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Guide to Reporting on Proforma Financial Statements (Pursuant to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009)
October, 08th 2012
         Guide to Reporting on
     Proforma Financial Statements
     (Pursuant to the SEBI (Issue of Capital and
    Disclosure Requirements) Regulations, 20091)




The Institute of Chartered Accountants of India
                    (Set up by an Act of Parliament)
                               New Delhi


1                                         th
    As amended by the Amendment order of 12 November, 2010.
 The Institute of Chartered Accountants of India


All rights reserved. No part of this publication may be
reproduced, stored in a retrieval system, or transmitted, in any
form, or by any means, electronic mechanical, photocopying,
recording, or otherwise, without prior permission, in writing,
from the publisher.




Edition       :      October, 2012


Committee/
Department    :      Auditing and Assurance Standards Board


E-mail        :      aasb@icai.org


Website       :      www.icai.org


Price         :      Rs. 150/-


ISBN No       :


Published by :       The Publication Department on behalf of
                     the Institute of Chartered Accountants of
                     India, ICAI Bhawan, Post Box No. 7100,
                     Indraprastha Marg, New Delhi - 110 002.


Printed by    :      Sahitya Bhawan Publications, Hospital
                     Road, Agra - 282 003
                     October/2012/1,000 Copies
                                                                    Contents


                                                                             Paragraphs
Background .................................................................. 1 ­ 3
Scope of the Guide .......................................................................4
Applicability of the Regulations in Relation to Proforma
Financial Statements ..............................................................5 ­ 9
          Period for which Proforma Financial Statements are
          Required............................................................................9
Management's Responsibility for the Preparation of
Proforma Financial Statements ............................................. 10-11
          Determination of Materiality Threshold ............................11
Principles of Preparation of Proforma financial
Statements...........................................................................12 - 48
          General ....................................................................12 - 14
          Contents of Proforma Financial Statements ............. 15 -20
          Proforma Balance Sheet ...........................................21- 22
          Proforma Statement of Profit and Loss............................23
          Notes to Proforma Balance Sheet and Proforma
          Statement of Profit and Loss ...........................................24
          Other Disclosures to Be Included in Proforma
          Financial Statements .......................................................25
          Accounting Policies ..................................................26 - 28
          Proforma Adjustments ..............................................29 - 32
          Materiality Considerations .......................................33 - 34
          Directly Attributable to the Transaction .....................35 - 37
          Evidence to Support Adjustments.............................38 - 40
          Adjustments Without Continuing Effects .................... 41-42
        Adjustments with One Time Impact .................................43
        Tax Effects ......................................................................44
        Omitted Adjustments .......................................................45
        Effects of New Arrangements ..........................................46
        Inappropriate Adjustments...............................................47
        Areas of Special Consideration... ....................................48
Auditor's Responsibilities and Reporting ..............................49 - 63
        Auditor's Responsibility in Relation to Proforma
        Financial Statements............................................49 ­ 53
        Auditor's Responsibility in Relation to Proforma
        Adjustments ............................................................ 54 ­ 55
        Written Representations ............................................ 56-57
        Agreeing the Terms of Engagement ................................58
        Elements of the Auditor's Report on Proforma Financial
        Statements ......................................................................59
        Auditor's Responsibilities when Transactions are
        not Material ..............................................................60 - 63



Appendices
Appendix A:       Text of Item IX of Part A of Schedule VIII
                  of the SEBI (Issue of Capital and Disclosure
                  Requirements) Regulations, 2009
Appendix B:       Illustrative Proforma Consolidated Financial
                  Statements
Appendix C:       Illustrative Auditor's Report on Proforma Financial
                  Statements
Appendix D:       Illustrative Auditor's Report where Acquisition/
                  Divestment is Below the Materiality Threshold
Background
1.     The Securities and Exchange Board of India ("SEBI"),
through its Order no. LAD-NRO/GN/201-11/19/26456 dated 12
November 2010, issued the SEBI (Issue of Capital and Disclosure
Requirements) (Fourth Amendment) Regulations, 2010 to amend
the SEBI(Issue of Capital and Disclosure Requirements)
Regulations, 2009. Pursuant to the said amendment Order, SEBI
introduced a number of changes to the various requirements of
the 2009 Regulations, including the Schedules thereto.
2.      The amendment Order, by amending sub-item (B) of item
(IX) of Part A to Schedule VIII to the 2009 Regulations, introduced
a new paragraph (23), requiring the Issuer to prepare Proforma
Financial Statements when certain conditions contained therein
are met as also reporting by the statutory auditor of the Issuer on
certain information to be given by the Issuer pursuant to the
requirements of paragraph (23). The said paragraph (23) states
as follows:
"(23) Proforma Financial Statements
(1)     In addition to other requirements laid down in these
        regulations and subject to the stipulation in sub-para. (3)
        of this para., the Issuer shall disclose Proforma Financial
        Statements in the offer document, if -
       (a)    an acquisition or divestment is made by the Issuer
              after the end of the latest disclosed annual financial
              results in the offer document, due to which certain
              companies become/cease to be direct or indirect
              subsidiaries of the Issuer, and
       (b)    the financial statements of such acquired or
              divested entity is material to the financial
              statements of the Issuer company.
              Explanation: The financial statements of the
              acquired or divested entity shall be "material" to the
              financial statements of the Issuer if:
               (i)    the total book value of the assets of the
                      acquired/divested entity amounts to more
                      than 20% of the pre-acquisition/pre-
                      divestment book value of the assets of the
                      Issuer;
               or
               (ii)   the total income of the acquired/divested
                      entity amounts to more than 20% of the pre-
                      acquisition/predivestment total income of
                      the Issuer.
(2)     Proforma Financial Statements shall be disclosed in
        respect of the following, namely:
       i.      the last completed accounting year, and
       ii.     the period beginning from the date of the end of the
               last completed accounting year and ending on the
               date on which financial statements of the Issuer
               have been disclosed in the offer document.
(3)     Where the said acquisition or divestment does not fulfill
        the tests of materiality specified in clause 23 (1) (b)
        above, the fact of the acquisition or divestment along with
        the consideration paid/received and the mode of financing
        such acquisition shall be disclosed.
(4)     The information disclosed as per sub-clause (2) and (3)
        above shall be certified by the statutory auditor of the
        Issuer."
The text of the complete item (IX) of Part A of Schedule VIII of the
2009 Regulations, as amended by the Order of 12th November
2010, is given as Appendix A to the Guide.
3.       The Proforma Financial Statements, are, normally, used in
the offer documents to demonstrate the effect of a transaction on
the financial statements of a company as if those transactions had
occurred at an earlier date. The Proforma Financial Statements
take the form of Statement of Profit and Loss and Balance Sheet
to illustrate how the transactions might have affected the assets,


                                 2
         Guide to Reporting on Proforma Financial Statements

liabilities and earnings of the Issuer. They also include notes in
relation to the significant aspects of the transactions, assumptions
used to prepare the Proforma Financial Statements and the
adjustments made to arrive at the Proforma Balance Sheet and
Proforma Statement of Profit and Loss.
Scope of the Guide
4.       This Guide is applicable to the Proforma Financial
Statements prepared for the purposes of complying with the
aforesaid SEBI Regulations and is, therefore, limited to offerings
registered in India. It should be noted that presently para (23) of
sub-item (B) of item (IX) of Part A of Schedule VIII of the
Regulations is only applicable in cases of Initial Public Offer,
Further Public Offer (including Fast Track Public Issue) and in
certain cases rights issue of equity shares and convertible
securities. As per the Regulations, it is only to be applied in case
of acquisition or divestiture of direct/indirect subsidiaries and not
for any jointly controlled asset, operations or entity or any equity
affiliate of the Issuer. Paragraph 8 of the Guide contains an
illustrative list of circumstances where requirements to present
Proforma Financial Statements may not apply. It should also be
noted that in cases where the proposed offering of equity shares
and convertible securities involve an offering in a country outside
India, additional procedures and reporting obligations may apply.
This Guide does not apply where there are other specified
requirements applicable to a particular foreign jurisdiction for the
purposes of offering of equity shares and convertible securities in
that jurisdiction or where the auditor has to report on Proforma
Financial Statements under a different reporting framework.
This Guide also does not apply to examination of prospective
financial information like a profit forecast which is included in a
public offering document2. Further, the Guide also does not deal
with matters which are specifically covered by Guidance Note on
Reports in Company Prospectus, issued by the Institute of


2
         Attention of the members is drawn to the Standard on Assurance
Engagement (SAE) 3400, Examination of Prospective Financial Information,
issued by the Institute of Chartered Accountants of India.

                                   3
Chartered Accountants of India. The auditor would also need to
comply with the requirements of the Guidance Note on Audit
Reports and Certificates for Special Purposes, issued by the
Institute of Chartered Accountants of India.
Applicability of the Regulations in Relation to
Proforma Financial Statements
5.      The conditions under which Proforma Financial Statements
are required to be prepared and presented by the Issuer in the
offer document, under the 2009 Regulations, are as follows:
(a)    an acquisition or divestment is made by the Issuer after the
       end of the latest disclosed annual financial results in the
       offer document, due to which certain companies
       become/cease to be direct or indirect subsidiaries of the
       Issuer; and
(b)    the financial statements of such acquired or divested entity
       is material to the financial statements of the Issuer
       company.
The financial statements of the acquired or divested entity are
considered to be "material" to the financial statements of the
Issuer if:
(i)    the total book value of the assets of the acquired/divested
       entity amounts to more than 20% of the pre-acquisition
       /pre-divestment book value of the assets of the Issuer; or
(ii)   the total income of the acquired /divested entity amounts to
       more than 20% of the pre-acquisition/pre-divestment total
       income of the Issuer.
6.      The SEBI Regulations are silent as to whether the analysis
of materiality is to be done by the management of the Issuer
company on the basis of the stand-alone financial statements of
the Issuer company or on the basis of the consolidated financial
statements of the Issuer Company. For the purpose of this Guide,
it has been assumed that the analysis would be done on the basis
of the stand alone financial statements of the Issuer Company.



                                4
         Guide to Reporting on Proforma Financial Statements

The following factors need to be considered for arriving at any
decision regarding materiality threshold:
(i)     For a like-to-like comparison, the latest annual stand-alone
        financial statements of the direct or indirect subsidiaries
        acquired or divested, immediately prior to the date of
        acquisition or divestment, should be prepared as per the
        instructions of the Issuer company, following the same
        accounting principles and policies as adopted by the Issuer
        company in its latest available audited annual stand-alone
        financial statements immediately prior to the date of
        acquisition or divestment of the direct or indirect
        subsidiaries. For instance, in case of acquisition/
        divestment of foreign subsidiaries, who, ordinarily, would
        have prepared their financial statements as per the
        Generally Accepted Accounting Principles (GAAPs),
        applicable to them in their jurisdiction. Accordingly, the
        financial statements of such foreign subsidiaries would
        need to be prepared as per the GAAPs followed by the
        parent Issuer company in its own latest available audited
        annual stand-alone financial statements. Before assessing
        the materiality threshold as specified above, these stand-
        alone financial statements of the acquired/divested
        entities, after conversion, would need to be translated into
        the reporting currency of the Issuer company (which is
        generally Indian Rupees (INR) for Indian companies) in
        accordance with the requirements of the Accounting
        Standard (AS) 11, The Effects of Changes in Foreign
        Exchange Rates, issued by the Institute of Chartered
        Accountants of India.
(ii)    The term "assets" would mean "total assets" (after
        conversion as per the Issuer company's accounting
        principles and policies as specified in (i) above) and not the
        "net assets".
(iii)   The term "total income" would    mean all items of income
        including other income and       other items of revenue
        appearing on the income side     of the Statement of Profit
        and Loss (after conversion as    per the Issuer company's

                                  5
        accounting principles and policies as specified in (i) above)
        and not "net income" or "net profit".
(iv)    Any acquisition/divestiture of group of direct/indirect
        subsidiaries as part of one whole transaction, though
        proposed to be executed in phases for commercial or
        regulatory reasons, for example, as open offer or for want
        of regulatory approval, would be considered as one single
        transaction for the purposes of above calculations.
(v)     The definition of a subsidiary to be considered for the
        purposes of preparation of Proforma Financial Statements
        as per the Regulations would be as defined under the
        Accounting Standard (AS) 21, Consolidated Financial
        Statements, issued by the Institute of Chartered
        Accountants of India.
7.      As per the 2009 Regulations, where the said acquisition or
divestment does not fulfil the tests of materiality, the fact of the
acquisition or divestment along with the consideration
paid/received and the mode of financing such acquisition needs to
be disclosed by the management. This would include disclosure of
any known or agreed upon deferred or contingent consideration
payable or receivable as part of the said acquisition or divestment.
8.     The following is an indicative list of circumstances where
the requirement to present Proforma Financial Statements under
the 2009 Regulations may not apply:
(i)    The acquisition or divestment is made by the Issuer before
       the end of the latest disclosed annual financial results.
(ii)   The acquisition or divestment does not result in one or more
       companies becoming or ceasing to be direct or indirect
       subsidiaries, eg, a transaction of merger, amalgamation, or
       de-merger, or an entity becoming or ceasing to be a jointly
       controlled asset in accordance with Accounting Standard
       (AS) 27, Financial Reporting of Interests in Joint Ventures,
       operations or entity or any associate in accordance with
       Accounting Standard (AS) 23, Accounting for Investments in
       Associates in Consolidated Financial Statements, of the
       Issuer, etc.




