Deloitte LLP
Athene Place
66 Shoe Lane
London EC4A 3BQ
Tel: +44 (0) 20 7936 3000
Fax: +44 (0) 20 7583 1198
www.deloitte.co.uk
Katerina Joannou
ICAEW
Chartered Accountants' Hall
Moorgate Place
London
EC2R 6EA
6 July 2012
Dear Sirs
Guidance on Financial Position and Prospects Procedures
Thank you for the opportunity to comment on the Corporate Finance Faculty‟s draft Guidance on Financial Position and
Prospects Procedures (“FPP”).
We believe that the time is right to replace FRAG 10/95 and that the draft Guidance, once finalised, will contribute to
an improved mutual understanding amongst market participants as to what is required of them.
We agree with the summary of regulatory drivers for FPP assurance set out in the draft Guidance, including the
assertion that a similar basis of FPP procedures is required for applications for a Premium Listing, admission to AIM or
admission to the PLUS-quoted market. Whilst this may result in a change in the scope of work to be performed for
some transactions, we believe that the analysis of the requirements of the markets set out in the guidance supports this
stance.
We think that it would be helpful for the ICAEW to take forward further work on assurance around FPP in the
circumstances set out in paragraphs 17-19 of the Introduction to the proposed Guidance. This might also usefully
include (a) assurance on integration plans relating to a Class 1 acquisition or a reverse takeover of one existing listed
company by another and (b) assurance where more than one firm of reporting accountants is involved. This should not
delay finalisation of the draft Guidance but could be taken forwards as a potential second technical release or a further
appendix to the Guidance.
Paragraph 2.3 of the „Developing the Guidance‟ section of the paper states that the ICAEW does not intend to provide
guidance to replace the reporting accountant‟s role in relation to the old Listing Rule 2.8, on the grounds that this rule
does not exist in a similar form in the current FSA Listing Rules. Nevertheless, reporting accountants are often asked to
confirm that, within the context of their instructions, they have reported to the company and the Sponsor/Nomad all
matters which have come to their attention in fulfilling their instructions which they consider should be disclosed as
being in their view material to the transaction. We believe it would be helpful for the ICAEW to consider developing
guidance as to the reporting accountant‟s interaction with the Sponsor‟s declaration under LR 8.4.3R(3).
Our responses to the consultation questions asked in section 1 of the draft Guidance are set out in Annex 1 to this letter,
together with some minor editorial comments and suggestions in Annex 2 and a suggested redraft of the assurance
report in Annex 3. If you have any questions concerning our comments, please contact Yvette Allen (Partner) on 020
7303 0996 or Richard Gillin (Director) on 020 7007 0202.
Yours faithfully
Deloitte LLP
Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC303675 and its
registered office at 2 New Street Square, London EC4A 3BZ, United Kingdom.
Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited (“DTTL”), a UK private company limited by guarantee,
and its network of member firms, each of which is a legally separate and independent entity. Please see
www.deloitte.co.uk/about for a detailed description of the legal structure of DTTL and its member firms.
Deloitte LLP is the United Kingdom member firm of DTTL.
Appendix 1 – response to consultation questions
1. Do you have any comments on the material set out in the Introduction to the new guidance and on the
transitional arrangements set out in Section 2.3?
We agree with the stance explained in section 2.2.1 of the “Developing the guidance” material on page 6 of the draft as
to the scope of the guidance, and in particular the approach of addressing “financial position and prospects procedures”
rather than “financial reporting procedures. This point might usefully be made in the permanent guidance, as otherwise
users might be surprised by the fact that section G in Appendix 1 is flagged as supplementary rather than core.
Potentially a new paragraph could be inserted beneath paragraph 16 as follows:
“This guidance addresses FPP – the ability of the directors to assess the entity’s position and prospects is related to, but
not the same as, the ability to produce the periodic reports required by the Listing Rules/AIM Rules/Plus Rules for
Companies. Directors’ duties in respect of periodic reports may be both wider (e.g. narrative reporting) and narrower
(only at set dates rather than the ongoing assessment of position and prospects). Any additional work required in
relation to compliance with other such rules would need to be agreed between the reporting accountant and the
sponsor.”
