AR 120: Compilation of Pro Forma Financial Information
EFFECTIVE DATE AND APPLICABILITY
| Original Pronouncement |
Statements on Standards for Accounting and Review Services (SSARSs) 14, 17 |
| Effective Date |
This statement currently is effective. |
| Applicability |
When an accountant is engaged to compile or issue a compilation report on pro forma financial information. |
OBJECTIVES OF AR SECTION 120
This section established standards for performing a compilation of pro forma financial information. A compilation of pro forma financial information is limited to presenting financial information that is the representation of management without undertaking to express any assurance on that information.
Entities issue pro forma information 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—for example, a business combination or the disposal of a portion of the business.
FUNDAMENTAL REQUIREMENTS
General Guidance
Reporting Obligation
An accountant may prepare or assist in the preparation of pro forma financial information and submitting such a preparation to management without the issuance of a compilation report, unless the accountant has been engaged to perform a compilation. However, in deciding whether to issue a compilation report, the accountant should consider how such a presentation of pro forma financial information will be used. If the accountant believes that he or she will be associated with the information, he or she should consider issuing a compilation report so a user will not infer a level of assurance that does not exist.
Additionally, the historical financial statements of the entity on which the pro forma information is based must have been compiled, reviewed, or audited and the related report should be included in the document containing the pro forma financial information.
Understanding with the Entity
The accountant should establish an understanding, preferably in writing, regarding the services to be performed. This understanding should include a description of the nature and limitations of the services to be performed and a description of the report.
Performance Requirements
Before completing a compilation of pro forma financial information, he or she must adhere to the compilation requirements contained in AR Section 100.07–.10, which require the accountant to possess a level of knowledge of the accounting principles and practices of the client’s industry that will enable him or her to perform the compilation. The accountant should also understand:
1. The nature of the entity’s business transactions
2. The form of its accounting records
3. The stated qualifications of its accounting personnel
4. The accounting basis of its financial statements
5. The form and content of the financial statements
The accountant should read the presentation of the pro forma financial information, including the summary of significant assumptions, and consider whether the information appears to be in appropriate form and free of obvious material mistakes.
Reporting Requirements
The basis elements of a report on one or more specified elements, accounts, or items of a financial statement are as follows:
1. An identification of the pro forma financial information
2. A statement that the compilation was performed in accordance with SSARSs issued by the American Institute of Certified Public Accountants (AICPA).
3. 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.)
4. 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.
5. A description of the basis on which the pro forma financial information is presented if that basis is not generally accepted accounting principles (GAAP) and a statement that that basis of presentation is a comprehensive basis of accounting other than GAAP.
6. A statement that a compilation is limited to presenting pro forma financial information that is the representation of management (owners).
7. 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.
8. A separate paragraph explaining the objective of pro forma financial information and its limitations.
The report should be signed and dated the date of the completion of the compilation. Each page of the financial statements should include a reference such as “See Accountant’s Compilation Report.”
ILLUSTRATIONS
Illustration 1. Engagement Letter for a Compilation on Pro Forma Financial Information
The following is an example compilation report on pro forma financial information.
[Appropriate Salutation]
This letter is to confirm our understanding of the terms and objectives of our engagement and the nature and limitations of the services we will provide.
We will perform the following services:
We will compile, from information you provide, the pro forma financial information of XYZ Company as of December 31, 20XX, and issue an accountant’s report thereon in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants.
The objective of a compilation is to assist you in presenting financial information in the form of pro forma financial information. We will utilize information that is your representation without undertaking to obtain or provide any assurance that there are no material modifications that should be made to the pro forma financial information in order for the pro forma financial information to be in conformity with [the applicable financial accounting framework (for example, accounting principles generally accepted in the United States of America)].
You are responsible for:
1. The preparation and fair presentation of the pro forma financial information in accordance with [the applicable financial reporting framework (for example, accounting principles generally accepted in the United States of America)].
2. Designing, implementing, and maintaining internal control relevant to the preparation and fair presentation of the pro forma financial information.
3. Preventing and detecting fraud.
4. Identifying and ensuring that the entity complies with the laws and regulations applicable to its activities.
5. Making all financial records and related information available to us.
We are responsible for conducting the engagement in accordance with the Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants.
A compilation differs significantly from a review or an audit of financial information. A compilation does not contemplate performing inquiry, analytical procedures, or other procedures performed in a review. Additionally, a compilation does not contemplate obtaining an understanding of the entity’s internal control; assessing fraud risk; testing accounting records by obtaining sufficient appropriate audit evidence through inspection, observation, confirmation, the examination of source documents (for example, canceled checks or bank images); or other procedures ordinarily performed in an audit. Accordingly, we will not express an opinion or provide any assurance regarding the pro forma financial information being compiled.
Our engagement cannot be relied upon to disclose errors, fraud, or illegal acts. However, we will inform the appropriate level of management of any material errors, and of any evidence or information that comes to our attention during the performance of our compilation procedures, that fraud may have occurred. In addition, we will report to you any evidence or information that comes to our attention during the performance of our compilation procedures regarding illegal acts that may have occurred, unless they are clearly inconsequential.
If, during the period covered by the engagement letter, the accountant’s independence is or will be impaired, insert the following:
We are not independent with respect to XYZ Company. We will disclose that we are not independent in our compilation report.
If, for any reason, we are unable to complete the compilation of your pro forma financial information, we will not issue a report on such schedule as a result of this engagement.
Our fees for these services . . .
We will be pleased to discuss this letter with you at any time.
If the foregoing is in accordance with your understanding, please sign the copy of this letter in the space provided and return it to us.
Sincerely yours,
________________________
[Signature of accountant]
Acknowledged:
XYZ Company
_______________________
President
_______________________
Date
Illustration 2. Compilation Report on Pro Forma Financial Information
Compilation report on pro forma financial information reflecting a business combination prepared in accordance with accounting principles generally accepted in the United States of America:
Accountant’s Compilation Report
[Appropriate Salutation]
I (we) have compiled the accompanying pro forma financial information of XYZ Company as of December 31, 20XX, reflecting the business combination of the Company and ABC Company. 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). I (we) have not audited or reviewed the accompanying pro forma financial information and, accordingly, do not express an opinion or provide any assurance about whether the pro forma financial information is in accordance with accounting principles generally accepted in the United States of America.
The management (owners) is (are) responsible for the preparation and fair presentation of the pro forma financial information in accordance with accounting principles generally accepted in the United States of America and for designing, implementing, and maintaining internal control relevant to the preparation and fair presentation of the pro forma financial information.
My (our) responsibility is to conduct the compilation in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. The objective of a compilation is to assist management in presenting financial information in the form of pro forma financial information without undertaking to obtain or provide any assurance that there are no material modifications that should be made to the pro forma financial information.
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 transaction (or event) actually occurred earlier.
Paragraph the accountant may add after the previous paragraph when management has elected to omit substantially all disclosures, but the pro forma financial information is otherwise in conformity with accounting principles generally accepted in the United States of America.
[Signature of accounting firm or accountant, as appropriate]
[Date]