                                  6
           Guide to Reporting on Proforma Financial Statements

(iii)    The materiality threshold i.e., 20% of the pre-
        acquisition/pre-divestment total book value of assets or total
        income of the Issuer, is not met.
(iv)    The materiality threshold i.e., 20% of the pre-acquisition/pre-
        divestment total book value of assets or total income of the
        Issuer,    is    met    at      an   aggregate     level     of
        investments/divestments, but not at the level of individual
        investments/divestments (if not done as part of one single
        transaction as explained in paragraph 6(iv) above).
Period for Which Proforma Financial Statements are
Required
9.     The 2009 SEBI Regulations require the presentation of
Proforma Financial Statements for:
a.       the last completed accounting year, and
b.       the period beginning from the date of the end of the last
         completed accounting year and ending on the date for
         which financial statements of the Issuer have been
         disclosed in the offer document (also referred to as the
         stub period).
Management's       Responsibility     for   the
Preparation of Proforma Financial Statements
10.    As discussed earlier, the Proforma Financial Statements
are used in the offer documents to demonstrate the effect of a
transaction on the financial statements of an Issuer company as if
the transactions had occurred at an earlier date. Preparation of
the Proforma Financial Statements involves the development of
several assumptions, and the application of adjustments arising
from those assumptions to the historical financial statements of
the Issuer company and the acquired/divested entity(ies).
Accordingly, the responsibility for preparation of the Proforma
Financial Statements is that of the management (Board of
Directors) of the Issuer company. The auditor's responsibility is to
report whether such Proforma Financial Statements have been
prepared by the management in accordance with the basis for


                                   7
preparation of such Proforma Financial Statements as stated by
the management.
Determination of Materiality Threshold
11.     The management of the company is responsible for
computing and certifying it to the auditor, whether the
acquisition/divestiture of the direct/indirect subsidiary(ies) are
above or below the materiality threshold as specified in the 2009
SEBI Regulations.
Principles of Preparation of Proforma Financial
Statements
General
12.     As indicated earlier, the objective of presenting Proforma
Financial Statements is to demonstrate the effect of a transaction
on the financial statements of the Issuer company as if the
transaction had occurred at an earlier date. The proforma
Statement of Profit and Loss is prepared as if the transaction/s
occurred immediately before the start of the period, and proforma
Balance Sheet is prepared as if the transaction/s occurred at the
balance sheet date. It follows that since the proforma Statement of
Profit and Loss and the proforma Balance Sheet are prepared on
different basis/ assumptions, there will be inherent inconsistencies
between the two.
13.    The underlying historical financial information must be
derived from a source duly approved by the Board of Directors of
the Issuer company, such as statutory accounts, interim financial
accounts or other historical financial information such as that
prepared in accordance with the requirements of Clause 41 of the
Listing Agreement (which might be included in the same
document).
14.     For the purposes of acquisitions, there is no requirement
for the two companies to have coterminous year ends. The
difference between two year-ends, ideally, should not be more
than that what is specified in paragraphs 18 and 19 of AS 21,
Consolidated Financial Statements, i.e. not exceeding more than
6 months. However, consideration needs to be given to the

                                 8
         Guide to Reporting on Proforma Financial Statements

possible effects of seasonality and materiality. Whilst this may not
be significant or material where full year Statements of Profit and
Loss are being aggregated, it may be significant or material where
balance sheets are being aggregated. In such cases, as well as
generally, adequate and due consideration needs to be given for
the effects of material transactions between the dates of period
end, of the Issuer and the acquired entity. These adjustments on
grounds of materiality should be reflected in the underlying
historical financial information with suitable disclosure and should
not form part of the proforma adjustments.
Contents of Proforma Financial Statements
15.     In order for the Proforma Financial Statements to
meaningfully reflect the effect/s of the transaction(s) that trigger(s)
their presentation, the following must, at a minimum, form part of
the Proforma Financial Statements:
a.     Proforma Balance Sheet/s;
b.     Proforma Statement of Profit and Loss; and
c.     Notes to the Proforma Balance Sheet/s and Proforma
       Statement of Profit and Loss.
16.     If the transaction/s has/have, however, been reflected in
the entity's stand-alone and or consolidated Statement of Profit
and Loss included in the offer document for an entire stub period,
a Proforma Statement of Profit and Loss would not be required to
be presented in relation to that/ those transaction/s for such stub
period unless the figures of the Proforma Statement of Profit and
Loss and the actual consolidated Statement of Profit and Loss are
expected to be different. For instance, if a material acquisition
requiring proforma reporting took place after the most recent full
financial year, but before the end of the stub period (for which
financial information is presented in the offer document), then the
proforma Statement of Profit and Loss should not consider the
effect of that acquisition/divestment as regards the stub period
financial information, if it is included for the entire period for which
the stub period financial information is prepared unless the
numbers and the actual consolidated numbers are expected to be
different. If not, then the proforma Statement of Profit and Loss for

                                   9
the stub period financial information would also be required. As
regards Proforma Balance Sheet, such Balance Sheet need not
be presented as of the end of the stub period in case actual
historical consolidated balance sheet presented as of the end of
the stub period gives effect to the transaction.


Illustration
 The financial year of the Issuer company is 31 March, 20x1. The
acquisition of a qualifying subsidiary happens on 1 June, 20x1.
The Company is including stub period financial information of April
20x1 to June 20x1 in the offer document in which the results of the
acquired entity for say one month of June 20x1 is already
consolidated with the Issuer company stub period financial
information of April 20x1 to June 20x1. In this case, the Proforma
Financial Statements for the stub period of April 20x1 to June
20x1 would be required in addition to the annual Proforma
Financial Statements for the year ended March 20x1, provided it
meets the threshold requirement of more than 20%. Also, no stub
period proforma balance sheet would be required, in case the
transaction is already consummated as at or before the stub
period historical balance sheet date.


17.     Ordinarily, the Proforma Financial Statements should
include each of the headings and sub-headings that were included
in the Issuer's most recent annual financial statements and the
relevant explanatory notes as required, including notes relating to
the proforma adjustments. Appropriate references should be
included to the relevant note(s) that explain(s) the basis, nature
and effect of the adjustments made to the Balance Sheet line
items, to arrive at the Proforma Balance Sheet.
18.    For presentation of Proforma Financial Statements on a
stand-alone and /or consolidated basis the following also need to
be considered:
(a)    The Proforma Financial Statements would be in columnar
       format.

                                10
          Guide to Reporting on Proforma Financial Statements

(b)     The first column shows the audited financial information of
        the Issuer company, on which effect of the transaction is
        illustrated.3
(c)     The second column shows the historical financial
        information of the acquired/divested entity for which
        Proforma Financial Statements are required. If the
        historical financial information of the acquired/divested
        entity were prepared in accordance with a different GAAP
        than that of the Issuer company and hence presented in a
        different format as compared to the format followed by the
        Issuer company, then the reclassification of historical
        financial information of the acquired/divested entity from
        the format in which they were audited to the format of the
        Issuer company followed for the purposes of preparation of
        Proforma Financial Statements would need to be
        explained by way of a separate note.
(d)     Subsequent columns would reflect adjustments for the
        effect of the acquisition/divestment for which Proforma
        Financial Statements are required to be prepared.
(e)     The proforma adjustments column could either be one
        single column covering all types of adjustments, like
        conversion to Issuer company GAAPs from local GAAPs of
        the acquired/divested entity, translation of foreign currency
        financial information of the acquired/divested entity and/or
        any other suitable proforma adjustments with necessary
        disclosures in the notes to the Proforma Financial
        Statements.
(f)     The last column would reflect the final proforma amounts
        so arrived at.
APPENDIX B to the Guide contains illustrative Proforma
Consolidated Balance Sheet and Statement of Profit and Loss.




3
  The regulator may, however, insist on presenting the first column as restated
number.

                                      11
19.    It must also be noted that ideally the proforma adjustments
should relate only to the acquisition/disinvestment related
adjustments.
20.    In order to meet the objective of Proforma Financial
Statements, the following specific requirements should be
considered.
Proforma Balance Sheet
21.     The balance sheet should be presented as of each period-
end as required to be so presented under the SEBI Regulations.
However, where the transaction of acquisition/divestment has
occurred after the date of the last audited annual financial
statements but before the end of the stub period for which
financial information is presented in the offer document, and the
effect of such acquisition/divestment is already included in such
historical financial information for the stub period, no separate
proforma Balance Sheet would require to be presented, as at the
stub period-end, in the offer document. The fact that, only the
balance sheet as at the annual year-end is presented and not the
balance sheet as at the stub-period end, should be appropriately
disclosed in the Proforma Financial Statements.
22.    The Proforma Balance Sheet would include proforma
adjustments as if the transaction was consummated as at the date
of the balance sheet(s) (as at annual year-end and stub-period
end or only annual year-end, as the case may be), for each
balance sheet (s) separately, included in the offer document.
Proforma Statement of Profit and Loss
23.    Typically, the Proforma Statement of Profit and Loss would
be prepared as if the transaction occurred at the beginning of the
relevant period for which Proforma Statement of Profit and Loss is
presented in the offer document, and the approach selected
needs to be clearly disclosed in the notes to the Proforma
Financial Statements and consistently applied. The Proforma
Statement of Profit and Loss should be presented for each period
required to be so presented under the SEBI Regulations.



                               12
        Guide to Reporting on Proforma Financial Statements

Notes to Proforma Balance              Sheet     and    Proforma
Statement of Profit and Loss
24.      The notes to the Proforma Financial Statements should
clearly include all accounting policies and should explain each
proforma adjustment, the basis, nature and effect of each of the
adjustments made to the Proforma Balance Sheet and Proforma
Statement of Profit and Loss, and the assumptions involved in its
calculation. For example, notes to the Proforma Financial
Statements depicting the effects of an acquisition of a
direct/indirect subsidiary should disclose how the amount of
goodwill arising on consolidation has been arrived at and
considered in the Proforma Financial Statements. The notes to the
proforma Balance Sheet and proforma Statement of Profit and
Loss should be presented for each period required to be so
presented under the SEBI Regulations.
Other Disclosures to be Included in Proforma Financial
Statements
25.    The following other disclosures need to be included as part
of the Proforma Financial Statements. Generally, these
disclosures are made as part of the explanatory notes
accompanying the Proforma Financial Statements:
(i)    The Proforma Financial Statements must include a
       description of the transactions, the businesses or entities
       involved and the period to which it refers, and must clearly
       state the following:
       a)     the purpose for which they have been prepared;
       b)     the fact that they have been prepared for illustrative
              purposes only;
       c)     the fact that because of its nature, the Proforma
              Financial Statements addresses a hypothetical
              situation and, therefore, does not represent the
              company's actual or expected financial position or
              results.
(ii)   The sources of the historical financial information included
       in the Proforma Financial Statements.

