AT 401: Reporting on Pro Forma Financial Information
EFFECTIVE DATE AND APPLICABILITY
| Original Pronouncement | Statements on Standards for Attestation Engagements (SSAE) 10, Attestation Standards: Revision and Recodification. |
| Effective Date | This statement currently is effective. |
| Applicability | Reports on an examination or a review of pro forma financial information. When pro forma information is provided outside the financial statements and the accountant is not engaged to report on it, the guidance in Section 550, Other Information in Documents Containing Audited Financial Statements, applies. |
DEFINITIONS OF TERMS
Pro forma financial information. Shows “what the significant effects on historical financial information might have been had a consummated or proposed transaction (or event) occurred at an earlier date.” (Emphasis added.)
OBJECTIVES OF SECTION 401
A high rate of mergers and acquisitions in the late 1980s increased the need for guidance on pro forma financial information. The Auditing Standards Board issued an SSAE, Reporting on Pro Forma Financial Information (the Statement) in 1988. The attestation statement applies to the accountant’s involvement with all presentations of pro forma financial information, including information required by Article 11 of Securities and Exchange Commission (SEC) Regulation S-X.
The statement explains the application of the general guidance for attestation engagements to engagements to report on pro forma information. The permitted levels of service that the accountant can provide related to pro forma information are a review or an examination.
The statement does not apply to the generally accepted accounting principles (GAAP) requirements in historical financial statements related to disclosure of a transaction consummated after the balance sheet date to achieve a more meaningful presentation, such as presentation of earnings per share revised for a subsequent stock split.
Use of Pro Forma Information
Pro forma information might be used to show the effects of a business combination, change in capitalization, disposition of a significant portion of a business, a change in form or status of a business (for example, from a division to a separate entity), or a proposed sale of securities and application of the proceeds.
In 2001, the Auditing Standards Board issued SSAE 10, Attestation Standards: Revision and Recodification. SSAE 10 superseded SSAEs 1 through 9 and renumbered the AT sections in the American Institute of Certified Public Accountants (AICPA) Codification.
FUNDAMENTAL REQUIREMENTS
Conditions for Reporting and the Accountant’s Objectives
A practitioner may examine or review pro forma financial information if all three of the following conditions are achieved:
1. The document including the pro formas also includes complete historical financial statements (or incorporates them by reference) of the entity for the most recent year. If pro formas are for an interim period, historical interim information for that period is also presented (or incorporated by reference). If the circumstances are a business combination, the document includes historical data for significant constituent parts of the combined entity.
2. The historical financial statements on which the pro forma information is based have been audited or reviewed by a practitioner.
NOTE: The level of assurance on the pro formas should be no greater than the level on the related historical statements. For a nonpublic entity, the review may be performed under AR Section 60–90.
3. The practitioner reporting on the pro forma information should have an appropriate level of knowledge of the entity’s accounting and financial reporting practices.
NOTE: Generally this knowledge will be the result of having audited or reviewed the historical statements. If the practitioner was not the auditor or reviewer of the historical statements, the practitioner “should consider whether, under the particular circumstances, he or she can acquire sufficient knowledge.”
Engagement Objectives
Examination
The objective of a practitioner’s examination of pro forma information is to provide reasonable assurance that
1. Management’s assumptions provide a reasonable basis for presenting the significant effects of the underlying transaction or event.
2. Pro forma adjustments give appropriate effect to the assumptions.
3. The pro forma column (historical information modified by adjustments) reflects the proper application of the adjustments.
Review
The objective of a practitioner’s review of pro forma information is to provide negative assurance on the three aspects of the pro forma information listed in the preceding paragraph.
NOTE: “Negative assurance” indicates that no information came to the practitioner’s attention that would cause him or her not to believe the three statements.
