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Prospective financial information means financial information based on assumptions about events that may occur in the future and possible action by the entity. Listed entities should have procedures that allow them to generate reliable PFI, compare it to market expectations, publish it when necessary and subsequently report actual performance against it.
The audit firm should obtain sufficient appropriate evidence as to whether:
management’s assumptions on which the PFI is based are not unreasonable.
the information is properly prepared on the basis of the assumptions.
the information is properly presented and all material assumptions are adequately disclosed.
Example
The directors of Ebagum Limited are planning a management buy-out from their parent entity and have asked your firm to report on the accuracy of the profit forecast and Statements of Financial Position of the entity for the following five years.
Ebagum buys car parts from manufacturers and sells them to retailers mainly on a cash basis from about retail outlets throughout the UK.
The management is planning to finance the buy-out from their own resources and from funds provided by financial institutions. It is expected that:
(a) the equity shares will be purchased by the directors and a financial institution.
(b) the current loan account between Ebagum and their parent will be repaid and be replaced by loans from banks and financial institutions. Some of these loans will have the option of conversion into equity at a later date.
A detailed monthly forecast Statement of Comprehensive Income and budgeted Statements of Financial Position have been prepared for the first year’s trading and an annual forecast Statement of Comprehensive Income and Statement of Financial Position have been prepared for the following four years:
