancial information in compiling the pro forma financial information;

• Checking whether management has appropriately extracted the unadjusted financial

information from the source documents;

• Evaluating whether management has compiled the pro forma financial information on

a basis consistent with the company’s financial reporting framework and its accoun-

ting policies under that framework;•

• Considering management’s evidence supporting the pro forma adjustments;•

• Determining whether the calculations within the pro forma financial information are

arithmetically accurate; and

• Evaluating the overall presentation and disclosure of the pro forma financial informa-

tion and related explanatory notes.

We believe that the evidence we have obtained is sufficient and appropriate to provide a

basis for our opinion.

Opinion

In our opinion, [the process to compile the pro forma financial information has, in all ma-

terial respects, been applied in accordance with the applicable criteria]/ [the pro forma fi-

nancial information has been properly compiled on the basis stated].

[Practitioner’s signature]

[Date of the practitioner’s report]

[Practitioner’s

Kommentar: This limitation is hardly relevant in situations where

the auditor provide an conclusion

based upon the same level of

assurance as in an audit.

The remark relates normally to

“agreed upon procedures”. Also in

is inconsistent with the title on the

last paragraph in the report “opin-

ion”

Kommentar: Alternative proce-

dures could be: •Reading the pro forma financial

information prepared by Manage-

ment, including the description of

the method for preparing the pro

forma financial information and

the limitations and uncertainties

described by Management;

•Discussion with Management the

method used for collecting data

and determining the assumptions

used and pro forma adjustments

made;

•Verifying on a test basis that the

pro forma financial information

has been prepared in accordance

with the basis stated and that pro

forma adjustments mare are based on the assumptions determined and

described by Management; and

•Verifying the mathematical accuracy of the unaudited combi-

ned condensed pro forma financial

information.

Kommentar: The wording “Evaluating whether management

has compiled the pro forma finan-

cial information on a basis con-

sistent with the company’s finan-

cial reporting framework and its

accounting policies under that

framework” should be deleted, cf.

above under question 2.

Kommentar: The wording

“Considering management’s

evidence supporting the pro forma adjustments” indicates a qualitati-

ve evaluation against an unknown

set of principles in turn indicating that the opinion issued is on the

pro forma financial information as

such and not solely on the process

applied.

Kommentar: As long as there is no accounting standard in respect of pro forma financial information

there should not be include any

specific reference as such as “Evaluating the overall presenta-

tion and disclosure of the pro

forma financial information and explanatory notes” as this indicates

that the opinion issued is on the

pro forma financial information as such and not solely on the process

applied.

Audit Tax Advisory

Kenneth C. Sharp Global Leader – Assurance Services Grant Thornton International Ltd 201 S College Street, Suite 2500 Charlotte, NC 28244-0100

T +1.704.632.3500 F +1.704.334.7701 www.GTI.org

1

September 30, 2010

Dear James

Mr James Gunn International Auditing and Assurance Standards Board International Federation of Accountants 545 Fifth Avenue, 14th Floor New York, NY 10017

Exposure Draft – ISAE 3420, Assurance Reports on the Process to Compile Pro Forma Financial Information Included in a Prospectus Grant Thornton International appreciates the opportunity to comment on the Exposure Draft – ISAE 3420, Assurance Reports on the Process to Compile Pro Forma Financial Information Included in a Prospectus. We believe that the proposed standard will contribute to consistency in quality and practice in the European Union. The Prospectus Directive gives rise to a need for common assurance standards throughout the European Economic Area (EEA), and in the wake of the financial crisis there is greater focus on harmonization of financial accounting around the world, and the reports provided by professional accountants in public practice.

General comments Opinion Using the EU prospectus regime as the basis for developing the requirements and guidance would suggest that the opinion paragraph be aligned with the requirement in the prospectus directive. We believe that cautionary language currently included in practitioners' responsibilities is sufficient to address the IAASB’s concerns that the positive wording on the pro forma financial information may be interpreted as an opinion on the PFI. We therefore suggest that the IAASB give practitioners the option to adopt the opinion in the EU prospectus when the engagement is undertaken within the EU prospectus regime as follows:

• The pro forma financial information has been properly compiled on the basis stated; and

• Such basis is consistent with the accounting policies of XYZ Group. Our responses to the specific questions are included in Appendix I. Comments on specific paragraphs appear in Appendix 2

Grant Thornton International Ltd

2

We would be pleased to discuss this letter with you. Please contact me at (704) 632-6781 if you have any questions.

Yours Sincerely, Kenneth C. Sharp Grant Thornton International Ltd Global Leader - Assurance Services

Responses to specific questions

Appendix I

1. In relation to respondents’ roles and responsibilities, would respondents adopt or apply the proposed ISAE, or request an engagement in accordance therewith, if it became effective? If not, please explain why (in this regard, respondents are asked to also consider question 4 below). Grant Thornton International is organized as independently owned and managed accounting and consultancy firms across 95 countries. We provide resources that assist member firms in delivering high quality services and benchmark our assurance services against IAASB pronouncements. However, given the specific nature and use of this report, the application and adoption of the standard will depend on jurisdictional factors. 2. Do respondents believe that the work effort set out in the proposed ISAE is sufficient and appropriate to enable the practitioner to express an opinion as to whether the process to compile the PFI has, in all material respects, been applied in accordance with the applicable criteria? Yes

3. Do respondents believe that it is clear from the illustrative practitioner’s report in the Appendix to the proposed ISAE that the practitioner is reporting on the process to compile the PFI and not on the PFI itself? Paragraph A52 of the proposed ISAE, in particular, provides two alternatives for the opinion in relation to the process, i.e. • Whether the process to compile the PFI has, in all material respects, been applied in accordance with the applicable criteria; or • Whether the PFI has been properly compiled on the basis stated. Yes 4. As the proposed ISAE is designed to convey assurance on the process to compile the PFI, do respondents believe that it would be desirable for the IAASB to also develop a separate standard on reporting on the PFI itself? If yes: (a) What do respondents believe would be the work effort implications in undertaking engagements to report on the PFI itself? In particular, how would such work effort differ from that specified in the proposed ISAE? (b) Should both reasonable assurance and limited assurance on the PFI be addressed? If so, how should the nature and extent of the practitioner’s work effort be differentiated between a reasonable assurance engagement and a limited assurance engagement to report on the PFI? Ideally the IAASB should have developed the ISAE only if it could have been applicable internationally, but we understand that this would have been problematic give the number of differences in legal and regulatory frameworks around the world. For that reason, we question the benefit in developing a further standard on reporting on the PFI itself. In our view this approach may result in a greater divide in consistency and quality of performance and reporting from one jurisdiction to another.

3

Grant Thornton International Ltd

4

The IAASB is also interested in comments on matters set out below. • Issuers, Investors and Regulators—Recognizing that PFI included in a prospectus is of particular interest and relevance to issuers, investors (including sponsoring banks, lead managers, underwriters, analysts, and institutional and retail investors), and regulators (including securities exchanges), the IAASB invites respondents from these constituencies to comment on the proposed ISAE and, in particular: (a) The content of the illustrative practitioner’s report; and (b) Whether the proposed ISAE will contribute to enhancing user confidence in how the PFI is produced. N/A • Developing Nations—Recognizing that many developing nations have adopted or are in the process of adopting the International Standards, the IAASB invites respondents from these nations to comment, in particular, on any foreseeable difficulties in applying the proposed ISAE in a developing nation environment. N/A • Translations—Recognizing that many respondents may intend to translate the final ISAE for adoption in their own environments, the IAASB welcomes comment on potential translation issues respondents may note in reviewing the proposed ISAE. N/A • Effective Date—Recognizing that the proposals in the proposed ISAE do not establish fundamentally new assurance principles and that the subject matter of the proposed ISAE does not represent a fundamentally new area of practice for the profession, and given the public interest need to harmonize inconsistent practice internationally as soon as practicable, the IAASB believes that an appropriate effective date for the standard would be 18 months after the date of final approval of the standard. The IAASB welcomes comment on whether this lead time relative to the effective date would provide a sufficient period to support effective implementation of the standard. This lead time is sufficient.

Comments on specific paragraphs

Appendix II

.

Paragraph Comment 25

Forming the Opinion We are of the view that paragraph 25 is unnecessarily repetitive of the objective and the requirement in paragraph 27. In addition, the section is “forming an opinion”, so the focus for the practitioner is how to conclude. We propose the following amendments: 25. The practitioner shall form an opinion on whether the process to compile the pro forma financial information has, in all material respects, been applied by the responsible party in accordance with the applicable criteria… 26. In order to form that opinion, the The practitioner shall conclude as to whether the practitioner has obtained sufficient appropriate evidence about whether the process applied by the responsibility party… (Ref: Para. A47–A48)

5

Sent electronically through the IAASB Website (www.ifac.org)

Our Ref.: C/AASC

30 September 2010

Executive Director, Professional Standards International Auditing and Assurance Standards Board, International Federation of Accountants, 545 Fifth Avenue, 14th Floor, New York 10017, USA. Dear Sir, IAASB Exposure Draft on ISAE 3420 Assurance Reports on the Process to

Compile Pro Forma Financial Information Included in a Prospectus

The Hong Kong Institute of Certified Public Accountants is the only statutory licensing body of accountants in Hong Kong responsible for the professional training, development and regulation of the accountancy profession. The HKICPA sets auditing and assurance standards, ethical standards and financial reporting standards in Hong Kong.

We welcome the opportunity to provide you with our comments on the IAASB ED on ISAE 3420. Our comments are set out in the attachment.

We trust that our comments are of assistance to you. If you require any clarification of our comments, please do not hesitate to contact me at [email protected].

Yours faithfully,

Steve Ong, FCPA, FCA Director, Standard Setting Department SO/SH/jn Encl.

---


2

ATTACHMENT

HONG KONG INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS’ COMMENTS ON THE IAASB EXPOURE DRAFT ISAE 3420 ASSURANCE REPORTS ON THE PROCESS TO COMPILE PRO FORMA FINANCIAL INFORMATION INCLUDED IN A PROSPECTUS Request for Specific Comments 1. In relation to respondents' roles and responsibilities, would respondents adopt or

apply the proposed ISAE, or request an engagement in accordance therewith, if it became effective? If not, please explain why.

As you may be aware, the HKICPA has embarked on a project to develop a series of standards and guidance on investment circular reporting - Hong Kong Standards on Investment Circular Reporting Engagements (HKSIR). One of the standards issued under the series is HKSIR 300 "Accountants' Reports on Pro Forma Financial Information in Investment Circulars". Attached as Appendix 1 is a copy of HKSIR 300 for your information.

When reporting under HKSIR 300 the reporting accountants provide assurance directly in relation to the pro forma financial information itself. As such HKSIR 300 is aligned with the Listing Rules of The Stock Exchange of Hong Kong Ltd (The Exchange) which require the reporting accountants to report directly on the pro forma financial information. Hence, there is currently no basis for believing that the proposed ISAE which contemplates reporting in relation to the process of the preparation of the pro forma financial information would be applied for local listing engagements in Hong Kong. However, we will consider the adoption of the proposed ISAE as part of our International Convergence Programme to provide guidance for engagements undertaken by our members for listing in other jurisdictions.

2. Do respondents believe that the work effort set out in the proposed ISAE is


In general, the proposed ISAE sets out sufficient and appropriate work procedures. Attached as Appendix 2 is draft guidance, Best Practice Guidance on Presenting Pro Forma Financial Information, developed by The Exchange, in consultation with

representatives from some of the larger accounting practices in Hong Kong, which may be of interest to IAASB. The aim of the draft guidance is to set out the principles for applying the current Hong Kong Listing Rules and to provide guidance on how to present pro forma financial information under specific scenarios. The IAASB may wish to consider the draft guidance and, where, deemed appropriate, incorporate some relevant elements of the guidance that will have more general application in the ED.

3

3. Do respondents believe that it is clear from the illustrative practitioner's report in the Appendix to the proposed ISAE that the practitioner is reporting on the process to compile the PFI and not on the PFI itself? Paragraph A52 of the proposed ISAE, in particular, provides two alternatives for the opinion in relation to the process, i.e.

Whether the process to compile the PFI has, in all material respects, been applied in accordance with the applicable criteria; or


There is a concern that providing two alternatives for the opinion in relation to the process may cause confusion. The wording of the second alternative may be read as to provide assurance on the pro forma information itself.

4. As the proposed ISAE is designed to convey assurance on the process to compile the PFI, do respondents believe that it would be desirable for the IAASB to also develop a separate standard on reporting on the PFI itself? If yes: (a) What do respondents believe would be the work effort implications in

undertaking engagements to report on the PFI itself? In particular, how would such work effort differ from that specified in the proposed ISAE?

(b) Should both reasonable assurance and limited assurance on the PFI be addressed? If so, how should the nature and extent of the practitioner's work effort be differentiated between a reasonable assurance engagement and a limited assurance engagement to report on the PFI?

To enhance the adoption and implementation of the proposed ISAE, it is desirable for the IAASB to also consider providing guidance on reporting on the PFI itself. However, having two separate standards may be confusing to users. In our locally developed HKSIR 300 referred to above, work consists primarily of comparing the unadjusted financial information with the source documents, considering the evidence supporting the adjustments made by the directors and making enquiries of the directors regarding the process by which they have prepared the pro forma financial information.