The objectives of an examination or review do not focus on the final pro forma column alone. The assurance is not that the pro forma column conforms with established criteria. The practitioner’s objectives relate to the three separate aspects of a pro forma presentation:
- Assumptions (reasonable)
- Adjustments (give effect to assumptions)
- Final column (application of adjustments is proper)
Procedures
The procedures for an examination or review include:
1. Obtaining an understanding of the underlying transaction or event
2. Obtaining a level of knowledge of each significant constituent part of the combined entity in a business combination
3. Discussing with management their assumptions about the effects of the transaction or event
4. Evaluating whether pro forma adjustments are included for all significant effects of the transaction or event
5. Obtaining sufficient evidence in support of such adjustments
NOTE: In considering the level of attestation risk the practitioner is willing to accept in a pro forma information engagement, the level of assurance on the underlying historical financial statements is a key factor. Accordingly, the procedures the practitioner should apply to the assumptions and pro forma adjustments are substantially the same for either an examination or a review engagement. The evidence needed is a matter of judgment and may vary with the level of service involved.
6. Evaluating whether the presentation of management’s assumptions is sufficiently clear and comprehensive, and whether management’s assumptions are consistent with each other and with the data used to develop them.
7. Determining whether computations of pro forma adjustments are mathematically correct and that the pro forma column reflects proper application of the adjustments.
8. Obtaining management’s written representations on:
a. Their responsibility for the assumptions
b. Assertion that the assumptions provide a reasonable basis for presenting all of the significant effects directly attributable to the transaction or event
c. Assertion that the related pro forma adjustments give appropriate effect to the assumptions
d. Assertion that the pro forma column reflects the proper application of adjustments
e. Their belief that significant effects of the transaction or event are appropriately disclosed
9. Reading the pro forma financial information and evaluating the appropriateness of the descriptions of:
a. The underlying transaction or event,
b. The pro forma adjustments, and
c. The significant assumptions and significant uncertainties about those assumptions.
Also, evaluating whether the source of the historical information base is appropriately identified.
Form of Report on Pro Forma Financial Information
According to AT 401.12, a practitioner’s examination report on pro forma financial information should include:
1. A title that includes the word independent
2. An identification of the pro forma financial information
3. A reference to the financial statements from which the historical financial information is derived and a statement as to whether such financial statements were audited (The report on pro forma financial information should refer to any modification in the practitioner’s report on the historical financial information.)
4. An identification of the responsible party and a statement that the responsible party is responsible for the pro forma financial information
5. Statements that:
a. The practitioner’s responsibility is to express an opinion on the pro forma financial information based on his or her examination.
b. The examination of the pro forma financial information was conducted in accordance with attestation standards established by the AICPA and, accordingly, included such procedures as the practitioner considered necessary in the circumstances.
c. The practitioner believes that the examination provides a reasonable basis for his or her opinion.
6. A separate paragraph explaining the objective of pro forma financial information and its limitations
7. The practitioner’s opinion as to whether management’s assumptions provide a reasonable basis for presenting the significant effects directly attributable to the transaction (or event), whether the related pro forma adjustments give appropriate effect to those assumptions and whether the pro forma column reflects the proper application of those adjustments to the historical financial statements.
8. The manual or printed signature of the practitioner’s firm.
9. The date of the examination report.
According to AT 401.13, a practitioner’s review report on pro forma financial information should include the following:
1. A title that includes the word independent
2. An identification of the pro forma financial information
3. A reference to the financial statements from which the historical financial information is derived and a statement as to whether such financial statements were audited or reviewed (The report on pro forma financial information should refer to any modification in the practitioner’s report on the historical financial information.)
4. An identification of the responsible party and a statement that the responsible party is responsible for the pro forma financial information
5. A statement that the review of the pro forma financial information was conducted in accordance with attestation standards established by the AICPA
6. A statement that a review is substantially less in scope than an examination, the objective of which is the expression of an opinion on the pro forma financial information and, accordingly, the practitioner does not express such an opinion
7. A separate paragraph explaining the objective of pro forma financial information and its limitations
8. The practitioner’s conclusion as to whether any information came to the practitioner’s attention to cause him or her to believe that management’s assumptions do not provide a reasonable basis for presenting the significant effects directly attributable to the transaction (or event), or that the related pro forma adjustments do not give appropriate effect to those assumptions, or that the pro forma column does not reflect the proper application of those adjustments to the historical financial statements
9. The manual or printed signature of the firm
10. The date of the review report
The practitioner’s report on the pro forma financial information:
- Should be dated as of the completion of the appropriate procedures
- May be added to the practitioner’s report on historical financial information or may appear separately
If the reports are combined and the date of completion of procedures on the pro forma financial information is after the completion of fieldwork for the audit or review of the historical financial information, the combined report should be dual-dated, as shown in the following:
February 15, 20X2, except for the paragraphs regarding pro forma financial information as to which the date is March 20, 20X2.