                               13
Accounting Policies
26.      Generally, the accounting policies of the Issuer, as
adopted in its most recent set of interim or annual financial
statements, must be applied in the preparation of the Proforma
Financial Statements, since the objective of Proforma Financial
Statements is to present the financial information of the Issuer as
if the transaction of acquisition or divestment had occurred at an
earlier date.
27.     When the Issuer includes Proforma Financial Statements
for the most recently completed financial period and the most
recently completed interim period and the Issuer has adopted a
change in accounting principle during the most recently completed
interim period, the Proforma Financial Statements should
consistently apply the newly adopted accounting principle to all
periods presented.
28.     Considering the requirements of paragraph 20 of AS 21,
Consolidated Financial Statements, where there are different
accounting policies used between the Issuer and the
acquired/divested entity, where it is not practicable to bring in
uniformity between the two in the preparation and presentation of
Proforma Financial Statements, the nature of such differing
policies and reasons therefor must be adequately disclosed in the
notes to the Proforma Financial Statements. If the auditor
concludes that adequate disclosure is not made, the auditor
should consider the effect thereof on his report. If the auditor
considers it necessary to modify the opinion on that account, the
matter should be discussed with those charged with governance
of the Issuer.
Proforma Adjustments
29.     Proforma adjustments include material charges, credits,
related tax and other effects that are directly attributable to the
transaction/s and are factually supportable. The effect of proforma
adjustments should be presented on the face of the Proforma
Financial Statements, with additional information in relation to the
nature, basis and determination of amounts being explained in the
notes to the Proforma Financial Statements.

                                14
        Guide to Reporting on Proforma Financial Statements

30.    There are two key aspects, in addition to the Proforma
adjustments being clearly explained that, these adjustments must
be:
a.     Directly attributable to the transaction/s; and
b.     Factually supportable.
31.    The adjustments, therefore, cannot relate to future
decisions or intentions. For example, it is generally inappropriate
to show anticipated cost savings or synergy benefits. However,
this by itself does not prevent adjustments being made that are
based upon estimates so long as the effect and scope of any
uncertainty are explained and such adjustments are supportable
with evidence. Any adjustment must be capable of some
reasonable degree of objective determination. In other words,
there may be circumstances where the lack of support prevents a
necessary adjustment from being made.
32.    In the presentation of Proforma Financial Statements, all
proforma adjustments need to be cross-referenced to the relevant
notes thereto.
Materiality Considerations
33.    In the context of determining the proforma adjustments,
consideration needs to be given to whether the adjustments being
made or excluded are material to the Proforma Financial
Statements. Adjustments to and misstatements as regards the
Proforma Financial Statements, including omissions, are
considered to be material if they, individually or in the aggregate,
could reasonably be expected to influence the economic decisions
of the intended users of such Proforma Financial Statements.
Determination of materiality is a matter of professional judgment,
and is affected by the practitioner's perception of the financial
statements needs of users of the Proforma Financial Statements.
Materiality depends on the size or nature (or both) of the omission
or misstatement judged in light of the facts and circumstances of
each case.
34.    A misstatement in the context of the compilation of
Proforma Financial Statements may include, for example:

                                 15
a)     Use of an inappropriate source for the unadjusted
       historical financial statements;
b)     Incorrect extraction of the unadjusted historical financial
       statements from an appropriate source; and
c)     Application of incorrect accounting policies in relation to
       the adjustments.
Directly Attributable to the Transaction
35.     Proforma Financial Statements should only reflect matters
that are an integral part of the transactions which are described in
the offer document. In particular, Proforma Financial Statements
should not include adjustments which are dependent on actions to
be taken once the current transactions have been completed,
even where such actions are central to the Issuer's purpose in
entering into the transactions.
36.     The accounting treatment applied to the adjustments
should be presented and prepared in a form consistent with the
policy the Issuer would adopt in its last or next published financial
statements. For instance, the Issuer should not include deferred or
contingent consideration in its Proforma Financial Statements if
such consideration is not directly attributable to the transaction at
hand but to a future event and may result in unduly inflating the
net assets figures. However, where the contingent consideration is
directly attributable to the transaction same needs to be
considered.
37.     It is not appropriate to omit adjustments that are directly
attributable to a transaction and factually supportable, on the
grounds that they do not have a continuing impact or,
alternatively, to make adjustments to eliminate items solely on the
grounds that they are considered not to have a continuing impact.
Evidence to Support Adjustments
38.    The requirement for adjustments being factually supported
means that there should be reliable, documentary evidence in
support of the adjustment, such as executed contracts and
consummated transactions. The nature of the facts supporting an
adjustment would vary with the facts and circumstances of each

                                 16
        Guide to Reporting on Proforma Financial Statements

case. Nevertheless, the facts are expected to be capable of some
reasonable degree of objective determination. Support might
typically be provided by published accounts, management
accounts, other financial statements and valuation reports
contained in the offer document, purchase and sale agreements
and other agreements to the transaction that may or may not be
covered by the offer document. For instance, in relation to the
management accounts, the interim figures for one of the
subsidiaries (forming part of a consolidated group) being acquired
may be derived from the consolidation schedules underlying that
entity's interim consolidated financial statements.
39.     In some cases, it may be difficult to determine whether a
proforma adjustment is factually supportable. In contrast, an
adjustment for projected cost savings following the acquisition of a
subsidiary, generally, should not be made (as it is not factually
supportable). In addition, proforma adjustments usually should not
give effect to actions taken by management (or expected to be
taken) after the acquisition related to the integration and
management of the acquired subsidiary.
40.     If the management of the Issuer does not have appropriate
support for the proforma adjustments, the auditor should discuss
these matters with management and request that the Proforma
Financial Statements be modified to include only those
adjustments that are factually supportable. The auditor should
obtain an understanding of the reason why management does not
have appropriate support for the proforma adjustments. The lack
of support for required information is not a reason to avoid
disclosure merely because management does not want to make
the disclosure or does not want to expend the effort to obtain the
necessary support. In this situation, if the support is not provided
and/or the Proforma Financial Statements are not modified, the
auditor should consider the effect thereof on the report.
Adjustments Without Continuing Effects
41.    In the preparation of the Proforma Statement of Profit and
Loss, adjustments that do and do not have a continuing effect
must be identified and separately disclosed in a manner that their


                                17
effect is clearly evident. It is suggested for these purposes that
items treated as discontinued operations in accordance with
Accounting Standard (AS) 24, Discontinuing Operations, are not
likely to have a continuing effect but additional disclosure should
be considered. Adjustment should not be made to eliminate items
just because they do not have a continuing effect.
42.     It is also not appropriate to remove the effects of
nonrecurring items included in a historical income statement from
which the Proforma Statement of Profit and Loss is derived if
those nonrecurring items are not directly related to the transaction.
For example, if the historical income statement included a material
provision (that did not result directly from the transaction for which
the Proforma Financial Statements are presented), say in relation
to impairment or restructuring, it is not appropriate to remove the
historical restructuring provision as a proforma adjustment. In
such a situation, it may be desirable to provide disclosure of the
nonrecurring items in a manner similar to that included in the
related historical financial statements.
Adjustments with One-time Impact
43.    When the proforma Statement of Profit and Loss is
prepared as if the transaction occurred at the beginning of each
period presented, the "one-time impact" will be reflected in both
the annual and interim periods and this should be disclosed in the
notes to the Proforma Financial Statements.
Tax Effects
44.     The tax effects, if any, of proforma adjustments should be
reflected as a separate proforma adjustment. The tax adjustments
should be calculated at the tax rate(s) in effect during the period(s)
for which the Proforma Financial Statements are presented, which
would typically be consistent with the rates used in the historical
financial statements. If taxes are calculated on another basis, or if
unusual effects of loss carry forwards or other aspects of tax
accounting are depicted, adequate explanation should be
provided in a note to the Proforma Financial Statements. Under no
circumstances, should tax effects be determined on the basis of



                                 18
        Guide to Reporting on Proforma Financial Statements

average tax rates applicable         to   the   Issuer   and/or   the
acquired/divested entity.
Omitted Adjustments
45.     An adjustment may be directly attributable to a transaction
but may not be factually supportable. Therefore, such an
adjustment would not be included in the Proforma Financial
Statements. The exclusion of adjustments of this nature may
render the Proforma Financial Statements to be misleading. An
example of such an adjustment would be a transaction involving
the purchase of a subsidiary involving some amount of contingent
consideration which is not fully determinable at the time of the
preparation of the Proforma Financial Statements. However,
disclosure of such item(s) is important to the users' understanding
of Proforma Financial Statements. If the auditor believes that an
omitted adjustment is so significant as to render the Proforma
Financial Statements misleading, he should discuss the matter
with the Issuer and ascertain whether revisions to the disclosures
should be made. If revisions to the disclosures, as considered
necessary by the auditor, are not made, the auditor should
consider the effect on his report.
Effects of New Arrangements
46.    Contractual terms of an acquisition of a subsidiary, such as
new compensation contracts with management, would generally
require proforma adjustment only if the new contract is entered
into as part of the overall acquisition of the subsidiary. New
arrangements such as new distribution, cost sharing,
management agreements or benefit plans may be reflected as
proforma adjustments only if the amounts can be supported with
evidence and are directly attributable to the acquisition
transaction.
Inappropriate Adjustments
47.    Generally, adjustments of the following nature are not
considered appropriate for inclusion in the Proforma Financial
Statements, but are included in the notes thereto:



                                19
       Interest income from the investment of proceeds from the
       sale of securities that are the subject of the transaction
       because the use of cash balances is subject to the
       discretion of management and, therefore, not factually
       supportable.
       Elimination or inclusion of operating results of other
       transactions during the year/period those are not directly
       attributable to the transaction for which the Proforma
       Financial Statements are presented.
The above list is by no means a complete or comprehensive list of
cases. The key conditions of an adjustment, i.e., being factually
supportable and directly related to the transaction, need to be met,
failing which an adjustment could be considered an inappropriate
adjustment (subject to other exceptions as described earlier in this
Guide).
Areas of Special Consideration
48.    Certain aspects of the Proforma Financial Statements may
require special consideration by the auditor. These have been
discussed below:
(a)    Tax Effects - In addition to the guidance given in
       paragraph 44 above, it should be noted that, generally, it
       would be inappropriate for the Issuer company to account
       for adjustments from tax effects of transactions or balances
       between itself and the acquired entity. This is because
       usually, income-tax is assessed at the level of individual
       entities. For instance, the losses of the acquired entity
       cannot normally be offset against the profits of the Issuer
       (or vice versa), in determining the income-tax charge or
       liability in the Proforma Financial Statements. However,
       where the applicable laws permit a legal right of offset or
       adjustment, such offset or adjustment is permissible. For
       example, an Issuer A that has a subsidiary B in country X,
       acquires a material subsidiary C, through subsidiary B,
       consequent to which A is required to present Proforma
       Financial Statements. If the tax laws in country X require
       or permit the income-tax assessment of B to be done at a