END

Accountants’ Reports on Pro Forma Financial Information in Investment Circulars

Hong Kong Standard on Investment Circular Reporting Engagements 300

HKSIR 300Issued March 2006

Effective for engagements wherethe investment circular is dated on or after 1 April 2006

joanneno

Text Box

Appendix 1

ACCOUNTANTS’ REPORTS ON PRO FORMA FINANCIAL INFORMATION IN INVESTMENT CIRCULARS

2 HKSIR 300

HONG KONG STANDARD ON INVESTMENT CIRCULAR REPORTING ENGAGEMENTS 300

ACCOUNTANTS’ REPORTS ON

PRO FORMA FINANCIAL INFORMATION IN INVESTMENT CIRCULARS

(Effective for engagements where the investment circular is dated on or after 1 April 2006)

CONTENTS

Paragraphs Definitions

Introduction ............................................................................................................................. 1-6

Nature of Pro Forma Financial Information ............................................................................ 7-8

Agreeing the Terms of Engagement ........................................................................................ 9-11

Quality Control ......................................................................................................................... 12

Planning and Performing the Engagement .............................................................................. 13-21

Materiality .......................................................................................................................... 19-21

Documentation ......................................................................................................................... 22-23

Professional Scepticism........................................................................................................... 24

Presentation of Pro Forma Financial Information under AG 7 and the Listing Rules/GEM Rules 25-27

Evidence ................................................................................................................................. 28-51

Unadjusted Financial Information...................................................................................... 30-33

Adjustments ..................................................................................................................... 34-42

Consistent Accounting Policies ........................................................................................ 43-45

Omitted Adjustments ......................................................................................................... 46-49

Compilation........................................................................................................................ 50

Representation Letter ........................................................................................................ 51

Reporting.................................................................................................................................. 52-66

Statement of Responsibility ............................................................................................... 54-55

Basis of Opinion................................................................................................................. 56

Expression of Opinion ....................................................................................................... 57-62

Date of Accountants’ Report ............................................................................................ 63

Modified Report ................................................................................................................ 64-65

Example Accountants’ Report ........................................................................................... 66

Consent ................................................................................................................................. 67

Subsequent Events .................................................................................................................. 68

Effective Date........................................................................................................................... 69


3 HKSIR 300

Appendix 1 Example Accountants’ Report on Pro Forma Financial Information in Investment Circulars

Appendix 2 Examples of Management Representation Letter Clauses Hong Kong Standard on Investment Circular Reporting Engagements (HKSIR) 300 “Accountants’ Report on Pro Forma Financial Information in Investment Circulars” should be read in the context of the “Preface to Hong Kong Standards on Quality Control, Auditing, Assurance and Related Services” which sets out the application and authority of HKSIRs.

This HKSIR is based on the Listing Rules/GEM Rules that were in effect as at 31 December 2005.


4 HKSIR 300

Definitions The definitions used in this HKSIR are: a. GEM Rules: Rules Governing the Listing of Securities on the Growth Enterprise

Market of The Stock Exchange of Hong Kong Limited. b. Investment circular: A document, including a prospectus, circular to shareholders or similar

document, issued by an issuer pursuant to the Listing Rules/GEM Rules, the Takeover Code or the Companies Ordinance relating to listed or unlisted securities on which it is intended that a third party would make an investment decision.

c. Issuer: As defined by the Listing Rules/GEM Rules, an issuer is any company

or other legal person any of whose equity or debt securities are the subject of an application for listing or some of whose equity or debt securities are already listed.

d. Listing Rules: Rules Governing the Listing of Securities on The Stock Exchange of

Hong Kong Limited. e. Prospectus: Any prospectus, notice, circular, brochure, advertisement, or other

document offering any shares or debentures of a company to the public for subscription or purchase for cash or other consideration; or circular to invite offers by the public to subscribe for or purchase for cash or other consideration any shares or debentures of a company.

f. Reporting accountant: A professional accountant engaged to prepare public reports and

letters for inclusion in, or private letters in connection with, an investment circular. Where the context requires, this term includes auditors where they are carrying out a role in connection with an investment circular, other than that of reporting as auditors on financial statements.

g. Sponsor: An entity appointed under the Listing Rules/GEM Rules by an issuer to

provide advice to and assist the issuer in listing, lodging the formal application for listing and supporting documents and dealing with the Stock Exchange.

h. Stock Exchange: The Stock Exchange of Hong Kong Limited. i. Takeover Code: The Code on Takeovers and Mergers and Share Repurchases issued

by the Securities and Futures Commission.


5 HKSIR 300

Introduction 1. The purpose of this HKSIR is to establish specific standards and provide guidance for

reporting accountants engaged to issue an accountants’ report on pro forma financial information in an investment circular. The standards and guidance are intended primarily for the purpose of reporting under the Listing Rules/GEM Rules. They may also assist in connection with reporting on pro forma financial information in investment circular other than those prepared under the Listing Rules/GEM Rules.

2. The work outlined in this HKSIR, having regard to the nature of pro forma financial information

and the opinion required by paragraph 57 below, does not constitute an audit or review in accordance with Hong Kong Standards on Auditing (HKSAs) or Hong Kong Standards on Review Engagements. Such work consists primarily of comparing the unadjusted financial information with the source documents, considering the evidence supporting the adjustments made by the directors and making enquiries of the directors regarding the process by which they have prepared the pro forma financial information.

3. In an engagement to report on pro forma financial information in investment circulars,

reporting accountants should comply with this HKSIR, and to the extent applicable, relevant HKSAs and Hong Kong Standards on Assurance Engagements.

4. Reporting accountants plan and perform their work so as to obtain sufficient evidence to

provide reasonable assurance that:

a. the pro forma financial information has been properly compiled by the directors of the issuer on the basis stated;

b. such basis is consistent with the accounting policies of the issuer; and c. the adjustments are appropriate for the purposes of the pro forma financial

information as disclosed pursuant to Listing Rule 4.29(1)/GEM Rule 7.31(1).

5. Guidance to the directors of the issuer on the preparation and presentation of pro forma financial information for inclusion in investment circulars is set out in Accounting Guideline (AG) 7 Preparation of Pro Forma Financial Information for Inclusion in Investment Circulars.

6. Listing Rule 4.29(1)/GEM Rules 7.31(1) requires that the pro forma financial information

presented must not be misleading. In the event that the reporting accountants have reasons to believe that the pro forma financial information is misleading in the context of the purpose for which the pro forma financial information has been presented, they are unable to give the opinion as required in paragraph 58 below until they have resolved the matter. AG 7 provides guidance on judging whether pro forma financial information is misleading.

Nature of Pro Forma Financial Information 7. Pro forma financial information is included in an investment circular to provide users of the

investment circular with information about the transaction that is the subject of the investment circular by showing how it might have affected financial information of the issuer if the transaction had been undertaken at the commencement of the financial period used for the illustration or, in the case of a pro forma balance sheet or net asset statement, at the date reported on.

8. For the purpose of this HKSIR “pro forma financial information” includes financial information

such as net assets or profit or cash flow statements which demonstrate the impact of a transaction on previously published financial information and the explanatory notes thereto. Under AG 7 and Listing Rule 4.29(2)/GEM 7.31(2) pro forma financial information is accompanied by an introductory text describing its purpose and limitations.


6 HKSIR 300

Agreeing the Terms of Engagement 9. Reporting accountants should agree the terms of the engagement with those from

whom they accept instructions. The whole of the terms of the engagement should be recorded in writing.

10. The engagement letter should specify those reports and letters which are intended for

publication in the investment circular. The engagement letter should specify, in respect of each report and letter, to whom it is to be addressed.

