(1) Objective and Basis of Preparation – The objective of pro forma financial statements is to illustrate the impact of a transaction on a reporting issuer’s financial position and financial performance by adjusting the historical financial statements of the reporting issuer to give effect to the transaction. Accordingly, the pro forma financial statements should be prepared on the basis of the reporting issuer’s financial statements as already filed. No adjustment should be made to eliminate discontinued operations.
(2) Pro Forma Statement of Financial Position – Subsection 8.4(5) of the Instrument does not require a pro forma statement of financial position to be prepared to give effect to significant acquisitions that are reflected in the reporting issuer’s most recent annual or interim statement of financial position filed under the Instrument.
(3) Non-coterminous Year-ends – Where the financial year-end of a business differs from the reporting issuer’s year-end by more than 93 days, paragraph 8.4(7)(c) requires a statement of comprehensive income for the business to be constructed for a period of 12 consecutive months. For example, if the constructed reporting period is 12 months and ends on June 30, the 12 months should commence on July 1 of the immediately preceding year; it should not begin on March 1st of the immediately preceding year with three of the following 15 months omitted, such as the period from October 1 to December 31, since this would not be a consecutive 12 month period.
(4) Effective Date of Adjustments – For the pro forma income statements included in a business acquisition report, the acquisition and the adjustments should be computed as if the acquisition had occurred at the beginning of the reporting issuer’s most recently completed financial year and carried through the most recent interim period presented, if any. However, one exception to the preceding is that adjustments related to the allocation of the purchase price, including the amortization of fair value increments and intangibles, should be based on the acquisition date amounts of assets acquired and liabilities assumed as if the acquisition occurred on the date of the reporting issuer’s most recent statement of financial position filed.
(5) Acceptable Adjustments – Pro forma adjustments are generally limited to the following two types of adjustments required by paragraph 8.4(7)(b) of the Instrument:
(a) those directly attributable to the specific acquisition transaction for which there are firm commitments and for which the complete financial effects are objectively determinable, and
(b) adjustments to conform amounts for the business or related businesses to the issuer’s accounting policies.
If financial statements for a business or related businesses are prepared in accordance with accounting principles that differ from the issuer’s GAAP and the financial statements do not include a reconciliation to the issuer’s GAAP, pro forma adjustments as described in item (b) above will often be necessary. For example, financial statements for a business or related businesses may be prepared in accordance with U.S. GAAP, or in the case of a venture issuer, in accordance with Canadian GAAP applicable to private enterprises, in each case without a reconciliation to the issuer’s GAAP. Even if financial statements for a business or related businesses are prepared in accordance with the issuer’s GAAP, pro forma adjustments as described in item (b) may be necessary to conform amounts for the business or related businesses to the issuer’s accounting policies, including, for example, the issuer’s revenue recognition policy where the revenue recognition policy of the business or related businesses differs from the issuer’s policy.
If the presentation currency used in financial statements for a business or related businesses differs from the presentation currency used in the issuer’s financial statements, the pro forma financial statements must present amounts for the business or related businesses in the presentation currency of the issuer’s financial statements. The pro forma financial statements should explain any adjustments to conform presentation currency.
(6) Multiple Acquisitions – If a reporting issuer has completed multiple acquisitions then, under subsection 8.4(5) of the Instrument, the pro forma financial statements must give effect to each acquisition completed since the beginning of the most recently completed financial year. The pro forma adjustments may be grouped by line item on the face of the pro forma financial statements provided the details for each transaction are disclosed in the notes.
(7) Pro Forma Financial Statements Based on an Earlier Interim Financial Report – The pro forma financial statements are prepared on the basis of the financial statements included in the business acquisition report. As a result, if the reporting issuer relies on subsection 8.4(4) of the Instrument to include financial statements for an earlier interim period of the acquired business than would otherwise be required under subsection (3), the issuer uses its comparable interim period to prepare the pro forma financial statements.
(8) Indirect Acquisitions – Under the securities legislation of certain jurisdictions, it is generally an offence to make a statement in a document that is required to be filed under securities legislation, and that does not state a fact that is necessary to make the statement not misleading. When a reporting issuer acquires a business that has itself recently acquired another business or related businesses (an “indirect acquisition”), the reporting issuer should consider whether it needs to provide disclosure of the indirect acquisition in the business acquisition report, including historical financial statements, and whether the omission of these financial statements would cause the business acquisition report to be misleading, untrue or substantially incomplete. In making this determination, the reporting issuer should consider the following factors:
- if the indirect acquisition would meet any of the significance tests in section 8.3 of the Instrument when the reporting issuer applies each of those tests to its proportionate interest in the indirect acquisition of the business, and
- if the amount of time between the separate acquisitions is such that the effect of the first acquisition is not adequately reflected in the results of the business or related businesses the reporting issuer is acquiring.
(9) Pro Forma Financial Statements where Financial Statements of a Business or Related Businesses are Prepared using Accounting Principles that Differ from the Issuer’s GAAP – Section 3.11 of National Instrument 52-107 Acceptable Accounting Principles and Auditing Standards permits reporting issuers to include in a business acquisition report financial statements of a business or related businesses prepared in accordance with U.S. GAAP and without a reconciliation to the issuer’s GAAP. That section also permits, subject to specified conditions, a venture issuer to include in a business acquisition report financial statements of a business or related businesses prepared in accordance with Canadian GAAP applicable to private enterprises and without a reconciliation to the issuer’s GAAP. However, section 3.14 of National Instrument 52-107 Acceptable Accounting Principles and Auditing Standards requires that pro forma financial statements be presented using accounting policies that are permitted by the issuer’s GAAP and would apply to the information presented in the pro forma statements if that information were included in the issuer’s financial statements for the same time period as that of the pro forma financial statements. As well, subsection 8.4(7) of the Instrument requires pro forma financial statements to include a description of the underlying assumptions on which the pro forma financial statements are prepared, cross-referenced to each related pro forma adjustment. Therefore, the pro forma financial statements must describe the adjustments presented in the pro forma income statement relating to the business or related businesses to adjust amounts to the issuer’s GAAP and accounting policies.
The pro forma statement of financial position should present the following information:
(i) the statement of financial position of the reporting issuer,
(ii) the statement of financial position of the business or related businesses,
(iii) pro forma adjustments attributable to each significant acquisition that reflect the reporting issuer’s accounting for the acquisition and include new values for the business’ assets and liabilities, and
(iv) a pro forma statement of financial position combining items (i) through (iii).
The pro forma income statement should present the following information:
(i) the income statement of the reporting issuer,
(ii) the income statement of the business or related businesses,
(iii) pro forma adjustments attributable to each significant acquisition and other adjustments relating to the business or related businesses to conform amounts to the issuer’s GAAP and accounting policies, and
(iv) a pro forma income statement combining items (i) through (iii).