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
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Edition : October, 2012
Committee/
Department : Auditing and Assurance Standards Board
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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,
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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.
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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.
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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
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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.
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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.
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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.
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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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