11. If in the course of the engagement it becomes clear that the terms of the engagement

need to be changed, such changes should be agreed and recorded in writing. Quality Control 12. Reporting accountants should comply with the applicable standards and guidance set

out in HKSQC 1 “Quality Control for Firms that Perform Audits and Reviews of Historical Financial Information, and other Assurance and Related Services Engagements”. Although HKSAs do not apply to engagements covered by this HKSIR, they may nevertheless provide relevant guidance, and reporting accountants should also comply, to the extent relevant, with HKSA 220 “Quality Control for Audits of Historical Financial Information”.

Planning and Performing the Engagement 13. Reporting accountants should develop and document a plan for their work so as to

perform the engagement in an effective manner. 14. Additional basic principles, essential procedures and guidance on planning are set out in

paragraphs 15 to 21. 15. Reporting accountants should obtain an understanding of the key factors affecting the

subject matter sufficient to identify and assess the risk of the pro forma financial information not being properly compiled and sufficient to design and perform evidence gathering procedures including:

a. the nature of the transaction being undertaken by the issuer; b. the entity’s business; and

c. the procedures adopted, or planned to be adopted, by the directors of the

issuer for the preparation of the pro forma financial information.

16. Reporting accountants gain an understanding of the transaction in respect of which the pro forma financial information is being prepared by discussion with the directors or management of the issuer and by reading relevant supporting documentation.

17. Reporting accountants use professional judgement to determine the extent of the

understanding required of the entity’s business. 18. Other matters for consideration by reporting accountants include the availability of evidence to

provide factual support for the proposed adjustments and the accounting policies that will form the basis of the adjustments for the pro forma financial information.


7 HKSIR 300

Materiality 19. Reporting accountants should consider materiality in planning their work in

accordance with their instructions and in determining the effect of their findings on the report to be issued.

20. Matters are material if their omission or misstatement could, individually or collectively,

influence the economic decisions of the intended users of the pro forma financial information. Materiality depends on the size or nature (or both) of the omission or misstatement judged in light of the surrounding circumstances.

21. A misstatement in the context of the compilation of pro forma financial information includes,

for example:

a. use of an inappropriate source for the unadjusted financial information;

b. incorrect extraction of the unadjusted financial information from an appropriate source; and

c. in relation to adjustments, the misapplication of accounting policies.

Documentation 22. Working papers should record the reporting accountants’ planning; the nature, timing

and extent of the procedures performed; and the conclusions drawn. 23. Reporting accountants should document matters which are important in providing

evidence to support their opinion and evidence that their work was carried out in accordance with this HKSIR.

Professional Scepticism 24. Reporting accountants should plan and perform an engagement with an attitude of

professional scepticism. Presentation of Pro Forma Financial Information under AG 7 and the Listing Rules/GEM Rules 25. Reporting accountants should assess whether the presentation adopted in the pro

forma financial information is consistent with the recommended practice in AG 7 and the requirements of the Listing Rules/GEM Rules.

26. In particular, reporting accountants assess whether:

a. the pro forma financial information clearly states the purpose for which it has been prepared, that it has been prepared for illustrative purposes only and that because of its hypothetical nature, it may not give a true picture of the issuer’s financial position or results; and

b. the pro forma financial information is presented in columnar form showing separately

the unadjusted financial information, the pro forma adjustments and the pro forma financial information in accordance with AG 7 and Listing Rule 4.29(3)/GEM Rule 7.31(3).


8 HKSIR 300

27. Under AG 7 and Listing Rule 4.29(4)/GEM Rule 7.31(4), pro forma financial information is published in respect of:

a. the current financial period; b. the most recently completed financial period; and/or c. the most recent interim period for which relevant unadjusted information has been or

will be published or is being published in the same document,

and, in the case of a pro forma balance sheet or net asset statement, as at the date on which such periods end or ended.

Evidence 28. Reporting accountants should obtain sufficient appropriate evidence on which to base

their opinion on the pro forma financial information. 29. Reporting accountants gain an understanding of the transaction, in respect of which the pro

forma financial information is being prepared, by discussions with the directors or management of the issuer and by reading relevant supporting documentation.

Unadjusted Financial Information 30. Reporting accountants should consider whether the source of the unadjusted financial

information is one of those set out in AG 7 and Listing Rule 4.29(5)/GEM Rule 7.31(5) and assess whether the source of the unadjusted financial information is clearly stated.

31. Since AG 7 and the Listing Rules/GEM Rules set out the acceptable sources of unadjusted

financial information, reporting accountants are not required to have audited or carried out a review on that information nor do reporting accountants have a responsibility to verify it.

32. If reporting accountants have reason to believe that the unadjusted financial

information is, or may be, unreliable, such as if it is unaudited or if an accountants’ or auditors’ report thereon has identified any uncertainties or disagreements, reporting accountants should seek to ensure that appropriate disclosure is made. Where such disclosure is not made reporting accountants should consider the effect of this on their opinion.

33. Reporting accountants should check the extraction and, where relevant,

summarisation of the unadjusted financial information from the source concerned.

Adjustments 34. Reporting accountants should report, among other things, that adjustments are

appropriate for the purposes of the pro forma financial information. 35. AG 7 describes the appropriate adjustments to be made “of which the issuer is aware” and

provides guidance for directors concerning such adjustments to be made by the directors pursuant to the Listing Rules.

36. Reporting accountants consider the way in which the directors have fulfilled their

responsibilities. With their understanding of the transaction and the entity’s business as background, reporting accountants discuss with the directors the steps the directors have taken to identify relevant adjustments and whether such adjustments are permitted.


9 HKSIR 300

37. If, as a result of these enquiries, reporting accountants are aware of a significant

adjustment which, in their opinion, should be made for the purposes of the pro forma financial information, they should discuss the position with the directors of the issuer and, if appropriate, the issuers’ advisers. If reporting accountants are not able to agree with the directors of the issuer as to how the matter should be resolved, they should consider the consequences for their opinion.

38. The nature of adjustments to be made is qualified by reference to the tests set out in AG 7

and Listing Rule 4.29(6)/GEM Rule 7.31(6), which are that any adjustments must be:

a. clearly shown and explained; b. directly attributable to the transaction concerned and not relating to future events or

decisions; c. factually supportable; and d. in respect of a pro forma profit or cash flow statement, clearly identified as to those

adjustments which are expected to have a continuing effect on the issuer and those which are not.

39. Reporting accountants consider the adjustments to assess whether they are “directly

attributable” to the transaction whose impact is being illustrated by the pro forma financial information, that is, that they are an integral part of the transaction concerned.

40. Reporting accountants assess whether adjustments “relate to future events and/or decisions”.

This condition would lead to the exclusion of adjustments that are related to the transaction being illustrated but which are dependent on actions to be taken once the transaction has been completed.

41. Reporting accountants consider whether the adjustments have been clearly shown and

explained and, in respect of a pro forma profit or cash flow statement, whether they have been clearly identified as to those which are expected to have a continuing effect on the issuer (that is, relate to events or circumstances that are expected to recur) and to those which are not.

