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.
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:
Proper compilation and consistency with the issuer’s accounting policies
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 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 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 in 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. CESR has 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.
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© CESR - Committee of European Securities Regulators
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