                                20
       Guide to Reporting on Proforma Financial Statements

      consolidated level (ie, including its subsidiaries), then there
      is a legal right of set off/adjustment in relation to the
      financial results of C, which could be considered when
      presenting Proforma Financial Statements. Appropriate
      disclosures, however, will be required to be made in the
      Proforma Financial Statements in this regard.
(b)   Earnings Per Share (EPS) - Proforma EPS calculations
      should be based on Proforma Statement of Profit and Loss
      and the assumption that any new shares issued as part of
      the transaction were in issue for the whole period for which
      Proforma Financial Statements are presented.
(c)   Purchase Consideration - The notes to the Proforma
      Financial Statements would need to state how any
      purchase consideration in shares has been calculated, the
      assumptions made in mixed cash and shares offer, and
      whether the consideration will be revised to reflect the
      market price of the shares on the day the shares are
      issued or based on a legally agreed document like in case
      of scheme of merger, demerger or amalgamation under
      the Companies Act, 1956, as the case may be. All of these
      would be based on the actual facts and the accounting to
      be done as per the applicable Accounting Standards
      specified in Section 211 (3C) of the Companies Act, 1956.
      An extra column can be added to show the effect of
      another mix of shares and cash, or this could be disclosed
      in the notes. In addition, the mode of discharge of the
      purchase consideration will also require disclosure in the
      notes to the Proforma Financial Statements.
(d)   Contingent Consideration - A realistic estimate should be
      made (and not simply the maximum amount that could be
      paid). The same should be disclosed very clearly, including
      all the contingencies and uncertainties involved in
      payment/receipt of the contingent consideration in relation
      to an acquisition or divestment of a subsidiary.
(e)   Proforma Statement of Profit and Loss - The goodwill
      arising on consolidation and any asset impairment charge


                                21
      and financing cost related to an acquisition or divestment
      should be included in a proforma Statement of Profit and
      Loss.
(f)   Post Acquisition (or Post Disposal) Impact - No
      adjustment should be made for expected synergy benefits
      arising from proposed management action.
(g)   Cost and Revenue Eliminations - It may be that certain
      revenues or costs will not recur in the future under the
      terms of the transaction (e.g., directors' emoluments where
      new service agreements have been entered into on
      acquisition). Whilst consideration may be given to adjusting
      these in any proforma Statement of Profit and Loss, there
      will often be an offset in other costs that cannot be
      factually supported. For example, management charges
      from the previous parent company for the supply of
      corporate support services might not recur, but the
      additional costs to be incurred on its own account are
      unlikely to be capable of factual support. In this case, no
      adjustment should be made and the matter should be dealt
      with by making appropriate disclosures.
(h)   Intra-group Transactions - In the preparation of Proforma
      Financial Statements, intra-group transactions (i.e.,
      transactions amongst two or more members of the group)
      will require elimination. Particulars of all intra-group
      transactions which require elimination should be disclosed
      in the notes to the Proforma Financial Statements, in
      addition to any proforma adjustments that may arise from
      such transactions in the preparation of the Proforma
      Financial Statements.
(i)   Foreign Currency Translation - It may be necessary to
      translate adjustments into the reporting currency of the
      Issuer. For a Proforma Balance Sheet, the rate applied
      would usually be the rate ruling at the date of the Issuer's
      historical balance sheet. For a proforma Statement of Profit
      and Loss, the rate applied would be the average rate for
      the relevant period which would normally be calculated on


                              22
         Guide to Reporting on Proforma Financial Statements

       the basis used by the Issuer in preparing its statements for
       the relevant period.
Auditors' Responsibilities and Reporting
Auditors' Responsibilities in Relation to Proforma
Financial Statements
49.     Paragraph 23(4) of sub-item (B) of Item (IX) of Part A of
Schedule VIII envisages an assurance from the statutory auditors
on the Proforma Financial Statements as also in situations where
the acquisition or divestment doesn't fulfil the test of materiality.
The auditor's procedures and considerations in this regard are
discussed in the following paragraphs. It should also be noted,
that the auditor has no responsibility to report on, review or verify
the source documentation. His procedures are limited to
ascertaining that the Proforma Financial Statements have been
correctly extracted/summarised from the underlying financial
information/financial statements for the purposes of presentation
of the Proforma Financial Statements in the offer document, and
appropriate adjustments and assumptions have been applied
thereon.
50.    The auditor need to consider whether the period which the
Proforma Financial Statements cover is permitted and required
under the 2009 SEBI Regulations and whether the source of the
unadjusted historical statements is appropriate and clearly stated.
The auditor would also need to consider the need for disclosure or
the impact on their opinion if he/she believe that the information is
or may be unreliable.
51.     The auditor would need to discuss with management of the
Issuer the steps taken to identify relevant adjustments. In
particular, the auditor would:
i.     determine whether any significant adjustments have been
       omitted;
ii.    determine whether all adjustments relate to the transaction
       and not to future events; and




                                 23
iii.   obtain appropriate evidence that the management have
       factual support for all adjustments.
If appropriate adjustments have been omitted, possibly because
there is no factual support, the auditor considers whether
adequate disclosures relevant to an understanding of the
Proforma Financial Statements have been made.
In addition to above, the auditor would also need to consider the
effect on the Proforma Financial Statements and, in particular,
whether the exclusion renders the Proforma Financial Statements
misleading. In such circumstances, the auditor would consider
whether the disclosure in the notes to the Proforma Financial
Statements of the fact that such an adjustment has not been
made is sufficient in the context of the overall purpose of the
Proforma Financial Statements. However, if the auditor concludes
that an omitted adjustment is so fundamental as to render the
Proforma Financial Statements misleading in the context of the
purpose for which they have been presented, he should discuss
the matter with the management of the Issuer and consider the
impact of the same on his opinion.
52.    The auditor should determine the steps taken by the Issuer
to ensure that the accounting policies of the Issuer have been
applied consistently in the Proforma Financial Statements, where
required.
53.    There may be situation where the acquired entity has been
audited by another firm of chartered accountants or may not have
been subject to audit during the last completed accounting year
and stub period. In those circumstances, it would be considered
necessary by the Issuer to seek audited financial statement for the
last completed accounting year and stub period, if any, and if
necessary, the issuer's auditors may issue necessary instructions
as may be required.
Auditor's Responsibilities in Relation to Proforma
Adjustments
54.    The auditor considers the guidance provided in paragraphs
15 to 20 in relation to the overall preparation and presentation of
the Proforma Financial Statements itself, paragraphs 26 to 28 in

                                24
        Guide to Reporting on Proforma Financial Statements

relation to the accounting policies used, and paragraphs 29 to 32
in relation to the proforma adjustments, in the context of the
engagement to report on Proforma Financial Statements.
55.     Having regard to the matters discussed in paragraph 10
(Management's Responsibility for the preparation of Proforma
Financial    Statements)      and     paragraph   49     (Auditor's
Responsibilities and Reporting) above, the auditor is not
responsible for the identification, completeness or correctness of
the proforma adjustments themselves. This fact would be clearly
indicated in the engagement letter to be entered into with the
Issuer company and also would be clearly spelt out in the
management representation letter to be taken from the
management of the Issuer company for inclusion of the necessary
information as per the Regulations.
Written Representations
56.     The auditor should request written representations from
the Issuer that:
(a)    In compiling the Proforma Financial Statements, the Issuer
       has identified all appropriate proforma adjustments
       necessary to illustrate the impact of the event or
       transaction at the date or for the period of the illustration;
(b)    The Proforma Financial Statements has been compiled, in
       all material respects, on the basis of the applicable criteria;
       and
(c)    Acknowledgment         of   the   Issuer's    management's
       responsibility for the Proforma Financial Statements
57.     Where the auditor, based on his experience and also
having regard to the various matters discussed in this Guide, is of
the view that one or more of the proforma adjustments are
incorrect, erroneous or otherwise inappropriate, he/ she should
bring such matters to the attention of the Company's management
and request that such matters be rectified. Where management of
the Company does not make necessary rectifications to the
Proforma Financial Statements, the auditor considers the impact
on his report on the Proforma Financial Statements.

                                 25
Agreeing the Terms of Engagement
58.     The auditor should agree the terms of the engagement
with the client so as to avoid any misunderstandings at a later
date. The engagement letter should specify those reports which
are intended for publication in the Offer Document. The
engagement letter should specify, in respect of each report, to
which it is to be addressed.
Elements of the Auditor's Report on Proforma Financial
Statements
59.     The auditor's report on Proforma Financial Statements
ordinarily includes:
(a)   An addressee, which is, ordinarily, the Board of Directors
      of the Issuer, which is responsible for the preparation of
      the Proforma Financial Statements.
(b)   Identification of the Proforma Financial Statements,
      including where appropriate, the fact that the Proforma
      Financial Statements is unaudited, the period (or date)
      covered, and a reference to a description of the basis of
      preparation used by management.
(c)   A statement that preparation of the Proforma Financial
      Statements is the responsibility of the Issuer's
      management.
(d)   A statement that the auditor's responsibility is to express
      an opinion that the Issuer's Proforma Financial Statements
      has been prepared, in all material respects, in accordance
      with the basis stated.
(e)   A statement that the engagement was conducted in
      accordance with the Guidance Note on Audit Reports and
      Certificates for Special Purposes issued by the Institute of
      Chartered Accountants of India.
(f)   Where required, other matters (such as qualifications in the
      auditors' report on the historical financial statements of the
      Issuer and/or the investee[s]/divested entity[ies], statement



                               26
         Guide to Reporting on Proforma Financial Statements

       of reliance on the auditors' report of other auditors to the
       extent relevant, etc.)
(g)    A conclusion on whether the Proforma Financial
       Statements have been prepared, in all material respects,
       on the basis stated in the notes thereto.
(h)    A statement that the report is prepared in connection with
       an offer document prepared in connection with an offer to
       the public in the relevant jurisdiction and that it should not
       be used or relied upon for any other purpose or for any
       sale of securities outside of that jurisdiction.
(i)    A statement that the report is issued solely for the purpose
       of compliance with the relevant clause of the Regulations
       and not for any other purpose.
(j)    The signature and name of the partner/proprietor, and the
       name and registration number of the firm.
(k)    Date of the report.
(l)    Place of the report.
Appendix C to the Guide contains an illustrative format of the
report to be issued by the auditor on Proforma Financial
Statements.
Auditor's Responsibilities When Transactions Are Not
Material
60.     In cases where the acquisition or divestment falls under
paragraph 7 above, presentation of Proforma Financial
Statements is not required and as per the Regulations, the
statutory auditors are required to certify the disclosure of the facts
of the acquisition or divestment along with the consideration
paid/received and the mode of financing such acquisition. Under
these circumstances, since it would not be possible to certify the
content of the management's declaration, the auditor should
consider discharging his/her reporting responsibility in accordance
with the requirement of the Guidance Note on Audit Reports and
Certificates for Special Purposes, issued by Institute of Chartered
Accountants of India (`ICAI'). Appendix D to the Guide contains


                                 27
an illustrative format of a statutory auditor's report in such
circumstances.
61.    For obtaining a reasonable assurance the statutory auditor
should perform the procedures including:
a)     Reading the disclosure made in the Declaration of facts of
       the acquisition or disinvestment made by the Management
       and exercise professional judgement on whether same are
       appropriate;
b)     Inquiring from the Issuer Company's personnel whether
       the acquired/ divested subsidiary is/was a direct or indirect
       subsidiary of the Issuer Company;
c)     Tracing the amount paid/received or payable/receivable as
       consideration on acquisition or divestment of the Company
       by the Issuer Company, to the sale/purchase agreement,
       which should be annexed to the report; and
d)     Inquiring from the Issuer Company personnel in respect of
       mode of financing acquisition of the Company.
62.     Although, the management is responsible for certifying
whether the acquisition or disinvestment was material or not, the
auditor should, as part of his working paper, document how he
has evaluated the adequacy of the management's assessment of
the materiality. This could include performing procedures
including:
i)     Tracing the details contained in management statement to
       the source document from which relevant details like the
       standalone total book value of assets or the total income of
       the acquired/divested Company has been extracted by the
       Management of the Issuer Company.
ii)    Tracing the details contained in management statements
       to the source document from which relevant details like the
       pre-acquisition/pre-divestment standalone total book value
       of assets or the pre-acquisition/pre-divestment standalone
       total income of the Issuer Company has been extracted by
       the Management of the Issuer Company.