42. Reporting accountants obtain appropriate evidence that the directors of the issuer have

factual support for each adjustment. Sources of such evidence would include audited financial statements, other financial information or valuations disclosed elsewhere in the investment circular, purchase and sale agreements and other agreements relating to the transaction. However, as noted in paragraph 2, the reporting accountants’ work does not constitute an audit or review.

Consistent Accounting Policies

43. Directors of the issuer are responsible for ensuring that the pro forma financial information is

prepared on a basis consistent with the accounting policies of the issuer. 44. Reporting accountants should assess and report whether the pro forma financial

information has been compiled on a basis consistent with the accounting policies of the issuer.

45. Where reporting accountants are not the auditors of the issuer or have not prepared an

accountants’ report on the unadjusted financial information relating to the subject of the securities transaction, they make enquiries of the issuer as to the steps taken to ensure that the pro forma financial information has been prepared on a basis consistent with the accounting policies of the issuer. Guidance for the directors of the issuer with respect to the consistency of accounting policies is provided in AG 7.


10 HKSIR 300

Omitted Adjustments 46. In view of the nature of the adjustments that are made under AG 7 and Listing Rule

4.29(6)/GEM Rule 7.31(6), the directors of the issuer may not be permitted to make all the adjustments which they would otherwise wish to. For example, an adjustment which is directly attributable but which is not factually supportable could not be included in pro forma financial information.

47. If any adjustments are excluded because of AG 7 or Listing Rule 4.29(6)/GEM Rule

7.31(6), reporting accountants should consider the effect on the pro forma financial information and in particular whether the exclusion renders the pro forma financial information misleading.

48. In such circumstances, reporting accountants may consider that disclosure in the notes to the

pro forma financial information of the fact that such an adjustment has not been made is sufficient in the context of the overall purpose of the pro forma financial information.

49. However, if reporting accountants conclude that an omitted adjustment is so

fundamental as to render the pro forma statement misleading in the context of the purpose for which the pro forma financial information has been presented, they should discuss the matter with the directors of the issuer and, if appropriate, the issuer’s advisers and consider the impact of this on their opinion.

Compilation

50. Reporting accountants should check whether the pro forma financial information is

properly compiled from the source documentation, included under the appropriate financial statement captions and arithmetically accurate.

Representation Letter

51. Reporting accountants obtain from the directors of the issuer such representations as they

consider appropriate. Examples of such representations might include an acknowledgement of the directors’ responsibility for the pro forma financial information and the completeness of the adjustments. An example of management representation letter clauses covering matters dealt with in this HKSIR is set out in Appendix 2.

Reporting 52. In all reports on pro forma financial information in investment circulars, reporting

accountants should:

a. include a title identifying the party or parties to whom the report is addressed; b. identify the financial information to which their report relates; c. address all matters that are required by the engagement letter;

d. explain the basis of their opinion;

e. give, where applicable, a clear expression of opinion;

f. where reporting accountants have been unable to complete their report or letter

in accordance with their instructions, such as in the case of a limitation on the scope of their work, omission of a fundamental adjustment or where, in the reporting accountants’ opinion, the issuer has not followed the guidance in AG 7 or the criteria in the Listing Rules/GEM Rules, describe the factors giving rise to the matter and consider consequences for their report or letter;


11 HKSIR 300

g. include their manuscript or printed signature; and

h. state the date of their report or letter.

53. The key aspects of the reporting accountants’ report on pro forma financial information are

further elaborated in paragraphs 54 to 66.

Statement of Responsibility 54. Reporting accountants should distinguish between their responsibilities and those of

the directors of the issuer by including in their report:

a. a statement that the pro forma financial information is the responsibility of the directors; and

b. a statement that the reporting accountants’ responsibility is to express an

opinion on the pro forma financial information. 55. The reporting accountants’ responsibility in relation to the opinion is limited to the provision of

the accountants’ report and the opinion expressed therein. Reporting accountants do not assume responsibility for the pro forma financial information nor, in so far as the accountants’ report is concerned, any responsibility for the components of the pro forma financial information. Basis of Opinion

56. Reporting accountants should include in the basis of opinion section of the

accountants’ report a statement that their work was conducted in accordance with this HKSIR.

Expression of Opinion

57. The reporting accountants’ report should contain a clear expression of opinion on the

pro forma financial information. 58. Under Listing Rule 4.29(7)/GEM 7.31(7), the pro forma financial information must be reported

on by the reporting accountants who must report that, in their opinion: a. the pro forma financial information has been properly compiled by the directors on the

basis stated; b. such basis is consistent with the accounting policies of the issuer; and c. the adjustments are appropriate for the purposes of the pro forma financial

information as disclosed pursuant to Listing Rule 4.29(1)/GEM Rule 7.31(1).

59. The first element of the opinion relates to the compilation of the pro forma financial information from the stated sources, and entails consideration of the accuracy of extraction of information from those sources and the arithmetical accuracy of the calculations in arriving at the pro forma financial information.

60. The second element relates to whether the adjustments have been measured and presented

in the pro forma financial information in accordance with the accounting policies of the issuer. 61. The third element entails consideration of whether the adjustments made by the directors of

the issuer in preparing the pro forma financial information satisfy the requirements of the Listing Rules/GEM Rules and guidance in AG 7.


12 HKSIR 300

62. In providing their opinion, reporting accountants are not providing any assurance in relation to any source financial information on which the pro forma financial information is based. In particular, reporting accountants are not re-addressing or updating any opinion that they may have given in any other capacity on any source financial information. Date of Accountants’ Report

63. The accountants’ report is normally dated on the same date as the investment circular in

which it is included or to which it relates.

Modified Report 64. In rare circumstances where the reporting accountants conclude that they are unable

to report in the manner prescribed in paragraph 58 above they should consider modifying their opinion accordingly.

65. If the reporting accountants are likely to express a modified opinion, they are recommended

to discuss with the issuer and, where appropriate, the issuer’s advisers whether the pro forma financial information should be omitted from the investment circular subject to the requirements of the Listing Rules/GEM Rules and also, subject to the issuer’s consent, consider consulting with the Stock Exchange in advance.

Example Accountants’ Report

66. An example accountants’ report on pro forma financial information for inclusion in investment

circulars expressing an unmodified opinion is set out in Appendix 1. Consent 67. Where reporting accountants are to give consent to the inclusion of their report, or

references to their name, in an investment circular they should, before doing so, consider their report in the form and context in which it appears, or is referred to, in the investment circular as a whole by:

a. comparing their report together with the information being reporting on with

the information in the rest of the investment circular and assessing whether they have any cause to believe that they are inconsistent; and

b. assessing whether they have any cause to believe any information in the

investment circular could be misleading. When reporting accountants believe that information in the investment circular is either inconsistent with their report, together with the information being reported on, or misleading, or the criteria set out in AG 7 and the Listing Rules/GEM Rules have not been applied in the preparation of the pro forma financial information, they should withhold their consent until they are satisfied that their concerns are unwarranted or until the investment circular has been appropriately amended.