See “Illustrations” for example reports on examinations (Illustration 1) and reviews (Illustration 2) of pro forma information.
NOTE: A practitioner’s report may combine a review of some pro forma information and an examination of other pro forma information (for example, an examination of annual pro formas with a review of quarterly pro forma information). An example of such a report is presented in Illustration 3.
Report Modifications
A practitioner should modify the report (qualify, adverse, or disclaim) or withdraw from the engagement for (1) restrictions on the scope of the engagement, or (2) reservations about the propriety of the assumptions or the conformity of the presentation with those assumptions, including inadequate disclosure of significant matters. Examples of modified reports appear as Illustrations 4 through 7.
NOTE: Uncertainty about whether the transaction/event will be consummated does not require a report modification.
INTERPRETATIONS
There are no interpretations for this section.
TECHNIQUES FOR APPLICATION
Presentation of Pro Forma Financial Information
Pro forma financial information:
1. Should be labeled to distinguish it from historical financial information
2. Should describe the transaction or event that is presented as pro forma, the source of the historical information on which it is based, significant assumptions underlying the information, and any significant uncertainties
3. Should indicate that it should be read in conjunction with the related historical information
4. Should indicate that it is not necessarily indicative of results that would have been obtained if the transaction had taken place earlier
NOTE: For presentation of pro forma information for a public company, the practitioner should also refer to Article 11 of Regulation S-X.
Nonaudit and Nonreview Clients
Can a practitioner who has not audited or reviewed the historical base financial statements have a sufficient level of knowledge of the entity’s accounting and financial reporting practices to accept a pro forma review or examination engagement? The knowledge would have to be obtained to permit the practitioner to report on the pro forma information. A practitioner may be able to obtain this knowledge in some cases. For example, if the 20X1 pro forma information were based on historical financial statements audited by someone else, but the practitioner has audited the historical financial statements for 20X2, and as part of that audit, reviewed the workpapers of the predecessor auditors, the practitioner should have obtained an appropriate level of knowledge.
Most Recent Year Historical Financial Statements
There is a requirement that the historical financial statements for the most recent year be included in the document containing the pro forma financial information. If the historical financial statements for the most recent year are not yet available, can the practitioner accept the engagement to report on the pro formas? Yes. The Statement indicates that the historical financial statements for the preceding year should be included if financial statements for the most recent year are not available.
Compiled Historical Financial Statements
An entity with audited financial statements acquires a small closely held business for which the practitioner has compiled the financial statements. Is it permissible for the practitioner to accept an engagement to report on pro forma financial information? No, not if the operating results of the closely held business are material to the combined entity. The historical base should be audited or reviewed. Compilation is not enough, but the practitioner can accept the engagement if he or she is able to perform a retroactive review or audit.
Qualified Report on Historical Financial Statements
The practitioner’s report on pro forma financial information refers to the financial statements from which the historical financial information was derived, and states whether the financial statements were audited or reviewed. If the report on the historical financial statements was a qualified opinion or was otherwise modified, a reference to the modification should be included in the report on pro forma information.
ILLUSTRATIONS
The following are examples of reports on pro forma financial information (adapted from SSAE 10, AT 400 Appendices A–E).
Illustration 1. Report on Examination of Pro Forma Financial Information
To the Board of Directors of Widget Company
Main City, USA
Independent Accountant’s Report
We have examined the pro forma adjustments reflecting the transaction [or event] described in Note 1 and the application of those adjustments to the historical amounts in [the assembly of] the accompanying pro forma condensed balance sheet of Widget Company as of December 31, 20X1, and the pro forma condensed statement of income for the year then ended. The historical condensed financial statements are derived from the historical financial statements of Widget Company, which were audited by us, and of Basic Company, which were audited by other accountants, appearing elsewhere herein [or incorporated by reference]. Such pro forma adjustments are based upon management’s assumptions described in Note 2. Widget Company’s management is responsible for the pro forma financial information. Our responsibility is to express an opinion on the pro forma financial information based on our examination.