We believe that the adoption of a risk-based approach (as set out in paragraphs 13-14) of the Introduction is the right
approach for both directors and reporting accountants. We strongly support the adoption of ISAE 3000 as the
underlying framework for the reporting accountants’ assurance work. In due course we would encourage the ICAEW to
update the guidance once the IAASB has issued a revised ISAE 3000. This would also allow time for the working
group to consider early feedback from stakeholders applying the FPP guidance and the sponsors and boards receiving
opinions and long form reports under this guidance.
The transitional provisions in section 2.3 are practicable.
2. Does the material on directors in Part 1 of the new guidance satisfactorily address both their responsibilities
and the main challenges in establishing FPP procedures?
Yes. In particular, we believe that the idea of a risk-based approach is helpful, and that the starting point should be the
directors’ assessment which the reporting accountant then provides assurance on.
3. Do you have any comments on the role of advisers described in Part 2 of the new guidance?
No.
4. Does the material on reporting accountants in Part 3 of the new guidance set out clearly the framework for
FPP assurance engagements and the reporting accountant’s main considerations?
Yes. We would, however, suggest that further guidance be provided to support paragraph 98 as to the factors which
might affect the level of work which the reporting accountant performs and the nature of the evidence to be obtained.
We suggest that the end of the paragraph be redrafted as follows (with new material in italics):
“Procedures will vary for each engagement and may include inspection, observation, confirmation, recalculation, re-performance, analytical procedures and inquiry. , but This will predominantly involve:


obtaining a description of the FPP procedures,;
considering whether the FPP procedures (if followed) would address the risks that they were
designed to address;
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

based on the reporting accountants’ assessment of risk, which may include their own assessment of
management’s risk assessment (see section A of Appendix 1) and the high-level reporting
environment (see section B of Appendix 1), considering on a selective sample basis the directors’
evidence that they have established such FPP procedures. which may This might include limited
walk-through testing to observe the control in operation. Where management have established
monitoring controls to determine whether the FPP procedures have been established, the reporting
accountant may wish to carry out testing of those monitoring controls and, assuming such testing is
successful, reduce the level of testing of underlying procedures,; and
obtaining written representations from the directors.”
We suggest that the first bullet point in paragraph 69 also be amended to read “descriptions of the procedures that
the applicant considers to be necessary vital in meeting...”. The reporting accountant would otherwise have to not
only consider which objectives are core and which supplementary, but which procedures are vital and which are
less than vital. If the concern is that the sponsor and applicant may not want commentary on all procedures, this
could be addressed by an additional comment at the end of paragraph 69 beneath the bullet points saying “The
parties to the engagement may agree that the reporting accountant’s report covers all FPP procedures or focuses on
certain areas.”
5. Do you have any comments on the illustrative objectives in Appendix 1 to the new guidance and the extent to
which they provide useful reference material?
No.
6. Do you have any comments on the example wording for matters for approval by the board in Appendix 2 to
the new guidance?
No.
7. Do you have any comments on the example paragraphs from the engagement letter in Appendix 3 to the new
guidance?
No.
8. Do you have any comments on the example assurance report in Appendix 4 to the new guidance and on the
proposed form of opinion for Main Market, AIM and PLUS-quoted market FPP assurance engagements?
Yes. Some of the terms in the example report are not consistent with those used elsewhere in the Guidance, and the
wording could also be simplified in places whilst still complying with ISAE 3000. For example, the reports in the SIRs
comply with ISAE 3000 but do not use separate headings for “Subject matter” and “Objectives and Scope”. We have
set out a simpler form of report which we believe complies with ISAE 3000 and the Guidance in Annex 3 to this letter.
Finally, the “context” section is presumably not intended to form part of this report. This material should either be
removed (with content over and above that in section 2 of the Guidance moved to that section) or the material should be
put in italics or otherwise clarified as not forming part of the example report.
9. Are there any other matters which should be taken into account when finalising the new guidance?
No.
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Appendix 2 – Editorial comments and suggestions
Introduction
Paragraph 17 – “...on a Class 1 acquisition or disposal or on a...”
Section 1
Paragraph 52(c) – we suggest that instead of “its implications for the FPP procedures” the guidance says “the extent of
FPP procedures necessary to respond to the identified risks.”
Paragraph 53 – Some directors may object to committing to the future maintenance of FPP as this is not directly the
subject matter of this form of assurance engagement. Consider replacing the second sentence with “Sponsors may wish
to ask directors to affirm their commitment to do so as part of the board approval process, but this does not form part of
the subject matter of the reporting accountant’s engagement.”
