Pro forma warning

Fears that investors were being misguided by inconsistent pro formainformation. financial information for investment and bid documents has seen the English ICA answer a Stock Exchange call for help.

The English ICA’s financial reporting committee, concerned that a lack of good information was forcing investors to make decisions based on ‘back of the envelope’ calculations, has issued new guidelines for accountants preparing pro forma financial information in investment and bid documents.

The new guidance addresses the circumstances in which pro forma information is presented, typically as balance sheets and profit & loss accounts showing the impact of share issues, restructurings, acquisitions or disposals on the issuing business.

‘On many deals, it’s in everyone’s interest for companies to provide pro forma financial information,’ said Robert Hodgkinson, chairman of the institute’s financial reporting committee. ‘Otherwise, investors will only try and do it for themselves on the back of an envelope,’ he added.

The institute’s technical release, ‘Pro forma financial information’ is designed to sit alongside the Stock Exchange’s Yellow Book of listing rules, which changed last year to allow companies to file pro forma information – a move which brought the UK into line with other capital markets.

The Stock Exchange and Auditing Practices Board joint working party, which examines the impact of rule changes on accountants, turned to the institute’s committee for assistance when it became apparent that many of the issues overlapped with financial reporting, explained APB technical director Jon Grant.

The APB plans to consider draft guidance for auditors at its October meeting and expects to publish a practice note afterwards, he added.

‘Our guidance responds to the changes introduced in the Stock Exchange listing rules last summer,’ said Grant. ‘The institute puts flesh to the bones of the listing rules, so directors and company sponsors will understand the accounting basis of what can and can’t be reflected in pro forma submissions,’ he added.

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