15 February 2013

FEE: Analysis of common practices on the preparation of combined and carve-out financial statements in compliance with IFRS

FEE has identified a need for a paper summarising commonly accepted practices related to the preparation of combined and carve-out financial statements that are perceived to be consistent with the principles of IFRS.

Harmonisation of the practices of preparing combined financial statements would be a contribution to a better functioning of capital markets. Accordingly, it is considered that this Analysis of Common Practices will help to share best practices and will be of use to preparers and users, as well as other practitioners.

This Analysis of Common Practices (“Paper”):

• builds primarily on the FEE Discussion Paper Combined Financial Statements of April 2011 and the responses received to its related Request for Comments which were very helpful for FEE to develop its further thinking on combined and carve-out financial statements;
• addresses additional relevant issues raised by the respondents that were not covered by the original Discussion Paper; and
• includes additional input that the FEE Capital Markets Working Party considers necessary and that makes the document more comprehensive and more useful to the reader.

Generally, this Paper summarises the prevalent issues and challenges encountered when preparing combined and carve-out financial statements in compliance with IFRS - as well as the most common practices used to address them.

Capital markets in Europe and around the globe require meaningful, reliable, relevant and comparable financial information about issuers of securities.

When securities are offered to the public or admitted to trading, the EU Directive and Regulation for prospectuses and/or specific guidance issued by securities regulators in the EU require such financial information be provided for (at least) the last two or three financial years, depending on the nature of the respective securities or type of issuer.

Usually such financial information is provided by presenting consolidated financial statements prepared in accordance with IFRS as endorsed in the EU.

In case of a divestment of a division or a business line or similar kind of transactions, however, such consolidated financial statements do not show the historical financial information of the respective economic activities that are the subject of the capital markets transaction. Therefore, in some cases the information may be provided by presenting combined financial statements showing the financial position, financial performance and cash flows of the economic activities.

Combined financial statements is a generic term used to describe financial statements that present the historical financial information of a number of entities or parts of entities that do not comprise a group for which consolidated financial statements can be prepared. A proposed comprehensive definition of combined financial statements, derived from the FEE consultation process, may be defined as financial statements presenting the historical financial information of an Area of Economic Activities for which consolidated financial statements are not prepared in order to present the financial position of the combined economic activities and their financial performance and cash flows.

This Analysis of Common Practices covers both combined financial statements and carve-out ones.

In Europe there is the EU Prospectus Directive in effect which defines the regulatory requirements related to the preparation of combined financial statements. Similar regulatory requirements apply in other capital markets outside the EU. FEE believes that this Paper could prove useful for preparers and investors from both Europe and other capital markets.

The EU Prospectus Directive does not have an explicit requirement for the preparation of combined financial statements. However, the implementation of the Prospectus Directive in the EU, combined with the adoption of IFRS for listed companies in the EU, has increased the focus on the presentation of historical financial information in prospectuses. This focus was enhanced by the amendment to the Prospectus Directive that effectively, requires issuers of securities with a complex financial history, where the entire business undertaking by the issuer is not covered by historical financial information relating to the issuer, to include specific additional items of financial information relating to an entity other than the issuer. In many cases this requirement can be fulfilled by the inclusion of combined financial statements showing the historical information of an area of economic activities with a common element.

At present, the IFRS do not contain a specific standard governing the preparation of combined and carve-out financial statements. Also, none of the existing IFRS provides principles for their preparation. Therefore, diverse practices in preparing such financial information have developed.

They include but are not limited to:

• determination of the Area of Economic Activities (entities or parts of entities) to be combined;
• applicable accounting policies;
• treatment of specific accounting issues, e.g. allocation of different types of costs, income, taxes, etc.;
• disclosures.

Press release

Analysis of Common Practices

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