PwC is concerned that the emphasis in the proposed standard on the "process to compile" may result in users underestimating the applicability and usefulness of the standard, and the level of assurance that the work effort actually supports. The firm suggests that certain proposals within the exposure draft, along with the title of the standard, be amended to refer to the "proper compilation" of the pro forma information.
For the attention of Mr James Gunn
International Auditing and Assurance Standards Board
545 Fifth Avenue, 14th Floor
New York, New York, 10017
28 October 2010
IAASB Exposure Draft ISAE 3420 – “Assurance Reports on the Process to Compile Pro Forma Financial Information Included in a Prospectus”
We appreciate the opportunity to comment on the IAASB’s proposed new International Standard on Assurance Engagements, ISAE 3420, ‘Assurance Reports on the Process to Compile Pro Forma Financial Information Included in a Prospectus’.
Following extensive consultation with members of the PricewaterhouseCoopers network of firms, this response summarises the views of member firms who commented on this Exposure Draft. “PricewaterhouseCoopers” refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.
We fully support the development of this standard and believe that it is appropriate for use in jurisdictions where practitioners are required to report on the proper compilation of pro forma financial information.
Overall, we support the proposals and content of the proposed standard. We believe that the work effort proposed is appropriate in the context of a requirement to report on the proper compilation. We are concerned, however, that the emphasis in the proposed standard on the “process to compile” may result in users underestimating the applicability and usefulness of the standard, and the level of assurance that the work effort actually supports. We therefore suggest that certain proposals within the exposure draft, along with the title of the standard, could be amended to refer to the “proper compilation” of the pro forma information. This would avoid undue emphasis on the “process” aspect of the engagement, whilst continuing to achieve the stated objective. We do not believe any increase in the proposed work effort would be needed, nor any change to the intended scope of the standard.
Our detailed comments in response to the specific questions raised in the exposure draft are set out below and explain further our views on the areas of the proposed content that we feel could be improved. We encourage IAASB to address these concerns in finalising the ISAE.
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?
We believe that the proposed standard defines an appropriate basis for practitioners to adopt in those jurisdictions where a requirement exists to report on the proper compilation of pro forma information. The proposed standard fills a gap in the current suite of international standards and we support the adoption of the proposed standard in those territories that do not currently have equivalent standards for such engagements. In other territories, existing laws or regulation may exist and it is therefore for securities regulators to make a decision regarding adoption.
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?
As explained in the overall comments section above, we are supportive of the proposed work effort and believe that this does support an opinion on ‘proper compilation’. We believe that there is informational value in an engagement that provides assurance on the proper compilation of the pro forma information - that is, how the pro forma information has been compiled.
In our view, an engagement focussed on the process to compile the pro forma information will, by necessity, need to consider the suitability of the underlying source information and adjustments. Therefore, we support the need for the standard to include requirements that address the potential perceived risk of reporting on the process to compile where there is inappropriate or ‘poor quality’ underlying data to which the pro forma adjustments are applied. In our view, the proposed guidance on considerations to determine whether the source is appropriate, and addressing transparency of whether the source was audited or reviewed through the disclosures expected to be included in the pro forma information, achieves this purpose. In addition, we believe that the need for the opening unadjusted financial information to be reviewed or audited is a decision for regulators to make, rather than the IAASB. However, given that different markets might have different requirements in this regard, we strongly support the proposed requirements and guidance designed to ensure transparency regarding the source of the opening unadjusted financial information.
We also believe that the proposed standard includes sufficient guidance on assessing the suitability of the applicable criteria to enable appropriate procedures to be defined in respect of the pro forma information.
However, given that the work effort to support an opinion on the proper compilation of the pro forma information necessarily involves consideration of the underlying source information and adjustments, we believe it is unnecessary to put undue emphasis on the standard being limited to the “process to compile”. In fact, doing so may result in users underestimating the level of assurance being provided. As such, we suggest that the title and objectives of the standard could be revised to eliminate some of the emphasis on the ‘process’, along with conforming revisions to wording within certain paragraphs throughout the body of the requirements and application guidance, to better reflect this, without changing the intended or actual scope of the standard. We would be comfortable if the standard focussed on the “proper compilation” of the pro forma information, rather than the “process to compile” the pro forma information.
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.
We are comfortable with proposed standard providing alternative forms of opinion to accommodate reporting requirements in different jurisdictions. We are also comfortable with the proposed wording of both alternatives. We believe that the work effort set out in the exposure draft supports either wording, for the reasons set out in our response to Question 2. As long as users have a sufficiently clear understanding of the responsibilities of the practitioner and of the work effort applied, which we feel is adequately addressed by the proposed illustrative report, we do not believe users will be misled by either wording.
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 pro forma information is hypothetical by nature, it is not entirely clear what is meant by “providing assurance on the pro forma information itself”. Most jurisdictions require assurance on aspects of the compilation in some form or another.
That being said, whilst we believe there was a need to develop a global standard on the proper compilation of pro forma information because it is a form of opinion required in a number of jurisdictions (including Europe, in which the requirements transcend national boundaries), we do not see significant demand for a global standard on reporting on pro forma information itself to be developed. A global standard addressing other forms of reporting on pro forma information might prove difficult to achieve because of differing requirements of different jurisdictions. Any global standard that tried to accommodate all of the differing situations would likely end up being quite complex. Therefore, unless it can be demonstrated that there are a large number of jurisdictions with similar reporting requirements, we believe that it may be preferable for national standard setters to develop local standards that are specifically tailored to meet their particular regulatory environment.
We note the IAASB’s concern over the potential confusion among users on the use of the terms “compile” and “compilation” given such terms are already used in ISRS 4410, but we do not believe there is any risk of confusion. The nature and objective of compilation engagements are sufficiently different that users and practitioners will understand the distinction.