Subsequent Events 68. After the date of their report, reporting accountants have no obligation to perform

procedures or make enquiries regarding the pro forma financial information or investment circular. If reporting accountants become aware of any subsequent events that may have material impact on the pro forma financial information after the date of their report, they should refer to the requirements in HKSA 560 “Subsequent Events” for appropriate action to be taken.


13 HKSIR 300

Effective Date 69. This HKSIR is effective for engagements where the investment circular is dated on or after 1

April 2006. Earlier application is encouraged.


14 HKSIR 300

Appendix 1 – Example Accountants’ Report on Pro Forma Financial Information in Investment Circulars

ACCOUNTANTS’ REPORT ON PRO FORMA FINANCIAL INFORMATION TO THE DIRECTORS OF XYZ LIMITED

We report on the unaudited pro forma financial information of XYZ Limited (the “Company”) and its subsidiaries (hereinafter collectively referred to as the “Group”), which has been prepared by the directors for illustrative purposes only, to provide information about how the [insert brief description of the transaction, e.g. “proposed placing and public offer” or “proposed acquisition of DEF Limited”] might have affected the financial information presented, for inclusion as Appendix [ ] to the Investment Circular of XYZ Limited dated [ ]. The basis of preparation of the pro forma financial information is set out on page [ ] to the Circular. Respective Responsibilities of Directors of the Company and Reporting Accountants It is the responsibility solely of the directors of the Company to prepare the unaudited pro forma financial information in accordance with [paragraph 4.29 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”)/paragraph 7.31 of the Rules Governing the Listing of Securities on the Growth Enterprise Market of The Stock Exchange of Hong Kong Limited (the “GEM Rules”)]2 and with reference to AG 7 Preparation of Pro Forma Financial Information for Inclusion in Investment Circulars issued by the Hong Kong Institute of Certified Public Accountants. It is our responsibility to form an opinion, as required by [paragraph 4.29(7) of the Listing Rules/ paragraph 7.31(7) of the GEM Rules]2, on the unaudited pro forma financial information and to report our opinion to you. We do not accept any responsibility for any reports previously given by us on any financial information used in the compilation of the unaudited pro forma financial information beyond that owed to those to whom those reports were addressed by us at the dates of their issue. Basis of Opinion We conducted our engagement in accordance with Hong Kong Standard on Investment Circular Reporting Engagements (HKSIR) 300 “Accountants’ Reports on Pro Forma Financial Information in Investment Circulars” issued by the Hong Kong Institute of Certified Public Accountants. Our work consisted primarily of comparing the unadjusted financial information with source documents, considering the evidence supporting the adjustments and discussing the pro forma financial information with the directors of the Company. This engagement did not involve independent examination of any of the underlying financial information. We planned and performed our work so as to obtain the information and explanations we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the pro forma financial information has been properly compiled by the directors of the Company on the basis stated, that such basis is consistent with the accounting policies of the Group and that the adjustments are appropriate for the purposes of the unaudited pro forma financial information as disclosed pursuant to [paragraph 4.29(1) of the Listing Rules/paragraph 7.31 (1) of the GEM Rules]2. [Our work has not been carried out in accordance with the auditing standards or other standards and practices generally accepted in the United States of America or auditing standards of the Public Company Accounting Oversight Board (United States) and accordingly should not be relied upon as if it has been carried out in accordance with those standards.]1

The unaudited pro forma financial information is for illustrative purposes only, based on the judgements and assumptions of the directors of the Company, and, because of its hypothetical nature, does not provide any assurance or indication that any event will take place in the future and may not be indicative of: • the financial position of the Group as at [date covered by the pro forma financial information] or

any future date; or


15 HKSIR 300

• the [earnings per share/results] of the Group for [period(s) covered by the pro forma financial

information] or any future periods.

Opinion In our opinion: a. the unaudited pro forma financial information has been properly compiled by the directors of

the Company on the basis stated; b. such basis is consistent with the accounting policies of the Group; and c. the adjustments are appropriate for the purposes of the unaudited pro forma financial

information as disclosed pursuant to [paragraph 4.29(1) of the Listing Rules/paragraph 7.31 (1) of the GEM Rules]2.

ABC & Co. Certified Public Accountants (Practising) [or Certified Public Accountants] Hong Kong Date Notes 1. Insert where applicable. 2. Delete as appropriate.


16 HKSIR 300

Appendix 2 – Examples of Management Representation Letter Clauses

The following are examples of management representation letter clauses relating to a report on pro forma financial information which may be obtained from the issuer. • We acknowledge that we are responsible for the pro forma financial information which has been

prepared in accordance with the Listing Rules/GEM Rules and with reference to Accounting Guideline 7 Preparation of Pro Forma Financial Information for Inclusion in Investment Circulars issued by the Hong Kong Institute of Certified Public Accountants.

• We confirm that, in our opinion, the pro forma financial information, which includes pro forma

[net tangible assets as at [ ], balance sheet as at [ ], profit and loss account for the year ended [ ], cash flow statement for the year ended [ ] and earnings per share for the year ended [ ]], provides investors with information about the impact of the transaction by illustrating how that transaction might have affected the financial information presented in the Prospectus had the transaction been undertaken at the commencement of the period being reported on or, in the case of the pro forma balance sheet or net asset statement at the date reported on. Furthermore, we confirm that, in our opinion, the pro forma financial information is not misleading.

• We confirm that, in our opinion, the pro forma financial information includes all appropriate

adjustments permitted by Listing Rules 4.29(6)/GEM Rule 7.31(6) of which we are aware, necessary to give effect to the transaction as if the transaction had been undertaken at the commencement of the period being reported on or, in the case of a pro forma balance sheet or net asset statement, at the date reported on.

• We confirm that the pro forma financial information has been properly compiled on the basis

stated in Appendix [ ] of the Prospectus and such basis is consistent with the accounting policies of the Company.

• [any other specific representations relating to the pro forma financial information]

joanneno

Text Box

Appendix 2

joanneno

Text Box

Hunter College Graduate Program

Economics Department

Advanced Auditing Class

ECO 775

COMMENTS TO ISAE 3420, ASSURANCE REPORTS ON THE PROCESS TO COMPILE PRO FORMA FINANCIAL INFORMATION INCLUDED IN A PROSPECTUS

September 30th, 2010

Principal Drafters

Ali Tamimu

Arielle Narinesingh

Gauri Pande

Hyunseok Seo

Kozue Hoshino

Mike Waxman

Shahrin Shafiq

Hunter College Advanced Auditing Class

Acosta, Jenny Amanat, Uzma Borrero, Cindy Ercetin, Secil Grueniger, Christine Johnson, Tiffany Kekic, Eldar Kenny, John Kitahata, Akina Lee, Sun Jeong Li, Ji Liang, Li Liu, Ying Ying Malik, Mahvash Newcombe, Jonathon Navarrete, Daisy Noorani, Ashraj Padilla, Wendy Peng, Weining Puchala, Jolanta Rafickrullah, Calvin Redhead, Maurice Rezk, Monika Sanderson, Timothy Siwka, Agnieszka Spikes, Hasea Su, Mao Tan, Kwon Tonge, Emily Tung, Henry

Professor Joseph A. Maffia, CPA

Hunter College Graduate Program

Economics Department

Advanced Auditing Class

ECO 775

Comments to ISAE 3420, Assurance Reports on the Process to Compile Pro Forma Financial Information Included in a Prospectus

General Comments

The Advanced Auditing Class has reviewed the exposure draft and offers the following

comments for consideration.