Our examination was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants and, accordingly, included such procedures as we considered necessary in the circumstances. We believe that our examination provides a reasonable basis for our opinion.
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 condensed financial statements are 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.
In our opinion, management’s assumptions provide a reasonable basis for presenting the significant effects directly attributable to the above-mentioned transaction [or event] described in Note 1, the related pro forma adjustments give appropriate effect to those assumptions, and the pro forma column reflects the proper application of those adjustments to the historical financial statement amounts in the pro forma condensed balance sheet as of December 31, 20X1, and the pro forma condensed statement of income for the year then ended.
Smith and Jones
February 15, 20X2
NOTE: Additional paragraph(s) may be added before the opinion paragraph to emphasize certain matters relating to the attest engagement or the subject matter.
Illustration 2. Report on Review of Pro Forma Financial Information
To the Board of Directors of Widget Company
Main City, USA
Independent Accountant’s Report
We have reviewed the pro forma adjustments reflecting the transaction [or event] described in Note 1 and the application of those adjustments to the historical amounts in [the assembly of] the accompanying pro forma condensed balance sheet of Widget Company as of March 31, 20X2, and the pro forma condensed statement of income for the three months then ended. These historical condensed financial statements are derived from the historical unaudited financial statements of Widget Company, which were reviewed by us, and of Basic Company, which were reviewed by other accountants, appearing elsewhere herein [or incorporated by reference]. Such pro forma adjustments are based on management’s assumptions as described in Note 2. Widget Company’s management is responsible for the pro forma financial information.
Our review was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants. A review is substantially less in scope than an examination, the objective of which is the expression of an opinion on management’s assumptions, the pro forma adjustments, and the application of those adjustments to historical financial information. Accordingly, we do not express such an opinion.
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 condensed financial statements are 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.
Based on our review, nothing came to our attention that caused us to believe that management’s assumptions do not provide a reasonable basis for presenting the significant effects directly attributable to the above-mentioned transaction [or event] described in Note 1, that the related pro forma adjustments do not give appropriate effect to those assumptions, or that the pro forma column does not reflect the proper application of those adjustments to the historical financial statement amounts in the pro forma condensed balance sheet as of March 31, 20X2, and the pro forma condensed statement of income for the three months then ended.
Smith and Jones
February 15, 20X2
NOTE: Additional paragraph(s) may be added before the opinion paragraph to emphasize certain matters relating to the attest engagement or the subject matter.
Illustration 3. Report on Examination of Pro Forma Financial Information at Year-End with a Review of Pro Forma Financial Information for a Subsequent Interim Date
To the Board of Directors of Widget Company
Main City, USA
Independent Accountant’s Report
We have examined the pro forma adjustments reflecting the transaction [or event] described in Note 1 and the application of those adjustments to the historical amounts in [the assembly of] the accompanying pro forma condensed balance sheet of Widget Company as of December 31, 20X1, and the pro forma condensed statement of income for the year then ended. The historical condensed financial statements are derived from the historical financial statements of Widget Company, which were audited by us, and of Basic Company, which were audited by other accountants, appearing elsewhere herein [or incorporated by reference]. Such pro forma adjustments are based upon management’s assumptions described in Note 2. Widget Company’s management is responsible for the pro forma financial information. Our responsibility is to express an opinion on the pro forma financial information based on our examination.
Our examination was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants and, accordingly, included such procedures as we considered necessary in the circumstances. We believe that our examination provides a reasonable basis for our opinion.
