Prospective and pro forma information

Identify what the information is trying to show

Future-oriented financial information supports decisions made before outcomes are known. A forecast uses management's best-estimate assumptions about expected events and actions. A projection uses hypothetical assumptions, or combines them with best estimates, to explore a specified scenario. Historical pro forma information instead illustrates how an earlier financial position or result would look after specified transaction adjustments.

Concept sources: ISAE 3400 in the IAASB 2023–2024 Handbook, Volume 3, paragraphs 3–6; ASAE 3450, December 2022, paragraphs 5 and 14; ASAE 3420, December 2022, paragraph 4 — categories; examples are original.

Select the engagement before designing procedures

ISAE 3400 addresses examination of prospective financial information. Australia uses ASAE 3450 for assurance involving corporate fundraisings and/or prospective financial information; it is not a word-for-word Australian adoption of ISAE 3400. ASAE 3450 can cover different information types and assurance levels within one fundraising engagement.

Agree the intended use, distribution, period, basis of preparation, management's responsibilities and the expected report. Establish access to records and people. A restriction that prevents necessary work is an acceptance problem, not merely wording to add at the end.

The forecast horizon matters. A ten-year spreadsheet is easy to calculate, but its later assumptions may be difficult to support. The useful horizon depends on the business and available evidence, rather than the number of columns a model contains.

Concept sources: ISAE 3400, IAASB 2023–2024 Handbook, Volume 3, paragraphs 10–16; ASAE 3450, December 2022, paragraphs 1–13 and 105–108 — scope, acceptance and forecast context.

Challenge the business story behind a forecast

A useful examination connects a model to the business that must produce its results. Start with its major drivers, then ask what evidence supports them and whether their consequences are consistently reflected. Last year's audited accounts can inform the starting point; they do not establish next year's sales or collections.

Now consider interactions. Recruiting staff earlier increases payroll before customer receipts arrive. Delaying equipment purchases preserves short-term cash but may reduce servicing capacity. A single assumption can therefore be reasonable in isolation while the collection of assumptions is internally inconsistent.

The practitioner can examine the model's formulas, reconcile opening amounts, compare accounting policies and investigate past forecasting errors. Errors recurring in one direction may reveal optimistic budgeting habits. A prior forecast miss is not proof that a current assumption is wrong; its cause helps identify what requires closer examination now.

Concept sources: ASAE 3450, December 2022, paragraphs 108–114 — historical sources, assumptions, preparation and time period; Beacon and the evidence reasoning are original applications.

Test uncertainty without pretending to remove it

Sensitivity analysis asks how results change when a driver changes. It helps identify which assumptions deserve the strongest support and clearest explanation. It does not assign a probability to an outcome merely because the spreadsheet produces a range.

In Beacon's model, delaying collections by two weeks could remove most of the forecast cash headroom, while a similar percentage change in stationery costs might have almost no effect. Work should follow those economic consequences. Consider whether several adverse changes could occur together, rather than testing each favourable assumption in isolation.

A forecast note should let a reader identify the significant assumptions, preparation date, relevant accounting basis and major uncertainties. If results depend on a significant change in customer behaviour, describing only the resulting revenue number conceals information needed to assess the forecast. Obtain management's written representations about intended use, completeness of significant assumptions and responsibility for the information; these do not replace other evidence.

Concept sources: ISAE 3400, IAASB 2023–2024 Handbook, Volume 3, paragraphs 21–26 — consistency, sensitivity, representation and disclosure considerations.

Examine a projection on its stated terms

A hypothetical assumption is a scenario condition. The practitioner does not need evidence that the hypothetical event will happen, but must examine its suitability for the stated purpose, realism and significant implications. Calling an assumption hypothetical is not permission to omit costs or construct an impossible scenario.

The question is conditional: if the scenario occurred, does the financial information reflect it coherently? A separate question is whether the board expects the scenario to occur. Making those questions visible helps users avoid treating a strategic option as management's forecast.

Under ASAE 3450, the projection-specific requirements in paragraphs 119–127 concern projections for non-public documents. A hypothetical scenario prepared for a board discussion should not be assumed suitable for public fundraising material.

Concept sources: ISAE 3400, IAASB 2023–2024 Handbook, Volume 3, paragraphs 18–20; ASAE 3450, December 2022, paragraphs 119–127 — hypothetical assumptions and the Australian projection scope.

Explain what prospective assurance can establish

Assurance cannot establish that a forecast result will occur. ISAE 3400 ordinarily contemplates moderate assurance on the assumptions and an opinion on preparation and presentation; it allows positive assurance on assumptions when justified. Its report warns about potentially material differences between actual and prospective results, and about the stated purpose of a projection.

Reporting responses depend on the problem. Under ISAE 3400, inadequate presentation can lead to qualification, an adverse opinion or withdrawal. Significant assumptions lacking a reasonable basis lead to an adverse opinion or withdrawal. A limitation preventing necessary procedures leads to withdrawal or disclaimer. Read these specific requirements rather than importing the historical financial statement audit decision mechanically.

Concept sources: ISAE 3400, IAASB 2023–2024 Handbook, Volume 3, paragraphs 8–9 and 27–32 — assurance limitations and reporting responses.

Understand the different promise in pro forma compilation assurance

For historical pro forma information, management selects historical source information and applies adjustments illustrating a transaction at an assumed earlier date. Management compiles it. The practitioner reports on the compilation against applicable criteria; the practitioner does not perform the compilation as part of this assurance engagement.

ISAE 3420 addresses reasonable assurance on compilation in a prospectus. ASAE 3420 extends the Australian scope to other documents and appropriate limited assurance engagements. If assurance is requested on the pro forma financial information itself, ASAE 3420 directs the practitioner to ASAE 3450.

Concept sources: ASAE 3420, December 2022, conformity statement, Aus 0.1–Aus 0.2, Aus 1.1–Aus 1.2 and paragraphs 2–6 — responsibility, international comparison and Australian scope.

The arithmetic illustrates a $1,000 acquisition funded by $700 of borrowing and $300 of cash. It is not a complete statement of financial position. The practitioner would still need to investigate purchase terms, financing evidence, omitted transaction effects and the relevant accounting policies. The neat table does not establish those matters.

Follow each pro forma adjustment to its evidence

Suitable criteria require an appropriate source and adjustments that relate directly to the transaction, have factual support and use consistent accounting policies. Check completeness, extraction, calculations and presentation. Consider the implications of modified reports on source information. The report must explain the illustration's purpose and limitations; it does not promise that actual results would have been identical.

Concept sources: ASAE 3420, December 2022, paragraphs 14–26 and 35 — criteria, evidence, source reports and reporting.

For the warehouse example, a signed purchase agreement may support the purchase price but leave transaction taxes or borrowing costs unresolved. A financing term sheet may differ from an executed loan. A management estimate of future delivery savings is a different kind of claim from a documented acquisition payment. Investigate those distinctions before accepting every management-labelled “adjustment”.

If management includes only favourable changes, test for related unfavourable changes and omissions. If the source comes from a different period or uses different policies, understand the implications before combining it. Trace the final explanatory notes back to what the illustration actually does: which transaction, which assumed date, which source and which adjustments.

Sources and further reading

• ISAE 3400, IAASB 2023–2024 Handbook, Volume 3: printed pages 130–135, paragraphs 1–32.
• ASAE 3450, December 2022: paragraphs 1–14, 105–127 and 128–136.
• ASAE 3420, December 2022: Aus 1.1–Aus 1.2 and paragraphs 14–35.