Our comments compare the related US Standard, the Statement for Standards for Attestation

Engagements (SSAE) No. 10 to the proposed ISAE 3420. We address the major differences

between the standards and propose a few changes to the scope of ISAE 3420. Additionally, we

suggest an editorial change to the opinion paragraph on page 38 of the proposed ISAE 3420. Our

comments to the four questions asked by the IAASB are as follows:

1. In relation to respondents’ roles and responsibilities, would respondents adopt or

apply the proposed ISAE, or request an engagement in accordance therewith, if it

became effective? If not, please explain why (in this regard, respondents are asked

to consider also question 4 below).

In the United States (US), the Statement for Standards for Attestation Engagements

(SSAE) No. 10 (AICPA, Professional Standards, Vol. 1, AT Section 401) provides

detailed guidance for reporting on pro Forma financial information. After reviewing the

exposure draft, ISAE 3420, as US students, our perception is that this standard will not be

accepted by practitioners in the US since we are not yet in convergence with international

standards. SSAE No. 10 displays a comprehensive description on pro forma reporting

that has proven to be copacetic for US pro forma reporting needs. However, looking

forward, even if the US were to adopt international standards in the future, ISAE 3420 is

far more limited in its’ scope in comparison to SSAE No. 10, in that it fails to address the

PFI itself and focuses on the process to compile.

Furthermore, the use of the words “compile” and “compilation” will present a challenge

for US practitioners since for the IAASB, these words mean to assemble, but in the US

these words represent a type of attestation service.

Footnote 4 on page 4 of ISAE 3420 states that research was conducted to give insight to

the IAASB on the regulatory requirements of nineteen non-EU countries, one of which

was the US. Publishing the results of this research in the introductory notes of this

exposure draft would have enabled commentators as well as the public to draw their own

conclusions on the validity and applicability of ISAE 3420 to not only their country’s

needs, but also to the needs of people worldwide. After all, the international standards

should not just cater to any specific country, but rather to the entire accounting world.

2. Do respondents believe that the work effort set out in the proposed ISAE is

sufficient and appropriate to enable the practitioner to express an opinion as to

whether the process to compile the PFI has, in all material respects, been applied in

accordance with the applicable criteria?

ISAE 3420 outlines sufficient and appropriate procedures that enable the practitioner to

issue merely the lowest level of assurance rather than reasonable assurance on the process

to compile the PFI. ISAE 3420 is extensive enough though, to allow the practitioner to

issue an opinion on the PFI itself; however, to do this, the responsible party must be

required to use audited historical financial statements as the basis upon which the pro

forma financial information would be compiled.

3. Do respondents believe that it is clear from the illustrative practitioner’s report in

the Appendix to the proposed ISAE that the practitioner is reporting on the process

to compile the PFI and not the PFI itself? Paragraph A52 of the proposed ISAE, in

particular, provides two alternatives for the opinion in relation to the process i.e.

Whether the process to compile the PFI has, in all material respects, been

applied in accordance with the applicable criteria; or


The illustrative practitioner’s report in the Appendix clearly refers to the practitioner’s

comments on the process to compile the PFI and not the PFI itself. However, on page 38,

the opinion section should be restated with more clarity to ensure that readers do not

assume that the practitioner expresses their opinion not only on the process to compile the

PFI but also the PFI itself. For instance:

Opinion

In our opinion, [the process to compile the pro forma financial information has, in all

material respects, been applied in accordance with the applicable criteria]/ [the pro

forma financial information has been properly compiled on the basis stated].

4. As the proposed ISAE is designed to convey assurance on the process to compile the

PFI, do respondents believe that it would be desirable for the IAASB to also develop

a separate standard on reporting on the PFI itself? If yes:

Yes, the IAASB should develop a standard on reporting on the PFI itself, or it should

expand the scope of ISAE 3420 to include reporting on the PFI itself.

(a) What do respondents believe would be the work effort implications in

undertaking engagements to report on the PFI itself? In particular, how would

such work effort differ from that specified in the proposed ISAE?

Paragraphs A16, A18, A26, A29, and A34 all delineate substantial procedures that

would allow the practitioner to report on the PFI itself; however, as mentioned in

question 2, a prior audit should be required for reasonable assurance on all matters of

the PFI. For the practitioner, there would be no additional work effort implications.

(b) Should both reasonable and limited assurance on the PFI be addressed? If so,

how should the nature and extent of the practitioner’s work effort be

differentiated between a reasonable assurance engagement and a limited

assurance engagement to report on the PFI?

Given the proposed standard, the practitioner should only be able to issue the lowest level

of assurance on the engagement; however, if ISAE 3420 were to incorporate an audit as

well as an issue of opinion on the PFI itself, then reasonable assurance would need to be

addressed by the IAASB. In this we find:

(i). The examples of additional procedures listed in paragraph A33 for un-audited

financial statements are inadequate as such procedures cannot provide the level of

assurance that a complete audit would allow for in regards to the data compilation.

(ii). Another issue is the use of Interim Financial Statements for compiling the PFI. Per

the SSAE No. 10, only a review report, not an examination or opinion, may be issued

when interim financial statements are used. We find that the IAASB should not allow an

opinion to be issued since no practitioner would be able to provide reasonable assurance

on the accuracy of the financial information.

(iii). Limited assurance (review) may also be applicable if the responsible party is simply

seeking an assurance engagement that is time and cost efficient.

5 October 2010 Technical Director International Auditing and Assurance Standards Board 545 Fifth Avenue, 14th Floor New York, New York 10017 USA www.iaasb.org Exposure Draft ISAE 3420 Assurance Reports on the Process to Compile Pro Forma Financial Information Included in a Prospectus Thank you for the opportunity to comment on Exposure Draft (ED) ISAE 3420 Assurance Reports on the Process to Compile Pro Forma Financial Information Included in a Prospectus. CPA Australia Ltd, the Institute of Chartered Accountants, and the National Institute of Accountants (the Joint Accounting Bodies) have considered the ED and our comments follow. The Joint Accounting Bodies represent over 180,000 professional accountants in Australia. Our members work in diverse roles across public practice, commerce, industry, government and academia throughout Australia and internationally. Matters on Which Specific Comment Requested