                                28
        Guide to Reporting on Proforma Financial Statements

iii)   Comparing the accounting policy followed for preparation
       of the standalone financial statements of the Issuer
       Company with those that are used for the preparation of
       the source document of the acquired/divested Company.
iv)    Checking the arithmetical accuracy of standalone total
       book value of asset/total income of the acquired/divested
       Company as a percentage of pre-acquisition/pre-
       divestment standalone total book value of assets or the
       pre-acquisition/pre-divestment standalone total income of
       the Issuer Company.
63.     There may be cases where some acquisition or divestment
would qualify the threshold as part of paragraph 5 above and
some of them do not as per paragraph 7 above. Both, these facts
have to be suitably disclosed as part of two separate reports as
specified in Appendix C and Appendix D to the Guide with a clear
disclosure that the Proforma Financial Statements so presented
by the Issuer company is only considering those entities which
qualify the threshold as part of paragraph 5 above.




                              29
                                                  Appendix A
    Text of Item IX of Part A of Schedule VIII of the
    SEBI (Issue of Capital and Disclosure
    Requirements) Regulations, 2009
    (IX)   Fin ancial Statem ent s:
           4
           [ [Notes:
           1.     The financial inform ations specified in this item
                  shall be certified by only those auditors who
                  have subjected them selves to the peer review
                  process       of   the Institute   of   Chartered
                  Accountants of India (ICAI) and hold a valid
                  certificate issued by the `Peer Review Board' of
                  the ICAI.
           2.     All financial inform ations specified in this item
                  must be reaudited for one full financial year and
                  the stub period, by the auditor certifying them in
                  case where the financial statem ents were audited
                  by an auditor who had not been subjected to peer
                  review process of ICAI.] ]
(A)        S elected C o n solid ated Fina n cial an d O p eratin g data:
(1)        The consolidated financial statem ent prepared                on
           the     basis    of    Accounting Standard 21(AS             21)
           "Consolidated Financial Statements" issued by                the
           Institute of Chartered Accountants of India shall             be
           incorporated in the offer document.
(2)        All the notes to the accounts, significant accounting
           policies as well as the auditors' qualifications shall be
           incorporated.
(B)        Fin ancial Info rm ation of th e Issuer:
(1)        A report by the auditors of the Issuer with respect to:

4
 Inserted by SEBI (Issue of Capital and Disclosure Requirements) (Amendment)
Regulations, 2009, w.e.f. 01.04.10.
       Guide to Reporting on Proforma Financial Statements

      (a)    profits and losses and assets and liabilities, in
             accordance with para (2) or (3) of sub-item (B) of
             Item (IX), as the case may require; and
      (b)    the rates of dividends, if any, paid by the Issuer
             in respect of each class of shares in the Issuer
             for   each    of     the   five   financial  years
             im m ediately preceding the issue of the offer
             document, giving particulars of each class of
             shares on which such dividends have been paid
             and particulars of the cases in which no
             dividends have been paid in respect of any class
             of shares for any of those years;
             and, if no accounts have been made up in respect
             of any part of the period of five years ending on a
             date three months before the issue of the offer
             document, containing a statement of that fact
             (and accompanied by a statement of the
             accounts of the Issuer in respect of that part of
             the said period up to a date not earlier than six
             months of the date of issue of the offer
             document indicating the profit or loss for that
             period and the assets and liabilities position as at
             the end of that period together with a certificate
             from the auditors that such accounts have been
             examined and found correct by them. The said
             statem ent may indicate the nature of provision or
             adjustments made or are yet to be made).
(2)   If the Issuer has no subsidiaries, the report shall:
      (a)    so far as regards profits and losses, deal with
             the     profits    or    losses     of    the Issuer
             (distinguishing item s of a non- recurring nature) for
             each of the five financial years im m ediately
             preceding the issue of the offer docum ent; and
      (b)    so far as regards assets and liabilities, deal with
             the assets and liabilities of the Issuer at the last
             date to which the accounts of the Issuer were
             m ade up.

                               31
(3)   If the Issuer has subsidiaries, the report shall:
      (a)    so far as regards profits and losses, deal
             separately with the Issuer's profits or losses as
             provided by para (2) of sub-item (B) of Item
             (IX) and in addition, deal either:
             (i)     as a whole with the combined profits or
                     losses of its subsidiaries, so far as they
                     concern the members of the Issuer; or
             (ii)    individually with the profits or losses of
                     each subsidiary, so far as they concern
                     the m embers of the Issuer;
                     or, instead of dealing separately with the
                     Issuer's profits or losses, deal as a whole
                     with the profits or losses of the Issuer, and,
                     so far as they concern the members of
                     the Issuer, with the combined profits
                     or losses of its subsidiaries; and
      (b)    so far as regards assets and liabilities, deal
             separately with the Issuer's assets and liabilities
             as provided by para (2) of sub-item (B) of Item
             (IX) and in addition, deal either:
             (i)     as a whole with the com bined assets and
                     liabilities of its subsidiaries, with or without
                     the Issuer's assets and liabilities; or
             (ii)    individually with the assets and liabilities of
                     each subsidiaries;
             and shall indicate as respects the assets and
             liabilities of the subsidiaries, the allowance to be
             made for persons other than the members of the
             Issuer.
(4)   If the proceeds, or any part of the proceeds, of the
      issue of the shares or debentures are, or is, to be
      applied directly or indirectly:
      (a)    in the purchase of any business; or

                               32
       Guide to Reporting on Proforma Financial Statements

      (b)   in the purchase of an interest in any business and
            by reason of that purchase, or anything to be done
            in consequence thereof, or in connection
            therewith; the Issuer will becom e entitled to an
            interest as respects either the capital or profits and
            losses or both, in such business exceeding fifty
            percent, thereof; a report m ade by accountants
            (who shall be nam ed in the offer docum ent) upon:
            (i)    the profits or losses of the business of each
                   of the five financial years im m ediately
                   preceding the issue of the offer docum ent;
                   and
            (ii)   the assets and liabilities of the business at
                   the last date to which the accounts of the
                   business were m ade up, being a date not
                   m ore than one hundred and twenty days
                   before the date of the issue of the offer
                   docum ent.
(5)
      (a)   If:
            (i)    the proceeds, or any part of the proceeds,
                   of the issue of the shares or debentures
                   are or is to be applied directly or indirectly
                   in any m anner resulting in the acquisition
                   by the Issuer of shares in any other body
                   corporate; and
            (ii)   by reason of that acquisition or anything to
                   be done in consequence thereof or in
                   connection therewith, that body corporate
                   will becom e a subsidiary of the Issuer; a
                   report shall be m ade by accountants
                   (who shall be nam ed in the offer
                   docum ent) upon:
                          the profits or losses of the other
                           body corporate for each of the five

                              33
                            financial   years       im m ediately
                            preceding   the    issue    of the
                            offer document; and
                           the assets and liabilities of the
                            other body corporate at the last
                            date to which its accounts were
                            made up.
      (b)    The said report shall:
             (i)    indicate how the profits or losses of the
                    other body corporate dealt with by the
                    report would, in respect of the shares to
                    acquired, have concerned m em bers of
                    the Issuer and what allowance would
                    have fallen to be m ade, in relation to
                    assets and liabilities so dealt with for
                    holders of other shares, if the Issuer had at
                    all m aterial tim es held the shares to be
                    acquired; and
             (ii)   where the other body corporate has
                    subsidiaries, deal with the profits or losses
                    and the assets and liabilities of the body
                    corporate and its subsidiaries in the
                    m anner provided by sub-clause (a) (ii)
                    above in relation to the Issuer and its
                    subsidiaries.
(6)   Principal terms of loan and assets charged as security:
      Brief terms and conditions of the term loans including re -
      schedulement, prepayment, penalty, default, etc.
(7)   (a)    Age-wise analysis of sundry debtors shall        be
      given.
      (b)    Aggregate book value of quoted investm ents
             as well as aggregate m arket value of quoted
             investm ents shall be disclosed.
(8)   All significant accounting policies and standards
      followed in the preparation of the financial statements

                              34
       Guide to Reporting on Proforma Financial Statements

      shall be disclosed in cluding all notes thereto and the
      auditors' qualifications shall be incorporated.
(9)   Statements of Assets and Liabilities and Profit and
      Loss or any other financial information shall be
      incorporated    after    making          the      followin g
      adjustments, wherever quantification is possible:
      (a)    Adjustm ents/ rectification for all incorrect
             accounting practices or failures to m ake provisions
             or other adjustm ents which resulted in audit
             qualifications. Audit qualifications, which have
             not been given effect to, if any, shall be
             highlighted     along    with   the    m anagem ent
             com m ents. If the im pact of non- provisions is
             not considered ascertainable, then a statem ent to
             that effect by the auditors.
      (b)    Material am ounts relating to adjustm ents for
             previous years shall be identified and adjusted
             in arriving at the profits of the years to which they
             relate irrespective of the year in which the event
             triggering the profit or loss occurred.
      (c)    W here there has been a change in accounting
             policy, the profits or losses of the earlier years
             (required to be shown in the offer docum ent)
             and of the year in which the change in the
             accounting policy has taken place shall be
             recom puted to reflect what the profits or losses of
             those years would have been if a uniform
             accounting policy was followed in each of these
             years.
      (d)    If an incorrect accounting policy is followed,
             the re-com putation of the financial statem ents
             shall be in accordance with correct accounting
             policies.
      (e)    Statem ent of profit or loss shall disclose the
             profit or the loss arrived at before considering
             extraordinary item s and after considering the

                               35
             profit or loss from extraordinary item s. An
             illustrative form at of the disclosure of profits and
             losses on this basis is specified hereunder:
                                  Year ended M arch 31, ... .
                           20X 1 20X 2 20X 3 20X 4 20X 5
                                        (R upees In lakh s)
Incom e
Sales -
of products                 1000     1240    1640    1800    1800
manufactured by the
Issuer
of products traded in by     100       60      60     200     200
the Issuer
Total                       1100     1300    1700    2000    2000
Other income                  10        30     40      60     100
Increase (decrease) in        40      (70)     60     180     310
inventories
                            1150     1260    1800    2240    2410
E xpen d iture
Raw materials consumed       400      480     630    1110    1200
Staff costs                  200      220     240     340     400
Other manufacturing          250      260     280     540     650
expenses
Administration expenses       40       42      60      80      85
Selling and distribution     110      120     130     190     250
expenses
Interest                      60       55      90      200     140
                            1095     1227    1495     2635    2795
Net profit before tax         55       33     305    (295)   (385)
and extraordinary items
Taxation                       25      12     144    (185)   (235)
Net profit before              30      21     161    (110)   (150)
extraordinary items
Extraordinary items (net               49     (64)    800    1000
of tax)-
N et Profit after              30      70      97     700     850
Extraordinary Item s