Section 2
Paragraph 62 – It would be helpful to explain why this is not normally possible, in order to manage the expectation that
a reporting accountant might be asked to give an assurance opinion on matters such as wider corporate governance
matters e.g. whether a particular proposed audit committee member was independent of the executive management. We
suggest: “Notwithstanding this, it is not usually possible to extend the reporting accountant’s assurance opinion on FPP
procedures to such other matters, as they may be subjective (rather than objectively verifiable) and/or suitable assurance
criteria may not exist. That The reporting accountant’s assurance opinion on FPP is given on a specific...”
Appendix 1
Section A – Second bullet – align with paragraph 36 of the Guidance.
Section A - Third bullet, first sub-bullet “the high-level reporting and control environment”.
Section A - Fourth bullet – align and re-order to match sections E-H and add a cross reference “(see also section [ ])” to
each.
Appendix 2
For clarity we suggest that:





Heading “Board responsibilities” should be moved above “As directors of ABC plc we are responsible for...”
Three bullets after “In carrying out our responsibilities...” do not match with paragraph 36 of the Guidance or
the start of section A of Appendix 1 that relates to risk assessment.
“We have evaluated.... and the objectives set out in Appendix 1 of that document”.
“We have set out a description of the relevant... (the ABC plc Board Memorandum ABC plc document)”
would reflect the title commonly given to such documents in practice (with conforming amendments to
Appendix 3 which refers to a “company document” in the directors’ responsibilities section and Appendix 4
which refers to a “FPP procedures statement”).
“where we have described FPP procedures.... implementation have been drawn up by the directors, but which
the directors have not yet been brought into operation...” would better reflect the fact that this statement is
being made by the directors themselves.
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Appendix 3
In the “Responsibilities of advisers” section clarify the meaning of “This” by changing the start of the last sentence of:


the AIM version to read “This Nomad’s confirmation includes the issuer’s declaration...”; and
PLUS version to read “This PLUS Corporate Adviser’s confirmation includes the requirement...”
In the directors’ responsibilities section:

Replace “company document” with “Board Memorandum” (or whatever title the working group decides on –
see comment on Appendix 2 above). Capitalise “directors’ statement” to be clearer that this is the statement
referred to in Appendix 2).
With regard to the square bracketed paragraph at the top of page 35:



Amend the first sentence to say “...certain aspects of ABC plc FPP procedures...”
We recommend adding a footnote at the end of the paragraph “See paragraph 69 of the Guidance for a
discussion of the scope of such a long form commentary and paragraphs 61-62 regarding extension of the
scope of the engagement to other areas.”
Given what is said in paragraphs 61-62 we suggest adding some words to the inner square-bracketed section
of this paragraph “[and of the following additional areas which will not be the subject of our opinion: .....its
other accounting and control procedures]”. This would avoid the default being a commentary on all
accounting and control procedures (which could be burdensome to applicants) and encourage more tailoring,
whilst also clarifying that there would not be an opinion on such matters.”
Appendix 4
We suggest that the sentence “In relation to the FPP procedures...” within the section “Objectives and scope” on page
37 should be moved to after the end of the first sentence of the “Respective responsibilities” section on the same page.
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Appendix 3 - redrafted example assurance report reflecting the comments in Appendix 2.
Independent reasonable assurance report to the directors of ABC plc (“the Directors”) and XYZ Ltd on the
Financial Prospects and Position procedures of ABC plc [and its group]
This report is produced under the terms of our engagement letter dated [•] (the Engagement Letter).
Use of report
This report is made solely for the use of the Directors, as a body, and XYZ Ltd and solely for the purpose of
assisting the addressees in accordance with the terms of the Engagement Letter. Our report must not be recited or
referred to in whole or in part in the [prospectus/admission document] or in any other document nor made available,
copied or recited to any other party, in any circumstances, without our express prior written permission, other than
in accordance with the terms of the Engagement Letter. To the fullest extent permitted by law, we do not accept or
assume responsibility to anyone other than the directors, as a body, and XYZ Ltd for our work, for this report or for
the opinions we have formed.
Respective responsibilities
The Directors’ responsibilities for establishing procedures that provide a reasonable basis for making proper
judgements [on an ongoing basis] ‡‡ as to the financial position and prospects of ABC plc [and its group] (“the FPP
procedures”) and for preparing a Board Memorandum§§ and for preparing the Directors’ Statement are set out in the
Directors’ Statement. In preparing the Directors’ Statement and the Board Memorandum §§, for which they are solely
responsible, the Directors have had regard to ICAEW Technical Release [•] (“the Technical Release”), including the
objectives set out in Appendix 1 of that Technical Release.
