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SSARS No. 14--compilation of pro forma financial information.

(AICPA, Professional Standards, vol. 2, AR sec. 120)

1. Statements on Standards for Accounting and Review Services (SSARS) currently provide guidance concerning the standards and procedures applicable when an accountant submits unaudited financial statements to his or her client or third parties. By definition, presentations of pro forma financial information are not financial statements. This Statement expands SSARS to apply when an accountant is engaged to compile or issues a compilation report on pro forma financial information.

2. A compilation of pro forma financial information is limited to presenting financial information that is the representation of management (owners) without undertaking to express any assurance on that information. (The accountant might consider it necessary to perform other accounting services to compile the financial information.)

3. The objective of pro forma financial information is to show what the significant effects on historical financial information might have been had a consummated or proposed transaction (or event) occurred at an earlier date. Pro forma financial information is commonly used to show the effects of transactions such as the following:

* Business combination

* Change in capitalization

* Disposition of a significant portion of the business

* Change in the form of business organization or status as an autonomous entity

* Proposed sale of securities and the application of the proceeds

4. This objective is achieved primarily by applying pro forma adjustments to historical financial information. Pro forma adjustments should be based on management's assumptions and give effect to all significant effects directly attributable to the transaction (or event).

5. Pro forma financial information should be labeled as such to distinguish it from historical financial information. This presentation should describe the transaction (or event) that is reflected in the pro forma financial information, the source of the historical financial information on which it is based, the significant assumptions used in developing the pro forma adjustments, and any significant uncertainties about those assumptions. The presentation should also indicate that the pro forma financial information should be read in conjunction with the related historical financial information and that the pro forma financial information is not necessarily indicative of the results (such as financial position and results of operations, as applicable) that would have been attained had the transaction (or event) actually taken place earlier.

CONDITIONS FOR COMPILING PRO FORMA FINANCIAL INFORMATION

6. Nothing in this Statement is intended to preclude an accountant from preparing or assisting in the preparation of pro forma financial information and submitting such pro forma financial information to the client without the issuance of a compilation report, unless the accountant has been engaged to compile such pro forma financial information. If an accountant prepares or assists a client in preparing pro forma financial information, (1) the accountant should consider how such a presentation of pro forma financial information will be used. The accountant should consider the potential of being associated with pro forma financial information and the likelihood that the user may inappropriately infer, through that association, an unintended level of assurance. If the accountant believes that he or she will be associated with the information, the accountant should consider issuing a compilation report so a user will not infer a level of assurance that does not exist.

7. An engagement to compile pro forma financial information may be undertaken as a separate engagement or in conjunction with a compilation of financial statements. The accountant may agree to compile pro forma financial information if the document that contains the pro forma financial information includes (or incorporates by reference) complete historical financial statements of the entity for the most recent year (or for the preceding year if financial statements for the most recent year are not yet available) and, if pro forma financial information is presented for an interim period, the document also includes (or incorporates by reference) historical interim financial information for that period (which may be presented in condensed form). In the case of a business combination, the document should include (or incorporate by reference) the appropriate historical financial information for the significant constituent parts of the combined entity.

8. Additionally, the historical financial statements of the entity (or, in the case of a business combination, of each significant constituent part of the combined entity) on which the pro forma financial information is based must have been compiled, reviewed, or audited. The accountant's compilation or review report or the auditor's report on the historical financial statements should be included (or incorporated by reference) in the document containing the pro forma financial information.

UNDERSTANDING WITH THE ENTITY

9. When an accountant is engaged to compile pro forma financial information, the accountant should establish an understanding with the entity, preferably in writing, regarding the services to be performed. The understanding should include a description of the nature and limitations of the services to be performed and a description of the report. The understanding should also provide:

a. That the engagement cannot be relied upon to disclose errors, fraud, (2) or illegal acts (3) and

b. That the accountant will inform the appropriate level of management of any material errors and of any evidence or information that comes to the accountant's attention during the engagement to compile pro forma financial information (4) that fraud or an illegal act may have occurred. (5) The accountant need not report any matters regarding illegal acts that may have occurred that are clearly inconsequential and may reach agreement in advance with the entity on the nature of any such matters to be communicated.