      (f)    The statem ent of assets and liabilities shall be

                              36
       Guide to Reporting on Proforma Financial Statements

              prepared after deducting the balance outstanding
              on revaluation reserve account from both fixed
              assets and reserves and the net worth
              arrived     at   after  such    deductions.   An
              illustrative form at of assets and liabilities is
              specified hereunder:
                                           As at M arch 31, ... .
                            20X 1 20X 2 20X 3      20X 4    20X 5
                                           (R upees in lakh s)
(1) Fixed Assets
    Gross Block               440    750    900      922    1350
    Less Depreciation        (55) (107) (170)      (250)    (320)
    Net Block                 385    643    730      672    1030
    Less: Revaluation       (100)   (95)   (89)     (83)     (75)
    Reserve
    Net    Block    after
    adjustm ent       for
                              285    548    641      589     955
    Revaluation Reserve
(2) C urrent As sets,
    Lo ans and
    Ad vances
    Inventories               485    420    720    1030     3200
    Sundry Debtors             28     30     30      500    2500
    Cash and Bank              13     14     22      200     400
    Balances
    Loans and Advances         78    100     85    1100     2000
    Other Current Assets       70     80     55      200     220
    Total                     674    644    912    3080     8320
(3) Liab ilities and
    Provisio n s:


                              37
       Secured Loans              376     607     616      620        460
       Unsecured Loans               3      3        -        -   4000
       Current Liabilities and    250     180     330      460    1100
       Provisions
       Total                     (629) (790) (946) (1080) (5560)
(4) N et w orth                   330     402     607    2589     3715
(5) R epre sented b y
       Share Capital              300     300     400    1600     2000
       Reserves                   130     197     296    1072     1790
       Less:                     (100)    (95)   (89)     (83)        (75)
       Revaluation Reserve
       Reserves (Net of            30     102     207      989    1715
       revaluation reserves)
       N et w orth                330     402     607    2589     3715


        (g)     Relevant details of all the contingent liabilities.
(10)    The turnover disclosed in the Profit and Loss Statement
        shall be bifurcated into:
        (a)     turnover of products m anufactured by the Issuer;
        (b)     turnover of products traded in by the Issuer; and
        (c)     turnover in respect of products not norm ally
                dealt in by the Issuer but included in (b) above,
                shall be m entioned separately.
(11)    The offer document shall disclose details of `Other
        Income' in all cases where such income (net of related
        expenses) exceeds twenty per cent. of the net profit
        before tax, including:
        a)      the sources and other particulars of such incom e;
                and


                                  38
        Guide to Reporting on Proforma Financial Statements

       b)    an indication as to whether such incom e is
             recurring or non-recurring, or has arisen out of
             business activities/ other than the norm al business
             activities.
(12)   R elated Party Transactions:       The Issuer shall
       disclose the following details of related        party
       transactions and m ake disclosures in accordance
       with the requirem ents of Accounting Standard (AS 18)
       "Related Party Disclosures" issued by the Institute of
       Chartered Accountants of India:
       (a)   Inform ation with respect to transactions or loans
             between the Issuer and
             (i)     enterprises that directly or indirectly
                     through one or m ore interm ediaries,
                     control or are controlled by, or are
                     under com m on control with, the Issuer;
             (ii)    associates;
             (iii)   individuals owning, directly or indirectly,
                     an interest in the voting power of the
                     com pany that gives them significant
                     influence over the Issuer, and close
                     m em bers of any such individual's fam ily;
             (iv)    key m anagerial personnel, that is, those
                     persons having authority and responsibility
                     for planning, directing and controlling the
                     activities of the Issuer, including directors
                     and senior m anagem ent of com panies and
                     close m em bers of such individuals'
                     fam ilies;
             (v)     enterprises    in   which     a substantial
                     interest in the voting power is owned,
                     directly or indirectly, by any person
                     described in (c) or (d) or over which such a
                     person is able to exercise significant
                     influence and includes enterprises owned

                              39
                    by directors or m ajor shareholders of the
                    Issuer.
       (b)   The nature and extent of any transactions which
             are m aterial to the Issuer or the related party, or
             any transactions that are unusual in their
             nature or conditions, involving goods, services,
             or tangible or intangible assets, to which the
             Issuer or any of its parent com panies was a party.
       (c)   The am ount of outstanding loans (including
             guarantees of any kind) m ade by the Issuer or
             any of its parent com panies to or for the benefit of
             any of the      directors  or    key     m anagerial
             personnel. The inform ation given should include
             the am ount outstanding as of the latest date, the
             nature of the loan and the transaction in which
             it was incurred, and the interest rate on the
             loan.
(13)   Accounting and other ratios:
       (a)   The following key accounting ratios shall
             be given for each of the accounting periods
             for which financial inform ation is given.
       (b)   Earnings per Share and Diluted Earnings Per
             Share: This ratio shall be calculated after
             excluding extra ordinary items.
       (c)   Return on net worth: This ratio shall be
             calculated after excluding revaluation reserves
             and extra-ordinary items.
       (d)   Net Asset      Value per share. This ratio
             shall   be     calculated excluding revaluation
             reserves.
       (e)   `Accounting and other Ratios' shall be based
             on the Financial Statem ents prepared on the
             basis of Indian Accounting Standards.
       (f)   In the event of capital structure undergoing
             a change on account of capitalisation of
             reserves, its im pact on the key ratios should

                              40
        Guide to Reporting on Proforma Financial Statements

              be      distinctly brought out. The im pact of
              outstanding financial instrum ents, if any, on the
              ratios, should also be disclosed.
(14)   C apitalisation Statem ent:
       (a)    A Capitalisation Statem ent showing total debt,
              net worth, and the debt/equity ratios before and
              after the issue is m ade shall be incorporated.
       (b)    In case of any change in the          share capital
              since the date as of which             the financial
              inform ation has been disclosed       in the offer
              docum ent, a note explaining the      nature of the
              change shall be given.
       (c)    An illustrative form at of the        Capitalisation
              Statem ent is specified hereunder:
             Partic u lars              P re-iss u e        As
                                           as at        Ad ju sted
                                        30-6-20X 1      for issue
                                              (R u p ees in lakh s)
Short-Term Debt                         1870            1870
Long Term Debt                          4370            4370
Shareholders Funds
Share Capital                       4000        4450
Reserves                            14570        37520
Total Shareholders Funds            18570        41940
Long Term Debt/Equity               0.24:1      0.10:1
N ote: Since 31-3-20X1 (which is the last date as of which
financial information has been given in para of this
document) share capital was increased from Rs.3000 lacs to
Rs.4000 lacs by the issue of bonus shares in the ratio of 1
share for every 3 shares.


(15)   Presentation of financials in case of change of
       denom ination: In case of change in standard
       denom ination of equity shares, the com pliance with the
       following shall be ensured while m aking disclosure in the
       offer docum ent:

                               41
        (a)    all the financial data affected by the change in
               denom ination of shares shall be clearly and
               unam biguously presented in the offer docum ent.
        (b)    com parison of financial ratios representing value
               per share and com parison of stock m arket data
               in respect of price and volum e of securities
               shall be clearly and unam biguously presented in
               the offer docum ent.
        (c)    the capital structure incorporated in the offer
               docum ent shall be clearly presented giving all
               the   relevant    details  pertaining  to   the
               change in denom ination of the shares.
(16 )   U nsecured loans:
        (a)    Break-up of total outstanding unsecured loans
               taken by the Issuer shall be given in the offer
               docum ent into the am ount borrowed from
               prom oters/group com panies/subsidiaries/m aterial
               associate com panies and am ount borrowed from
               others. Further, in respect of each such loan of the
               form er category, terms and conditions shall be
               disclosed including the interest rates and
               repaym ent schedule. If the loans can be
               recalled by the lenders at any tim e, the sam e
               shall be disclosed.
        (b)    Break-up of the total outstanding unsecured
               loans    taken    by   the     prom oters, group
               com panies, related parties, m aterial associate
               com panies and others shall be disclosed.
        (c)    If the loans can be recalled by the lenders at
               any tim e, the sam e shall be disclosed along
               with details of such loans.
(17)    For a proper understanding of the future tax incidence,
        the following factors shall be identified and explained
        through proper disclosures:
        (a)    Profits after tax are often affected by the tax
               shelters which are available.


                                42
        Guide to Reporting on Proforma Financial Statements

      (b)     Som e of these are of a relatively perm anent
              nature (for exam ple, arising out of export profits)
              while others m ay be lim ited in point of tim e (for
              exam ple, tax holidays for new undertakings).
      (c)     Tax provisions are also affected by tim ing
              differences which can be reversed in the
              future (for exam ple, the difference between
              book depreciation and tax depreciation).
      (d)     In respect of provision for taxation, adjustm ent
              shall be m ade for deferred tax assets and deferred
              tax liabilities in accordance with the requirem ents
              of Accounting Standard (AS 22) "Accounting for
              Taxes on Incom e" issued by the Institute of
              Chartered       Accountants     of   India  and    a
              reconciliation of taxable incom e and book
              profits shall be disclosed in accordance with
              the illustrative form at given hereunder:
                                    Year ended M a rch 31, ... .
                                20X 1 20X 2 20X 3 20X 4 20X 5
                                           (R u p ees in lakh s)
Tax at Notional Rate              28     70     89     546 675
Adjustments:
Export Profits                      (4)    (5)   (20)   (100) (120)
Difference between Tax              (6)    (8)    (9)    (10) (10)
Depreciation and Book
Depreciation
Other Adjustments                    3      3      4       4      5
Net Adjustments                     (7)   (10)   (25)   (106) (125)
Tax Saving thereon                  (3)    (5)   (13)    (49)   (58)
Total Taxation                      25     65     76     497    617
Taxation on Extraordinary                  53    (68)    682    852
Items-
Tax on Profits before               25     12    144    (185) (235)
Extraordinary Items



                               43
(18)   The Issuer, if it so desires, m ay include in the offer
       docum ent, the financial statem ents prepared on the
       basis of m ore than one accounting practices, subject to
       disclosure of the        m aterial differences   arising
       because of differences in the accounting policies of
       different accounting practices.
(19)   In respect of the periods, within the period of five
       years, when the relevant Accounting Standard issued
       by the Institute of Chartered Accountants of India
       was m andatory in respect of such Issuers:
       (a)    W here, in respect of listed Issuers, the auditors
              report does not deal with the profits and losses
              and assets and liabilities of the Issuer and its
              subsidiaries as a whole, the consolidated
              balance sheets and profit and loss accounts
              shall be presented in respect of the periods, within
              the period of five years, when preparation of
              such statem ents was m andatory in respect of
              such Issuers under the listing agreem ent with the
              recognised stock exchanges.
       (b)    In respect of business segm ents, disclosure
              shall be m ade of segm ent revenue, segm ent
              result and net capital em ployed and where the
              prim ary segm ent is a geographic segm ent,
              sim ilar details by geographic segm ents shall be
              given.
(20)   The latest statem ent of audited/unaudited quarterly
       financial results published by the Issuer in accordance
       with clause 41 of the equity listing agreem ent with
       the stock exchanges shall be reproduced.
(21)   It shall be disclosed in the offer docum ent whether any of
       the sundry       debtors is related to the directors or
       prom oters or the Issuer in any way. Sim ilar disclosures
       shall be m ade in case of loans and advances.




