IAASB Proposed ISAE 3420, Assurance Reports on the Process to Compile Pro Forma Financial Information (PFI) Included in a Prospectus.

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1 Foreningen af Statsautoriserede Revisorer Kronprinsessegade 8, 1306 København K. Telefon Telefax nr Internet: Mr James Gunn Technical Director International Auditing and Assurance Standards Board 545 Fifth Avenue, 14th Floor New York, New York 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 jis@fsr.dk Yours sincerely Judith Skou

2 Responses to specific questions raised in the Consultation Paper: 2 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). FSR welcomes the development of a standard as this issue has high priority for the auditors involvement 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 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) (b) The basis upon which it is prepared; 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 relation 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 3 Whether, such opinion can be rendered in the form the Prospectus Directive requires (a positive 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? Yes please note detailed comments below. Also it could be questioned whether the list of procedures is considered to be exhaustive as well as it could be questioned whether they are always 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 procedure 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 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 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? 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 4 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, including those on PFS. It is important that ISAE 3000 and all sub standards are drafted in a consistent 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 understanding 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 practitioner 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 practitioner 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 accounting 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 published 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 responsible 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 5 The auditors report could preferably be more easily readable for the users of the PFI. Unnecessary 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 don t change. Also consider to include paragraphs that refers to matters appropriately 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 practitioners 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 Matter 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 practitioner 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 states 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 sufficient 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 Regulation 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 position as at that date] [and its financial performance [and cash flows] for the period then ended]. As part of this process, information about the company s [financial position], [financial performance] [and cash flows] has been extracted from the company s financial statements [for the period ended [date]], on which [[an audit]/ [a review] report]/ [no audit or review report] has been published. Because of its nature, the pro forma financial information 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 [Securities 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 information.. 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]" - reference should be extended as follows as well as the description of the basis, methodology and assumptions applied in the preparation of such. Kommentar: Should be included 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 practitioner.

6 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 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 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 financial 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 accounting 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 information 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 material respects, been applied in accordance with the applicable criteria]/ [the pro forma financial 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 opinion Kommentar: Alternative procedures could be: Reading the pro forma financial information prepared by Management, 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 combined condensed pro forma financial information. Kommentar: The wording Evaluating 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 that framework should be deleted, cf. above under question 2. Kommentar: The wording Considering management s evidence supporting the pro forma adjustments indicates a qualitative 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 presentation 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.