In addition, we have reviewed the related pro forma adjustments and the application of those adjustments to the historical amounts in [the assembly of] the accompanying pro forma condensed balance sheet of Widget Company as of March 31, 20X2, and the pro forma condensed statement of income for the three months then ended. The historical condensed financial statements are derived from the historical financial statements of Widget Company, which were reviewed by us, and Basic Company, which were reviewed by other accountants, appearing elsewhere herein [or incorporated by reference]. Such pro forma adjustments are based upon management’s assumptions as described in Note 2. Our review was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants. A review is substantially less in scope than an examination, the objective of which is the expression of an opinion on management’s assumptions, the pro forma adjustments, and the application of those adjustments to historical financial information. Accordingly, we do not express such an opinion on the pro forma adjustments or the application of such adjustments to the pro forma condensed balance sheet as of March 31, 20X2, and the pro forma condensed statement of income for the three months then ended.
The objective of this pro forma financial information is to show what the significant effects on the historical information might have been had the transaction [or event] occurred at an earlier date. However, the pro forma condensed financial statements are 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.
In our opinion, management’s assumptions provide a reasonable basis for presenting the significant effects directly attributable to the above-mentioned transaction [or event] described in Note 1, the related pro forma adjustments give appropriate effect to those assumptions, and the pro forma column reflects the proper application of those adjustments to the historical financial statement amounts in the pro forma condensed balance sheet as of December 31, 20X1, and the pro forma condensed statement of income for the year then ended.
Based on our review, nothing came to our attention that caused us to believe that management’s assumptions do not provide a reasonable basis for representing the significant effects directly attributable to the above-mentioned transaction [or event] described in Note 1, that the related pro forma adjustments do not give appropriate effect to those assumptions, or that the pro forma column does not reflect the proper application of those adjustments to the historical financial statement amounts in the pro forma condensed balance sheet as of March 31, 20X2, and the pro forma condensed statement of income for the three months then ended.
Smith and Jones
February 15, 20X2
NOTE: Additional paragraph(s) may be added before the opinion paragraph to emphasize certain matters relating to the attest engagement or the subject matter.
Illustration 4. Report on Examination of Pro Forma Financial Information Giving Effect to a Business Combination to Be Accounted for as a Pooling of Interests
Independent Accountant’s Report
We have examined the pro forma adjustments reflecting the proposed business combination to be accounted for as a pooling of interests described in Note 1 and the application of those adjustments to the historical amounts in the accompanying pro forma condensed balance sheet of X Company as of December 31, 20X1, and the pro forma condensed statements of income for each of three years in the period then ended. These historical condensed financial statements are derived from the historical financial statements of X Company, which were audited by us, and of Y Company, which were audited by other accountants, appearing elsewhere herein [or incorporated by reference]. Such pro forma adjustments are based upon management’s assumptions described in Note 2. X Company’s management is responsible for the pro forma financial information. Our responsibility is to express an opinion on the pro forma financial information based on our examination.
Our examination was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants and, accordingly, included such procedures as we considered necessary in the circumstances. We believe that our examination provides a reasonable basis for our opinion.
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 transactions [or event] occurred at an earlier date.
[Additional paragraph(s) may be added to emphasize certain matters relating to the attest engagement or the subject matter.]
In our opinion, the accompanying condensed pro forma financial statements of X Company as of December 31, 20X1, and for each of the three years in the period then ended give appropriate effect to the pro forma adjustments necessary to reflect the proposed business combination on a pooling of interests basis as described in Note 1 and the pro forma column reflects the proper application of those adjustments to the historical financial statements.
[Signature]
[Date]
Illustration 5. Report on Examination of Pro Forma Financial Information—scope Limitation Qualification
To the Board of Directors of Widget Company
Main City, USA
Independent Accountant’s Report
We have examined the pro forma adjustments reflecting the transaction [or event] described in Note 1 and the application of those adjustments to the historical amounts in [the assembly of] the accompanying pro forma condensed balance sheet of Widget Company as of December 31, 20X1, and the pro forma condensed statement of income for the year then ended. The historical condensed financial statements are derived from the historical financial statements of Widget Company, which were audited by us, and of Basic Company, which were audited by other accountants, appearing elsewhere herein [or incorporated by reference]. Such pro forma adjustments are based upon management’s assumptions described in Note 2. Widget Company’s management is responsible for the pro forma financial information. Our responsibility is to express an opinion on the pro forma financial information based on our examination.
Except as described below, our examination was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants and, accordingly, included such procedures as we considered necessary in the circumstances. We believe that our examination provides a reasonable basis for our opinion.