                               44
           Guide to Reporting on Proforma Financial Statements
5
    [(22) If the Issuer has entered into any scheme of
          arrangement during the period for which the financials
          are disclosed in the offer document, lead merchant
          banker to the issue shall ensure that the following
          disclosure requirem ents as specified in Accounting
          Standard 14 has been complied with:-
          (a)    A description of the accounting treatm ent followed
                 in respect of financials contained in the schem es
                 of arrangem ent and the reasons for following the
                 treatm ent if it is different from those, which
                 has been prescribed in applicable Accounting
                 Standards.
          (b)    In case of deviations, disclosure of the
                 accounting   treatm ent had  the applicable
                 standard been followed.
          (c)    Im pact on the financials, if any, arising due to such
                 deviation.]
"(23)     Proform a Financial Statem ents
          (1)    In addition to other requirements laid down in
                 these regulations and subject to the stipulation in
                 sub-para. (3) of this para., the Issuer shall
                 disclose Proforma Financial Statements in the
                 offer document, if -
                 (a)     an acquisition or divestment is made by the
                         Issuer after the end of the latest
                         disclosed annual financial results in the
                         offer document, due to which          certain
                         companies become / cease to be direct or
                         indirect subsidiaries of the Issuer, and
                 (b)      the   financial    statements   of   such
                         acquired or divested entity is material to
                         the     financial statements of the Issuer
                         company.
5
 Inserted by SEBI (Issue of Capital and Disclosure Requirements) (Amendment)
Regulations, 2009, w.e.f. 01.01.10

                                    45
        Explanation: The financial statements of the
        acquired or divested entity shall be "material" to
        the financial statements of the Issuer if:
        (i)    the total book value of the assets of the
               acquired / divested entity amounts to
               more than 20% of the pre-acquisition/
               pre-divestment book value of the assets
               of the Issuer;
        or
        (ii)   the total income of the acquired /divested
               entity amounts to more than 20% of the
               pre-acquisition/pre- divestment total income
               of the Issuer.
(2)     Proforma Financial Statements shall be disclosed
        in respect of the following, namely:
        i.     the last completed accounting year, and
        ii.    the period beginning from the date of the
               end of the last completed accounting
               year and ending on the date on
               which financial statements of the Issuer
               have been disclosed in the offer document.
(3)     Where the said acquisition or divestment does
        not fulfill the tests of materiality specified in
        clause 23 (1) (b) above, the fact of the
        acquisition    or divestment     along    with the
        consideration paid /received and the mode of
        financing such acquisition shall be disclosed.
(4)     The information disclosed as per sub-clause (2)
        and (3) above shall be certified by the statutory
        auditor of the Issuer."
(III)   in item (XI), in sub-item (K), after the words
        "Reserve Bank of India" the words "or Insurance
        Regulatory and Development Authority" shall be
        inserted.


                        46
 Guide to Reporting on Proforma Financial Statements

(b)   in Part E, in item (IX), under para. (A), the following
      sub-paras. shall be inserted-
      "(1) Details of current and past directorship(s) for
      a period of five years in listed companies whose
      shares have been/ were suspended from being
      traded on the Bombay Stock Exchange
      Ltd./National Stock Exchange of India Ltd., as
      follows:
            Name of the Company:
            Listed on [give name of the Stock
             Exchange(s)]
            Date of Suspension on stock exchanges:
            Suspended more than three months:
             Yes/No. If yes, reasons for suspension and
             period of suspension.
            Whether suspension revoked: Yes/No. If
             yes, date of revocation of suspension.
            Date and Term of Director in the above
             company(ies):
      Explanation: The above details shall be given for
      a period of five years prior to date of filing of
      draft offer document and ought to be updated
      upto the date of filing of the red herring
      prospectus. In case of offer documents for fast
      track issues filed under Regulation 10, the
      period of five years shall be reckoned on the
      date of filing of prospectus with Registrar of
      Companies or letter of offer with the
      designated stock exchange.
      (2) Details of current and past directorship in listed
      companies who have been/ were delisted from the
      stock exchange(s):
            Name of the Company:


                        47
   Listed on [give     name    of   the   Stock
    Exchange(s)]:
   Date of delisting on the Stock Exchange(s):
   Compulsory or voluntary delisting:
   Reasons for delisting:
   Whether relisted: Yes/No. If yes, date of
    relisting on [give name of the Stock
    Exchange/(s)].
   Date and Term of Director in the above
    company/ies."




             48
                                            Appendix B
   Illustrative Proforma Consolidated Financial
                     Statements
Company X acquires Company Y, on June 2012. Pursuant to
such acquisition the Company Y becomes 100% subsidiary of
Company X. Company X and Company Y have March 31 as their
financial year end for purpose of statutory reporting.
During May 2012, the Company X intends to go for initial public
offer and thus in accordance with the requirement of SEBI
Regulation, the Company X has to prepare Proforma Financial
Statements for purpose of its intended filing of the offer document
in August 2012, which will include financial information for each of
the 5 years ended March 31, 2012 in accordance with SEBI
Regulations.
As discussed earlier, Proforma Financial Statements are used in
the offer documents to demonstrate the effect of a transaction on
the financial statements of an Issuer company as if the
transactions had occurred at an earlier date. Accordingly,
Company X would be required to present proforma balance sheet
as at March 31, 2012 as if the acquisition completed on March 31,
2012, and present proforma Statement of Profit and Loss for year
ended March 31, 2012 as if the acquisition completed on April 1,
2011. The approach selected should be clearly disclosed in the
notes to the Proforma Financial Statements and consistently
applied.
     Illustrative Proforma Consolidated Balance Sheet As At March 31, 2012


                                (in Millions)


                         Com-   Com-        Proforma Adjustments          Total   Proforma   Notes
                         pany   pany                                     Adjust   consoli-
                          X      Y                                       -ments   dated
                                                    Acqui-     Offer-
                                         GAAP
                                                    sition      ing
                                        Adjust-
                                                   Adjust-    Adjust-
                                         ments
                                                    ments      ments
                                        (Note 1)
                                                   (Note 2)   (Note 2)
                                                                           F=        G=
                          A      B          C         D          E       C+D+E     A+B +F


I.   SOURCES OF FUNDS:
     SHAREHOLDERS'
     FUNDS :
                                             Guide to Reporting on Proforma Financial Statements



       Share Capital             xxx   xxx           (xxx)    xxx      xxx     xxx       (b), (d)
       Share Application         xxx   xxx                                     xxx




                                                                                                     Guide to Reporting on Proforma Financial Statements
       Money Pending
       Allotment

     RESERVES &
     SURPLUS

       General Reserve           xxx   xxx           (xxx)             (xxx)   xxx       (b)
51




       Profit and Loss account   xxx   xxx   xxx     (xxx)             xxx     xxx       (b), (e),
                                                                                         (i)
       Capital Reserve           xxx   xxx           (xxx)             (xxx)   xxx       (c)

     LOAN
     FUNDS:

       Secured Loans             xxx   xxx           xxx      (xxx)    xxx     xxx       (a), (d)
       Unsecured Loans           xxx   xxx                                     xxx


                         Total   xxx   xxx   xxx     xxx      xxx      xxx     xxx




                                              51
                                                                                           Guide to Reporting on Proforma Financial Statements
     II.   APPLICATION OF FUNDS:

           GOODWILL                     xxx   xxx        xxx             xxx   xxx   (c)

           FIXED ASSETS:

             Gross block                xxx   xxx            -       -         xxx

             Less : Depreciation        xxx   xxx            -       -         xxx

             Net block                  xxx   xxx                              xxx
52




             Capital work in progress   xxx   xxx        -       -             xxx
             and capital advances


                                        xxx   xxx        -       -       xxx   xxx
           CURRENT ASSETS, LOANS AND
           ADVANCES
             Inventories                xxx   xxx            -       -         xxx
             Sundry Debtors             xxx   xxx            -       -         xxx
             Cash and Bank
             Balances                   xxx   xxx            -       -         xxx
             Other Current Assets       xxx   xxx            -       -         xxx




                                                    52
                                                  Guide to Reporting on Proforma Financial Statements



        Loans and Advances            xxx   xxx                                     xxx
                                                         -        -




                                                                                                        Guide to Reporting on Proforma Financial Statements
                              xxx           xxx          -        -                 xxx
     LESS:CURRENT LIABILITIES AND
     PROVISIONS

        Current Liabilities           xxx   xxx          -        -                 xxx
        Provisions                    xxx   xxx                                     xxx
                                                         -        -

                                      xxx   xxx          -        -                 xxx
     NET CURRENT
53




     ASSETS                           xxx   xxx          -        -                 xxx


     MISCELLANEOUS                                xxx
     EXPENDITURE                      xxx   xxx          -        -         xxx     xxx       (i)
     (to the extent not written off
     or adjusted)


                         Total        xxx   xxx   xxx     xxx      xxx      xxx     xxx




                                                   53
                                                                                                                         Guide to Reporting on Proforma Financial Statements
     NOTE 1 - These adjustments represent adjustments for significant differences between accounting policies
     followed by the acquired entity for the purposes of the preparation of foreign gaap financial statements, and the
     accounting policies followed by the Issuer company, as explained hereunder:
     (i)     Miscellaneous expenditure incurred during the year ended March 31, 2012, capitalised in the financial
             statements of the acquired company, not capitalised in accordance with the accounting policy of the
             Issuer company.

     NOTE 2 - The proforma balance sheet has been prepared to reflect the acquisition of Company Y by Company X
     for an aggregate price of $ xxx Proforma adjustments are made to reflect
     (a)     The issuance of Rs. xxx bank indebtedness with an interest rate of XX% maturing on ______ to provide
             the funds to complete the purchase acquisition.
54




     (b)     The elimination of the common shareholders' equity accounts of Company Y
     (c)     Goodwill/Capital reserve arising on consolidation




                                                         54
                                                       Guide to Reporting on Proforma Financial Statements



                Illustrative Proforma Consolidated Statement of Profit and Loss
                                for the Year ended March 31, 2012
                                                                            ( in Millions)




                                                                                                                    Guide to Reporting on Proforma Financial Statements
                               Comp     Comp                      Proforma             Total     Proform    Notes
                               any X    any Y                    Adjustments           Adjust-   a
                                                                                       ments     consolid
                                                                                                 ate-ed
                                                 Account-    Acquis-    Offering
                                                 ing         ition      Adjust-
                                                 Policy      Adjust-    ments
                                                 Adjust-     ments      (Note 2)
55




                                                 ments       (Note 2)
                                                 (Note 1)
                                 A        B          C           D            E            F=      G=
                                                                                         C+D+E   A+B +F
     INCOME :
        Sale of Products and
        Services                xxx     xxx                  -          -                        xxx

         Less: Excise Duty      (xxx)    (xxx)                   -             -                 (xxx)



                                                        55
                                                                                                   Guide to Reporting on Proforma Financial Statements
                                     xxx   xxx                     -         -   xxx

          Other income              xxx    xxx                     -         -   xxx

                                    xxx    xxx                                   xxx
                                                               -       -


     EXPENDITURE :
         Cost of goods/materials
        consumed                     xxx   xxx                                   xxx
         Selling, Administrative
56




        & other expenses             xxx   xxx    (xxx)                          xxx   (i), (e)
         Depreciation                xxx    xxx                                  Xxx
         Financial expenses         xxx    xxx                 xxx     (xxx)     xxx
        (Net)                                                                          (a), (c )
                                     xxx   xxx    (xxx)        xxx     xxx       xxx
      Loss for the year before      xxx    xxx                                   xxx
     tax
      Tax expense                   xxx    xxx    xxx          (xxx)   xxx       xxx   (b), (d)
      Loss for the year after tax   xxx    xxx    (xxx)        xxx     (xxx)     xxx


     Earning per share




                                                          56
                                                              Guide to Reporting on Proforma Financial Statements



     NOTE 1 - These adjustments represent adjustments for significant differences between accounting policies followed by the
     acquired entity for the purposes of the preparation of foreign GAAP financial statements, and the accounting policies
     followed by the Issuer company, as explained hereunder:




                                                                                                                                  Guide to Reporting on Proforma Financial Statements
     (i) Miscellaneous expenditure incurred during the year ended March 31, 2012,capitalised in the financial statements of the
     acquired company, not capitalised in accordance with the accounting policy of the Issuer company.
     NOTE 2 - These adjustments represent adjustments for significant differences between accounting policies followed by the
     acquired entity for the purposes of the preparation of foreign GAAP financial statements, and the accounting policies
     followed by the Issuer company.