We have no comments regarding adoption by developing nations or regarding translation. We believe that a period of 18 months from final approval is reasonable for the effective date, given the proposed standard fills a gap in the suite of international standards and on the presumption that IAASB follows its normal practice of permitting early adoption.
Our detailed comments in respect of specific paragraphs within the exposure draft are included in the appendix to this letter.
We would be happy to discuss our views further with you. If you have any questions regarding this letter, please contact Deian Tecwyn (+44 207 212 3695) or Jamie Shannon (+44 141 355 4225).
We encourage IAASB to address the following matters in finalising the ISAE.
|4, A2, A13||We believe paragraphs 4 and A2 should make clear that the subject of a prospectus may include pro forma adjustments that relate to more than a single event or transaction. There may be circumstances where it may be appropriate for adjustments relating to more than one recent past event or transaction to be amalgamated where these are either linked or where there are other valid reasons for doing so. Guidance should not be worded in such a way that may appear to prevent the inclusion of such adjustments that are not directly related to the most recent transaction or event, but nonetheless are considered to be relevant and directly attributable to the purpose for issuing the prospectus. Specifically, we suggest that reference to ‘directly attributable’ transactions in paragraph A2 or cross referencing to paragraph A13 would be beneficial, ensuring that conforming amendments are made to paragraph A13 as necessary to ensure consistency with any amendments made to paragraph A2. However it should be clear that transactions that are not directly attributable are not to be included.|
|21||We believe that this requirement might be better described by focussing on whether “the practitioner hasidentified evidence that…”. As the required action is to discuss the matter with the responsible party, asking the practitioner to form a “conclusion” at this point seems premature.
We also question the appropriateness of referencing this requirement to paragraphs A17 – A19. These application guidance paragraphs deal specifically with materiality and it is not entirely clear how this application material is to be read and applied with respect to this requirement.
We also believe it would be beneficial to clarify IAASB’s thoughts on the potential implications for the practitioner’s report as outlined in the final sentence of this requirement. In particular, the relationship to the requirements on forming the opinion (paragraphs 25 to 27) is unclear. We believe that a cross reference to those requirements dealing with forming the opinion may benefit the practitioner’s understanding of the potential implications or alternatively it may be more effective to provide appropriate new application material similar in nature to paragraph A42.
|A8||We do not disagree that all adjustments are required to be factually supportable, but we believe that additional considerations may need to be taken into account in circumstances when the pro forma adjustments are based on forecast unadjusted financial information. We recommend that the standard refer users to ISAE 3400 ‘The Examination of Prospective Financial Information’ in such circumstances where forecast information is used.
We also believe that the wording of this paragraph may need to be revised to avoid users interpreting the guidance too narrowly. As an example, an issuer may use a forecast net asset value as the unadjusted financial information on the acquisition of an asset with the subsequent pro forma adjustments based on an agreed or proposed consideration which itself could be considered to be factually supportable. The impact of the original forecast does not form the basis from which the pro forma adjustment is derived in this situation, but we believe the paragraph should not be worded in a way that would preclude users from applying information and adjustments of this nature in similar situations.
|A9||We suggest adding a further bullet regarding the need for the practitioner to have sufficient knowledge of the financial reporting frameworks used in the preparation of the source of the unadjusted financial information and, if applicable, of the target company.|
|A15, A16||We believe the application guidance should be made clearer as to determining the acceptability of the accounting policies on which the pro forma information is based. Specifically, for example, the EU prospectus rules state that the accounting policies that are applied must be those from the most recent annual financial statements or those to be applied in the next annual financial statements. However, it is also widely recognised that many issuers present the most recent interim financial statements as the unadjusted financial information, where these have been published, and apply the policies set forth in those interim statements in determining the pro forma adjustments. Given market practice in this area we believe that additional guidance is merited and that this may also be considered for inclusion in paragraph A32 which discusses the practitioner’s inquiries of the responsible party (in relation to accounting policies).|
|A18||We believe that the wording used in the introductory sentence of this paragraph is not sufficiently clear and suggest that the following may be a more readily understandable alternative, in the context of matters that may contribute to pro forma information being misleading to the intended users:
“The process to compile financial information may not be considered appropriate when there is evidence of:
|A29||In the third bullet, we question the need for the focus on a “published” audit or review report. The important consideration is whether or not an audit or review has been performed on the source information, rather than whether or not the related report has been “published”. The emphasis on the word “published” could be interpreted to mean “publicly issued”, and we doubt that is the intent.|
|A33||We believe that there is scope for the work effort detailed in this paragraph to be misunderstood because it is not clear that the work to be performed is intended to only be sufficient to assess the credibility of the source information (as explained in paragraph A31) when that information has not been subject to an audit or review. We believe that the intention of the guidance is not to impose a level of work effort that is equivalent to a review of the source information and therefore suggest that to avoid any potential misunderstanding the following changes to the paragraph wording be made:
“In the rare circumstances where the entity’s financial information has never been audited or reviewed there may be a regulatory requirement that the source information be audited or reviewed before the preparation of the pro forma financial information. If such a requirement does not exist the practitioner may need to perform additional procedures to determine the credibility of the source information. Such procedures may include, for example:
We also suggest that the second bullet be rephrased as follows: “Obtaining evidence that corroborates the responsible party’s responses to the practitioner’s inquiries”, to avoid creating a new category of evidence (i.e., “corroborative evidence”).
|Illustrative report||We suggest the following amendments to the wording of the illustrative report, which are designed to make it even clearer in the report that the practitioner is not required by the standard to audit or review the financial information used in compiling the pro forma financial information.
“Our responsibility is to express an opinion…….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 information, nor of the financial information used in compiling it, in the course of this engagement, and, accordingly,…”