1. In relation to respondents’ roles and responsibilities, would respondents adopt or apply the proposed ISAE, or request an engagement in accordance therewith, if it became effective? If not, please explain why (in this regard, respondents are asked to also consider question 4 below). Members of the accounting profession in Australia are often involved with pro forma and prospective financial information in connection with public documents (including prospectuses). It is common for this to be as members or observers of, or reporting persons to, due diligence committees. In these circumstances the professional accountant generally provides assurance over the financial information in the public document (refer our response to Question 4 below), and/or may undertake other agreed-upon procedures engagements in relation to the document. Typically this will not require assurance to be provided over the process to compile the financial information included in the document. The Accounting Professional and Ethical Standards Board (APESB) has issued a professional standard in Australia which outlines the professional accountant’s role in such circumstances. The standard, entitled APES 350 Participation by Members in Public Practice in Due Diligence Committees in Connection with a Public Document, has no international equivalent, and is available on the APESB website: http://www.apesb.org.au/attachments/APES350%20Standard.pdf This standard does not directly address the matter of assurance on the process to compile pro forma financial information contemplated by proposed standard ISAE 3420.

http://www.iaasb.org/

http://www.apesb.org.au/attachments/APES350%20Standard.pdf

In Australia the strategic directive provided by the Australian Government to the Auditing and Assurance Standards Board (AUASB) requires the AUASB to have regard to the standards issued by the IAASB and consequently the AUASB has to date issued equivalent Australian auditing and assurance standards for all standards issued by the IAASB. We would therefore expect the proposed ISAE to be issued as an equivalent Australian Standard on Assurance Engagements (ASAE) at some stage following its release, if the AUASB considers it appropriate. Finally, we note that the objective of this proposed ISAE is similar to the objective of an assurance standard on compliance engagements issued by the AUASB. The objective of ASAE 3100 Compliance Engagements is “to enable the assurance practitioner to express a conclusion on whether an entity has complied in all material respects, with requirements as measured by the suitable criteria” (refer Paragraph 9). We understand that the AUASB is considering seeking feedback from practitioners who have used this standard since its issue in September 2008. Although the Australian standard is a generic standard and is not devoted specifically to the matter addressed by this ISAE, the feedback received might provide useful insight into the finalisation of this standard.

2. Do respondents believe that the work effort set out in the proposed ISAE is sufficient and appropriate to enable the practitioner to express an opinion as to whether the process to compile the PFI has, in all material respects, been applied in accordance with the applicable criteria? We believe that the work effort set out in the proposed ISAE is sufficient and appropriate for the practitioner to be able to express an opinion on the process to compile the PFI in accordance with the applicable criteria. However we consider the use of the word ‘compile’ to be problematic in that it may lead to confusion amongst report users as to the distinction between engagements conducted under this proposed ISAE and those conducted under ISRS 4410 Engagements to Compile Financial Statements. We suggest replacing the word ‘compile’ with another word such as ‘prepare’.

3. Do respondents believe that it is clear from the illustrative practitioner’s report in the Appendix to the proposed ISAE that the practitioner is reporting on the process to compile the PFI and not on the PFI itself? Paragraph A52 of the proposed ISAE, in particular, provides two alternatives for the opinion in relation to the process, i.e.

• Whether the process to compile the PFI has, in all material respects, been applied in accordance with the applicable criteria; or

• Whether the PFI has been properly compiled on the basis stated.

The IAASB has used the EU prospectus regime as the basis for developing this draft standard, but has not used the form of opinion contained in that directive. We suggest that this form of reporting has much to commend it viz:

• The pro forma financial information has been properly compiled on the basis stated, and

• Such basis is consistent with the accounting policies of ABC Company. We do not think the draft report makes it clear where the responsibilities lie for the process to compile, and that the assurance is only on the process to compile and not the PFI itself. Consideration should be given to clarifying the responsibilities and the work undertaken in the following ways:

• changing the report heading to "Independent Practitioner's Assurance Report on ABC Company's Process to Prepare Pro Forma Information" to make it clear that it is the entity’s process;

• highlighting the responsibility of Those Charged with Governance by changing the sub-heading in the report to "Responsibility of the Board of Directors and Management for the Pro Forma Information and its Preparation";

• changing the wording under this sub-heading to "the Board of Directors and management are responsible for the processes to prepare the …";

• use of bold lettering or italics to highlight in the first paragraph under the "Practitioner's Responsibilities" sub-heading what the practitioner is not responsible for. Another option could be having separate paragraphs for responsibilities and those things for which they are not responsible.

4. As the proposed ISAE is designed to convey assurance on the process to compile the

PFI, do respondents believe that it would be desirable for the IAASB to also develop a separate standard on reporting on the PFI itself? If yes: We believe there is merit in the IAASB considering the development of a separate standard on reporting on the PFI itself. (a) What do respondents believe would be the work effort implications in undertaking

engagements to report on the PFI itself? In particular, how would such work effort differ from that specified in the proposed ISAE? As noted in our response to the following question, we believe that assurance engagements to report on the PFI itself are more likely to result in limited assurance being provided than reasonable assurance. The work effort required should be described consistently with the manner in which such engagements are described in revised and new standards on which the IAASB is currently working.

(b) Should both reasonable assurance and limited assurance on the PFI be addressed? If so, how should the nature and extent of the practitioner’s work effort be differentiated between a reasonable assurance engagement and a limited assurance engagement to report on the PFI? Based on current practice in Australia, we envisage there would be difficulty in providing reasonable assurance in this area, particularly in respect of obtaining sufficient appropriate evidence in relation to pro forma financial information. In Australia, professional accountants often undertake limited assurance engagements pertaining to financial information (historical, pro forma and prospective) included in public documents. As noted in our response to Question 1, professional obligations in relation to these engagements are addressed in APES 350. APES 350 in turn notes that practitioners typically undertake these limited assurance engagements in accordance with ASRE 2405 Review of Historical Information Other than a Financial Report or ASAE 3000 Assurance Engagements Other than Audits of Reviews of Historical Financial Information. A dedicated standard dealing with assurance engagements to report on pro forma financial information contained in public documents would be a useful addition to the standards in setting out requirements and providing guidance to practitioners. We note that the AUASB is proposing to issue an exposure draft later this year on the topic. The AUASB describes the project as Assurance Engagements in Connection with Proposed Fundraisings.

Effective Date—Recognizing that the proposals in the proposed ISAE do not establish fundamentally new assurance principles and that the subject matter of the proposed ISAE does not represent a fundamentally new area of practice for the profession, and given the public interest need to harmonize inconsistent practice internationally as soon as practicable, the IAASB believes that an appropriate effective date for the standard would be

18 months after the date of final approval of the standard. The IAASB welcomes comment on whether this lead time relative to the effective date would provide a sufficient period to support effective implementation of the standard. We consider 18 months to be sufficient time to implement the standard.

The Joint Accounting Bodies are committed to assisting where possible in the development and implementation of the highest quality International auditing and assurance standards. We hope that the comments provided are of assistance to the IAASB. If you have any questions regarding this submission, please do not hesitate to contact either Gary Pflugrath (CPA Australia) at +61 2 9375 6244 ([email protected]), Andrew Stringer (Institute) at +61 2 9290 5566 ([email protected]), or Tom Ravlic (NIA) at +61 3 8665 3143 ([email protected]). [Insert Date] Yours sincerely

Alex Malley Chief Executive Officer CPA Australia Ltd

Graham Meyer Chief Executive Officer Institute of Chartered Accountants in Australia

Andrew Conway Chief Executive Officer National Institute of Accountants

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