     (a) Interest expense on xxx of xx% bank indebtedness issued in connection with the acquisition maturing on _____.
     (b) Reduction of current income taxes relating to foregoing adjustments based upon the statutory rate of xx%.
57




     (c) Acquisition costs of xxx incurred by Company X (reflected in the Company X historical column) and xxx
     incurred by Company Y (reflected in the Company Y historical column) during 2012 in connection with
     Company X's acquisition of Company Y and included in Selling, Administrative & other expenses amounted to
     xxx and yyy, respectively




                                                               57
                                            Appendix C
                                                  [Refer para 59]
        Illustrative Independent Auditors' Report
            on Proforma Financial Statements
The Board of Directors
[Name of the Company]
[Address]
Independent Auditors' Report on Proforma Financial
Statements in Connection with the Initial Public Offer/Rights
Issue of [Name of the Company]
Dear Sirs,
1.    This report is issued in accordance with the terms of our
engagement letter dated [date].
2.       The accompanying Proforma Financial Statements
(hereinafter referred to as the "Proforma Financial Statements") of
[Name of the Company] (hereinafter referred to as the "Company")
comprising of the Proforma Balance Sheet as at
[month][date][year] and the Proforma Statement of Profit and Loss
for the year/period ended6 [month][date][year], read with the notes
thereto, has been prepared by the Management of the Company
in accordance with the requirements of paragraph 23 of item
(IX)(B) of Schedule VIII of the Securities and Exchange Board of
India (Issue of Capital and Disclosure Requirements) Regulations,
2009, as amended to date (the "SEBI Regulations") issued by the
Securities and Exchange Board of India (the "SEBI") to reflect the
impact of a significant [acquisition /disinvestment] made during
the [ ] period ended [month/date/year] and as further set out in the
basis of preparation paragraph included in the attached notes to
the Proforma Financial Statements, which is initialled by us for
identification purposes only.



6
    As the case may be.
          Guide to Reporting on Proforma Financial Statements

3.     We have examined the Proforma Financial Statements.
For our examination, we have placed reliance on the following:
         the audited/restated7 consolidated/standalone8 financial
         information of the Company for the year ended
         [month][dated][year] on which we have expressed a
         modified/an unmodified opinion in our reports dated
         [Mention report dates];
         the audited/restated9 consolidated/standalone10 financial
         statements of the Company for the period ended
         [month][dated][year] on which we have expressed a
         modified/ an unmodified opinion in our reports dated
         [Mention report dates];
         the audited consolidated/standalone11 financial statements
         of the [Name of the acquired/divested company/ies] for the
         year ended [month][date][year] on which we/other firms of
         chartered accountants have expressed a modified/an
         unmodified audit12 opinion dated [Mention report dates];
         the audited consolidated/standalone13 financial statements
         of the [Name of the acquired/divested company/ies] for the
         period ended [month][dated][year] on which we/another
         firm of Chartered Accountants14 have expressed a
         modified/an unmodified audit15 opinion in our/their reports
         dated [Mention report dates];

7
  As the case may be [Refer requirements stated in paragraph 18(b) above].
8
  As the case may be, as there may be some entities where consolidation is not
required at all, as there were no subsidiaries of the Issuer company.
9
  As the case may be [Refer requirements stated in paragraph 18(b) above].
10
   As the case may be, as there may be some entities where consolidation is not
required at all, as there were no subsidiaries of the Issuer company.
11
   As the case may be. However, in case of acquisition, the consolidated financial
statements of the acquired entity should be considered, if applicable. In case of
divestment, the entities which are divested alongwith the direct or indirect
subsidiary or the entire consolidated financial statements of the divested entity,
as the case may be, should be considered.
12
   As the case may be.
13
   As the case may be. However, in case of the acquisition, the consolidated
financial statements of the acquired entity should be considered. In case of
divestment, the entities which are divested alongwith the direct or indirect
subsidiary or the entire consolidated financial statements of the divested entity,
as the case may be, should be considered.
14
   As may be applicable.
15
   As the case may be.

                                       59
4.      For purposes of this engagement, we are not responsible
for updating or reissuing any reports or opinions on any historical
financial information used in compiling the Proforma Financial
Statements, nor have we, in the course of this engagement,
performed an audit or review of the financial information used by
the Management in the compilation of the Proforma Financial
Statements.
Managements' Responsibility for the Proforma Financial
Statements
5.      The preparation of the Proforma Financial Statements,
which is to be included in the [refer the appropriate document
where Proforma Financial Statements needs to included], is the
responsibility of the Management of the Company and has been
approved by the Board of Directors of the Company (hereinafter
referred to as the "Board of Directors") in their meeting dated [ ].
The Board of Directors' responsibility includes designing,
implementing and maintaining internal control relevant to the
preparation and presentation of the Proforma Financial
Statements. The Board of Directors is also responsible for
identifying and ensuring that the Company complies with the laws
and regulations applicable to its activities.
Auditors' Responsibilities
6.       Pursuant to the requirement of the SEBI (Issue of Capital
and Disclosure Requirements) Regulations, 2009, it is our
responsibility to express an opinion on whether the Proforma
Financial Statements of the Company for [specify the period], as
attached to this report, read with respective significant accounting
policies and the notes thereto have been properly prepared by the
Management of the Issuer Company on the basis stated in the
note [ ] to the Proforma Financial Statements.
7.     We conducted our engagement in accordance with the
Guidance Note on Audit Reports and Certificates for Special
Purposes, issued by the Institute of Chartered Accountants of
India.
8.       The purpose of the Proforma Financial Statements is to
reflect the impact of a significant [acquisition /disinvestment] made

                                 60
         Guide to Reporting on Proforma Financial Statements

during the [ ] period ended [month/date/year], as set out in the
basis of preparation paragraph included in the attached notes to
the Proforma Financial Statements and solely to illustrate the
impact of a significant event on the historical financial information
of the Company, as if the event had occurred at an earlier date
selected for purposes of illustration and based on the judgements
and assumptions of the Management of the Company to reflect
the hypothetical impact, and, because of its hypothetical nature,
does not provide any assurance or indication that any event will
take place in the future and may not be indicative of:
       the standalone/consolidated financial position of the
       Company as at [month][date][year] or any future date; or
       the standalone/consolidated results of the Company for
       year ended [month][date][year] or for the nine month
       period ended [month][date][year] or any future periods
9.     Our work consisted primarily of comparing the respective
columns in the Proforma Financial Statements to the underlying
restated/audited historical financial information, as the case may
be, referred to in paragraph 3 above, considering the evidence
supporting the adjustments and reclassifications, performing
procedures to assess whether the basis of preparation of
Proforma Financial Statements as explained in the attached notes
to the Proforma Financial Statements provide a reasonable basis
for presenting the significant effects directly attributable to the
[acquisition/divestment] and discussing the Proforma Financial
Statements with the Management of the Company.
10.     We have not audited any financial statements of the
Company as of any date or for any period subsequent to
[month/date/year]. Accordingly, we do not express any opinion on
the financial position, results or cash flows of the Company as of
any date or for any period subsequent to [month/date/year].
11.     We have no responsibility to update our report for events
and circumstances occurring after the date of the report.
12.    We planned and performed our work so as to obtain the
information and explanations we considered necessary in order to
provide us with sufficient evidence to issue this report.

                                 61
13.    This engagement did not involve independent examination
of any of the underlying financial information.
14.   We believe that the procedures performed by us provide a
reasonable basis for our opinion.
Opinion
15.    In our opinion the Proforma Financial Statements of the
Company for [specify the period], as attached to this report, read
with respective significant accounting policies and the notes
thereto have been properly prepared by the Management of the
Issuer Company on the basis stated in the note [ ] to the Proforma
Financial Statements.
Restrictions on Use
16.     This report is addressed to and is provided to enable the
Board of Directors of the Company to include this report in the
[refer the appropriate document where Proforma Financial
Statements need to be included] prepared in connection with the
proposed initial public offer/rights issue of the Company, to be
filed by the Company with the SEBI [and the concerned Registrar
of Companies].


                                            For Name of the Firm
                                        Firm Registration Number
                                           Chartered Accountants


                                            [Name of the Partner]
                                                          Partner
                                             Membership Number


Place:
Date:



                               62
                                                      Appendix D
                                                        [Refer para 60]
     Illustrative Independent Auditors' Report Where the
        Acquisition/ Divestment is Below the Materiality
                           Threshold

Board of Director
[Name of the Company]
[Address]
1.    This report is issued in accordance with the terms of our
engagement letter dated (date).
2.      The accompanying Declaration contains detailed fact of
the acquisition/disinvestment along with the consideration
paid/received [and the mode of financing such acquisition]16 (the
"Declaration"), as required by the clause (23) of point (IX)(B) of
Part A of Schedule VIII of the Securities and Exchange Board of
India (Issue of Capital and Disclosure Requirements) Regulations,
2009 (the "Regulations") issued by Securities and Exchange
Board of India ("SEBI") (hereinafter referred to as the `SEBI
Regulations'), which we have initialled for identification purposes
only.
Managements' Responsibility for the Declaration
3.      The preparation of the accompanying Declaration,
including its content, is the responsibility of the Management of
the Company.        This responsibility includes the designing,
implementing and maintaining internal control relevant to the
preparation and presentation of the Declaration, and applying an
appropriate basis of preparation; and making estimates that are
reasonable in the circumstances.
4.      The Management is also responsible for ensuring that the
Company complies with the requirements of the SEBI Regulations
and for providing all relevant information to the SEBI.

16
     Applicable only for the cases of acquisitions.
Auditors' Responsibility
5.      Pursuant to the requirements of the SEBI Regulations, it is
our responsibility to obtain reasonable assurance and form an
opinion as to whether the Declaration is in agreement with the
books and records of the Company and to obtain reasonable
assurance as to whether it fairly presents, in all material respects,
fact of the acquisition/disinvestment along with the consideration
paid/received [and the mode of financing such acquisition] 17 .
6.     We conducted our examination, in accordance with the
Guidance Note on Audit Reports and Certificates for Special
Purposes, issued by the Institute of Chartered Accountants of
India. As part of our engagement we performed following
procedures:
a)         We read the disclosure made in the Declaration of facts of
           the acquisition or disinvestment made by the Management;
b)         We inquired from the Issuer Company's personnel whether
           the acquired/ divested subsidiary is/was a direct or indirect
           subsidiary of the Issuer Company;
c)         We traced the amount paid/received or payable/receivable
           as consideration on acquisition or divestment of the
           Company by the Issuer Company, to the sale/purchase
           agreement, which is annexed to the report; and
d)         We inquired from the Issuer Company personnel in respect
           of mode of financing acquisition of the Company18.
Opinion
7.    Based on our examination as above, and the information
and explanations given to us, in our opinion, Declaration is in
agreement with the audited/unaudited19 books and records of the
Company and fairly presents, in all material respects, fact of the




17
     Applicable only for the cases of acquisitions.
18
     Applicable only for the cases of acquisitions.
19
     As may be applicable.

                                          64
             Guide to Reporting on Proforma Financial Statements

acquisition/disinvestment  along     with   the    consideration
paid/received [and the mode of financing such acquisition]20.
Restrictions on Use
8.     This report is addressed to and provided to Board of
Directors of the Company solely for the purpose of enabling it to
comply with its obligations under the SEBI (Issue of Capital and
Disclosure Requirements) Regulations, 2009 to submit the
accompanying Declaration to the SEBI and should not be used by
any other person or for any other purpose. [Name of the Firm] do
not accept or assume any liability or any duty of care for any other
purpose or to any other person to whom this report is shown or
into whose hands it may come without our prior consent in writing.


                                                        For [Name of the Firm]
                                                      Firm Registration number
                                                        Chartered Accountants


                                                         [Name of the Partner]
                                                                       Partner
                                                          Membership Number


Place:
Date:




20
     Applicable only for the cases of acquisitions.

                                          65
 
 
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