[We note and draw to your attention that the Board Memorandum describes a range of FPP procedures for which
plans have been drawn up by the Directors, but which the Directors have not brought into operation as at the current
date. We also draw to your attention the commitment made by the Directors as recorded in the ABC plc document
that they will ensure that the FPP procedures are brought into operation, and subsequently operated, in accordance
with the plans. In providing this report we are relying on this commitment of the Directors].
In the context of ABC plc’s application for listing of its securities, the sponsor’s responsibility, in accordance with
Listing Rule 8.4.2(4) issued by the financial services Authority (FSA), is not to submit to the FSA an application for
listing on behalf of ABC plc, in accordance with Listing Rule 3, unless it has come to a reasonable opinion, after
having made due and careful enquiry, that the Directors have established procedures which provide a reasonable
basis for them to make proper judgements on an ongoing basis as to the financial position and prospects of ABC plc
[and its group].
OR
In the context of ABC plc’s application for admission to trading of its securities, the Nominated Adviser’s
responsibility, in accordance with the AIM Rules for Nominated Advisers issued by the London stock Exchange, is
to be satisfied that ABC plc and its securities are appropriate to be admitted to AIM, having made due and careful
‡‡
Include the words “on an ongoing basis” in connection with a Premium Listing on the Main Market of the London Stock Exchange.
§§
Or whatever term the working group decides on – see comments on Appendices 2 and 3 of the
Guidance in Appendix 2 to this letter.
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enquiry and considered all relevant matters set out in the AIM Rules for Companies and the AIM Rules for
Nominated Advisers.
OR
In the context of ABC plc’s application for admission to trading of its securities, the Corporate Adviser’s
responsibility, in accordance with the Corporate Advisers Handbook issued by PLUS, is to ensure that ABC plc and
the securities to which the application relates meet the eligibility objectives and are otherwise suitable for admission
to the PLUS market.
The subject matter of our engagement is the FPP procedures. Our responsibility is to form an independent
conclusion, based on the work carried out in relation to the FPP procedures, and report this to the Directors and
XYZ Ltd.
Basis of our opinion
We conducted our engagement in accordance with International Standard on Assurance Engagements (ISAE) 3000,
the Standard for Investment Reporting (SIR) 1000 issued by the Auditing Practices Board and ICAEW Technical
Release [•] . We performed a reasonable assurance engagement as defined in ISAE 3000.
Our work was based upon obtaining an understanding of the FPP procedures as described in the Directors’
Statement and the Board Memorandum§§ and carrying out such testing as we considered necessary to obtain
reasonable assurance so as to form our conclusion.
Our work does not comply with professional standards and practice in any jurisdiction other than the UK.
Accordingly our work should not be relied upon as if it had been prepared in accordance with professional standards
and practice in any other country than the UK.
Inherent limitations
In common with all such procedures, the FPP procedures are dependent for their effectiveness on the diligence and
propriety of those responsible for operating them. such procedures cannot guarantee protection against (among other
things) fraudulent collusion especially on the part of those holding positions of authority or trust. In addition the
directors need to maintain the FPP procedures, review them on an ongoing basis and adapt them to changing
circumstances. Our conclusion as set out below gives no assurance as to the day-to-day operation, or where relevant
the bringing into operation, of the FPP procedures as at any date, or the commitment and the ability of the directors
to react to changing circumstances and to revise their plans as necessary.
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Conclusion
On the basis of the foregoing, in our opinion the directors have established procedures which provide a reasonable
basis for them to make proper judgements on an ongoing basis as to the financial position and prospects of ABC plc
[and its group].***
OR
On the basis of the foregoing, in our opinion procedures have been established which provide a reasonable basis for
the directors to make proper judgements as to the financial position and prospects of ABC plc [and its group]. †††
OR
On the basis of the foregoing, in our opinion ABC plc has established sufficient procedures to ensure a reasonable
basis for making informed decisions about its financial position and prospects.‡‡‡
Name of firm
Chartered Accountants
Location
Date
***
Include the words „on an ongoing basis‟ in connection with a Premium Listing on the Main Market of the London stock Exchange.
†††
‡‡‡
for admission to AIM.
for admission to the PLUS-quoted market.
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