We are unable to perform the examination procedures we considered necessary with respect to assumptions relating to the proposed loan described as Adjustment E in Note 2.
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 condensed financial statements are 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.
In our opinion, except for the effects of such changes, if any, as might have been determined to be necessary had we been able to satisfy ourselves as to the assumptions relating to the proposed loan, management’s assumptions provide a reasonable basis for presenting the significant effects directly attributable to the above-mentioned transaction [or event] described in Note 1, the related pro forma adjustments give appropriate effect to those assumptions, and the pro forma column reflects the proper application of those adjustments to the historical financial statement amounts in the pro forma condensed balance sheet as of December 31, 20X1, and the pro forma condensed statement of income for the year then ended.
Smith and Jones
February 15, 20X2
Illustration 6. Report on Examination of Pro Forma Financial Information—Qualification—Propriety of Assumptions
To the Board of Directors of Widget Company
Main City, USA
Independent Accountant’s Report
We have examined the pro forma adjustments reflecting the transaction [or event] described in Note 1 and the application of those adjustments to the historical amounts in [the assembly of] the accompanying pro forma condensed balance sheet of Widget Company as of December 31, 20X1, and the pro forma condensed statement of income for the year then ended. The historical condensed financial statements are derived from the historical financial statements of Widget Company, which were audited by us, and of Basic Company, which were audited by other accountants, appearing elsewhere herein [or incorporated by reference]. Such pro forma adjustments are based upon management’s assumptions described in Note 2. Widget Company’s management is responsible for the pro forma financial information. Our responsibility is to express an opinion on the pro forma financial information based on our examination.
Our examination was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants and, accordingly, included such procedures as we considered necessary in the circumstances. We believe that our examination provides a reasonable basis for our opinion.
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 condensed financial statements are 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.
As discussed in Note 2 to the pro forma financial statements, the pro forma adjustments reflect management’s assumption that X Division of the acquired company will be sold. The net assets of this division are reflected at their historical carrying amount; generally accepted accounting principles require these net assets to be recorded at estimated net realizable value.
In our opinion, except for inappropriate valuation of net assets of X Division, management’s assumptions described in Note 2 provide a reasonable basis for presenting the significant effects directly attributable to the above-mentioned transaction [or event] described in Note 1, the related pro forma adjustments give appropriate effect to those assumptions, and the pro forma column reflects the proper application of those adjustments to the historical financial statement amounts in the pro forma condensed balance sheet as of December 31, 20X1, and the pro forma condensed statement of income for the year then ended.
Smith and Jones
February 15, 20X2
Illustration 7. Disclaimer of Opinion on Pro Forma Financial Information—scope Limitation
To the Board of Directors of Widget Company
Main City, USA
Independent Accountant’s Report
We were engaged to examine the pro forma adjustments reflecting the transaction [or event] described in Note 1 and the application of those adjustments to the historical amounts in [the assembly of] the accompanying pro forma condensed balance sheet of Widget Company as of December 31, 20X1, and the pro forma condensed statement of income for the year then ended. The historical condensed financial statements are derived from the historical financial statements of Widget Company, which were audited by us, and of Basic Company, which were audited by other accountants, appearing elsewhere herein [or incorporated by reference]. Such pro forma adjustments are based upon management’s assumptions described in Note 2. Widget Company’s management is responsible for the pro forma financial information.
As discussed in Note 2 to the pro forma financial statements, the pro forma adjustments reflect management’s assumptions that the elimination of duplicate facilities would have resulted in a 30% reduction in operating costs. Management could not supply us with sufficient evidence to support this assertion.
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 condensed financial statements are 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.
Since we were unable to evaluate management’s assumptions regarding the reduction in operating costs and other assumptions related thereto, the scope of our work was not sufficient to express, and therefore, we do not express, an opinion on the pro forma adjustments, management’s underlying assumptions regarding those adjustments, and the application of those adjustments to the historical financial statement amounts in the pro forma condensed financial statement amounts in the pro forma condensed balance sheet as of December 31, 20X1, and the pro forma condensed statement of income for the year then ended.
Smith and Jones
February 15, 20X2
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