10. When the accountant is engaged to compile pro forma financial information and evidence or information conies to his or her attention during the engagement that fraud or an illegal act may have occurred, the accountant must adhere to the communication requirements contained in SSARS No. 1, Compilation and Review of Financial Statements (AICPA, Professional Standards, vol. 2, AR sec. 100.61-.62), as amended.

PERFORMANCE REQUIREMENTS

11. When the accountant is engaged to compile or issues a compilation report on pro forma financial information, he or she must adhere to the compilation performance requirements contained in SSARS No. 1 (Al% sec. 100.07-.10), as amended.

12. Before issuance of a compilation report on pro forma financial information, the accountant should read such compiled pro forma financial information, including the summary of significant assumptions, (6) and consider whether the information appears to be appropriate in form and free of obvious material errors. In this context, the term error refers to mistakes in the compilation of the pro forma financial information, including arithmetical or clerical mistakes, and mistakes in the application of accounting principles, including disclosures, if presented.

REPORTING REQUIREMENTS

13. When the accountant is engaged to compile or issues a compilation report on pro forma financial information, the basic elements of the report are as follows:

a. An identification of the pro forma financial information.

b. A statement that the compilation was performed in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants.

c. A reference to the financial statements from which the historical financial information is derived and a statement on whether such financial statements were compiled, reviewed, or audited. (The report on pro forma financial information should refer to any modifications in the accountant's or auditor's report on historical financial statements.)

d. A statement that the pro forma financial information was compiled. If the compilation was performed in conjunction with a compilation of the company's financial statements, the paragraph should so state and indicate the date of the accountant's compilation report on those financial statements. Furthermore, any departure from the standard report on those statements should also be disclosed if considered relevant to the presentation of the pro forma financial information.

e. A description of the basis on which the pro forma financial information is presented if that basis is not generally accepted accounting principles and a statement that that basis of presentation is a comprehensive basis of accounting other than generally accepted accounting principles.

f. A statement that a compilation is limited to presenting pro forma financial information that is the representation of management (owners).

g. A statement that the pro forma financial information has not been audited or reviewed and, accordingly, the accountant does not express an opinion or any other form of assurance on it.

h. A separate paragraph explaining the objective of pro forma financial information and its limitations.

i. A signature of the accounting firm or the accountant as appropriate. (The signature could be manual, stamped, electronic, or typed.)

j. The date of the compilation report. (The date of completion of the compilation should be used as the date of the accountant's report.)

Any other procedures that the accountant might have performed before or during the compilation engagement should not be described in the report.

14. Each page of the compiled pro forma financial information should include a reference, such as "See Accountant's Compilation Report."

15. The following is an illustration of an accountant's compilation report on pro forma financial information.
 I (we) have compiled the accompanying
 pro forma financial information as of and for
 the year ended December 31, 20XX, reflecting
 the business combination of the Company
 and ABC Company in accordance with
 Statements on Standards for Accounting and
 Review Services issued by the American Institute
 of Certified Public Accountants. The
 historical condensed financial statements are
 derived from the historical unaudited financial
 statements of XYZ Company, which
 were compiled by me (us), and of ABC
 Company, which were compiled by another
 (other) accountant(s). (7)

 A compilation is limited to presenting pro
 forma financial information that is the representation
 of management (owners). I (we)
 have not audited or reviewed the accompanying
 pro forma financial information and,
 accordingly, do not express an opinion or
 any other form of assurance on it.

 The objective of this pro forma financial
 information is to show what the significant
 effects on the historical financial information
 might have been had the transaction (or
 event) occurred at an earlier date. However,
 the pro forma financial information is not
 necessarily indicative of the results of operations
 or related effects on financial position
 that would have been attained had the
 above-mentioned transaction (or event) actually
 occurred earlier.

 [If the presentation does not include all applicable
 disclosures, the following paragraph should be
 added.] (8)

 Management has elected to omit all of the
 disclosures ordinarily included in pro forma
 financial information. The omitted disclosures
 might have added significant information
 regarding the company's pro forma financial
 position and results of operations.
 Accordingly, this pro forma financial information
 is not designed for those who are not
 informed about such matters.


16. An accountant is not precluded from issuing a compilation report on pro forma financial information for an entity with respect to which the accountant is not independent. (9) If the accountant is not independent, he or she should specifically disclose the lack of independence. However, the reason for the lack of independence should not be described. When the accountant is not independent, the following should be included as the last paragraph of the report:
 I am (we are) not independent with respect
 to XYZ Company.


17. This Statement is effective for engagements entered into after December 15, 2005. Early application is permitted.

This Statement titled Compilation of Pro Forma Financial Information was adopted unanimously by the assenting votes of the seven members of the Accounting and Review Services Committee.

Accounting and Review Services Committee (2004-2005)

Andrew M. Cohen, Chair

Suzanne M. Heidenreich

Henry Krostich

John J. Malahoski

Thomas A. Ratcliffe

Walter H. Webb

Mark E. Ziessman

AICPA Staff

Charles E. Landes

Vice President

Professional Standards

Michael E Glynn Technical Manager

Audit and Attest Standards

Note: Statements on Standards for Accounting and Review Services (SSARS) are issued by the AICPA Accounting and Review Services Committee (ARSC), the senior technical body of the Institute designated to issue pronouncements in connection with the unaudited financial statements or other unaudited financial information of a nonpublic entity. Rule 202, Compliance With Standards, of the Institute's Code of Professional Conduct requires an AICPA member who performs either a compilation or a review (the accountant) to comply with standards promulgated by the ARSC. The accountant should have sufficient knowledge of the SSARS to identify those that are applicable to his or her compilation or review and should be prepared to justify departures from the SSARS.

(1) If the pro forma financial information is included as accompanying information to the basic financial statements, the accountant should refer to Statement on Standards for Accounting and Review Services (SSARS) No. 1, Compilation and Review of Financial Statements (AICPA, Professional Standards, vol. 2, AR sec. 100.60), as amended.

(2) For purposes of this Statement, fraud is an intentional act that results in a misstatement in compiled pro forma financial information.

(3) For purposes of this Statement, illegal acts are violations of laws or government regulations, excluding fraud.

(4) Performance requirements with respect to an engagement to compile pro forma financial information are contained in paragraphs 11 and 12.

(5) Whether the act is, in fact, fraudulent or illegal is a determination that is normally beyond the accountant's professional competence. An accountant, in reporting on pro forma financial information, presents himself or herself as one who is proficient in accounting and compilation services. The accountant's training, experience, and understanding of the client and its industry may provide a basis for recognition that some client acts coming to his or her attention may be fraudulent or illegal. However, the determination as to whether a particular act is fraudulent or illegal would generally be based on the advice of an informed expert qualified to practice law or may have to await final determination by a court of law.

(6) The accountant may not report on compiled pro forma financial information if the summary of significant assumptions is not presented. Nothing in this Statement should be interpreted to preclude the accountant from reporting on compiled pro forma financial information when management elects to omit substantially all disclosures. In that situation, the accountant should follow the guidance in SSARS No. 1 (AR sec. 100.16-.18), as amended.

(7) Where one set of historical financial statements is audit ed or reviewed and the other is audited, reviewed, or compiled, wording similar to the following would be appropriate:
 The historical condensed financial statements are derived
 from the historical financial statements of XYZ
 Company, which were compiled by me (us), and of
 ABC Company, which were reviewed by another
 (other) accountant(s), appearing elsewhere herein (or
 incorporated by reference).


If either accountant's review report or auditor's report includes an explanatory paragraph or is modified, that fact should be referred to within this report.

(8) The accountant may not report on compiled pro forma financial information if the summary of significant assumptions is not presented.

(9) In making a judgment about whether he or she is independent, the accountant should be guided by the AICPA Code of Professional Conduct.
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Title Annotation:OFFICIAL RELEASES
Publication:Journal of Accountancy
Date:Nov 1, 2005
Words:2487
Previous Article:SSARS No. 13--Compilation of Specified Elements, Accounts, or Items of a Financial Statement.
Next Article:SSARS Interpretation.



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