Circular 10/2022/TT-BTC on pro forma financial statements

CIRCULAR

On pro forma financial statements

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Pursuant to the Law on Securities No. 54/2019/QH14 dated November 26, 2019;

Pursuant to the Government’s Decree No. 155/2020/ND-CP dated December 31, 2020, detailing a number of articles of the Law on Securities;

Pursuant to the Government’s Decree No. 87/2017/ND-CP dated July 26, 2017, defining the functions, tasks, powers and organizational structure of the Ministry of Finance;

At the request of Director of the Department of Accounting and Auditing Regulations and Chairman of the State Securities Commission;

The Minister of Finance promulgates a Circular on pro forma financial statements.

Chapter I

GENERAL PROVISIONS

Article 1. Scope of regulation

This Circular provides for the forms, principles and methods for preparation of pro forma financial statements, and calculation of average equity in the formula for calculation of return on equity (ROE) for the subjects and purposes specified in the Government’s Decree No. 155/2020/ND-CP dated December 31, 2020, detailing a number of articles of the Law on Securities (hereinafter referred to as “Decree No. 155/2020/ND-CP”).

Article 2. Subjects of application

This Circular applies to the following subjects:

1. Enterprises that must prepare pro forma financial statements in the cases specified in Articles 31, 35, 113, 114, 115 and 116 of the Decree No. 155/2020/ND-CP.

Other organizations and individuals involved in the preparation of pro forma financial statements as prescribed by the law provisions.

2. Enterprises other than those mentioned in Clause 1 of this Article may apply and fully comply with the provisions of this Circular in order to prepare their pro forma financial statements if necessary.

Chapter II

SPECIFIC PROVISIONS

Article 3. Contents and forms of pro forma financial statements

1. Pro forma financial statements include:

- Pro forma balance sheets;

- Pro forma profit and loss statements;

- Descriptions of pro forma financial statements;

2. The forms of pro forma financial statements are specified in Appendix 01 issued with this Circular;

Article 4. Reporting periods

The reporting periods of pro forma financial statements are specified in Articles 31, 35, 113, 114, 115 and 116 of the Decree No. 155/2020/ND-CP.

Article 5. Principles for preparation of pro forma financial statements

1. General principles:

a) Consolidation of pro forma financial information means the collection, classification, consolidation and presentation of financial information by an enterprise in order to demonstrate the impacts of crucial events or transactions to unadjusted financial information of the enterprise on the assumption that such events have occurred or such transactions have been performed at a selected time period. The consolidation of pro forma financial information includes the following steps:

- Identifying sources of unadjusted financial information used for consolidation of pro forma financial information;

- Adding pro forma adjustments to unadjusted financial information for presenting pro forma financial information. The pro forma adjustments include:

+ Adjustments to unadjusted financial information for demonstration of the impacts of crucial events or transactions to unadjusted financial information of the enterprise on the assumption that such events have occurred or such transactions have been performed on a previous date time;

+ Adjustments to unadjusted financial information that are necessary for the consolidation of pro forma financial information on the basis of consistency with the reporting unit’s financial statement preparation and presentation framework, and with accounting policies that are consistent with such framework.

- Presenting the results of pro forma financial information and descriptions thereof.

b) The sources of unadjusted information for preparation of the pro forma balance sheet and pro forma profit and loss statement as specified in Article 6 of this Circular shall be the balance sheet and the profit and loss statement for the reporting period of the pro forma consolidated financial statement. In cases where the enterprise is a parent company that must prepare the consolidated financial statement, the unadjusted information used for preparation of the pro forma balance sheet and pro forma profit and loss statement shall be the consolidated balance sheet and the consolidated profit and loss statement.

c) The pro forma financial statement shall be prepared on the basis of the assumption that the restructuring or separation of the company has been completed during the reporting period of the pro forma financial statement. Specific regulations on preparation principles are specified in Clauses 2 and 3 of this Article.

d) Techniques used for consolidation of pro forma financial information shall comply with Vietnam’s applicable accounting regulations and accounting standards of Vietnam. Enterprises must not apply provisional accounting regulations in accordance with Vietnam’s Accounting Standard No. 11 - Business consolidation.

dd) The pro forma financial statement must contain pro forma adjustments regarding the impacts of additional capital financing transactions (loans or equity) to complete restructuring transactions, usually including adjustments to additional capital and relevant costs, such as loan principal and interest.

e) When making an agreement on restructuring transactions that allows adjustments of prices and costs based on future events, the enterprise shall include in the pro forma financial statement descriptions of the price adjustment terms and their potential impacts on future incomes.

g) Pro forma adjustments on the pro forma financial statement must be consistent with the financial statement preparation framework and accounting policies applied to these events or transactions on the financial statement of the enterprise that is established after the restructuring or separation, unless otherwise specified in this Circular.

h) The pro forma financial statement shall only contain pro forma adjustments to the events that include all of the following characteristics:

- The events are directly related to the restructuring or separation of the company;

- The events have occurred by the time when the pro forma financial statements must be prepared; and

- The events are practically proven.

i) The events that occur directly from the restructuring or separation of the company and will not reoccur in the following periods shall not be included in the pro forma profit and loss statement but shall only be included in the pro forma balance sheet.

The enterprise must clearly state that these events are not included in the pro forma profit and loss statement, and describe related income, expenses and tax effects.

k) The pro forma financial statement shall not reflect information that are forecasts, prognoses or information about events that have not occurred, such as information about impacts that may happen or are expected to happen in connection with the transactions that the Board of Directors of the enterprise is expected to carry out due to the impacts of the company restructuring or separation.

l) The pro forma balance sheet and the pro forma profit and loss statement must have a separate part for data before the pro forma adjustments are made for each task of the company restructuring or separation, and a separate part for pro forma financial information. The enterprise must explain in details each pro forma adjustment in the description of the pro forma financial statement.

m) In cases where the enterprise has multiple activities of restructuring or separating the company for which pro forma financial statements must be prepared, the enterprise must separately present the pro forma adjustments for each transaction in the pro forma balance sheet and the pro forma profit and loss statement.

n) Tax effects:

- Tax effects must be calculated according to effective tax rates in accordance with the tax laws in the period of preparation of the pro forma profit and loss statement.

- In cases where the enterprise has foreseen future changes in corporate income tax rates when recording deferred income tax asset or deferred income tax payable, and the deferred income tax asset or deferred income tax payable will be reversed when the new tax rates become effective, the enterprise shall apply the new tax rates to record deferred income tax asset or deferred income tax payable in the pro forma financial statement.

2. Principles for preparation of the pro forma balance sheet

Pro forma adjustments shall be calculated on the assumption that the company restructuring or separation transactions are completed on the ending date of the period of preparing the pro forma balance sheet.

3. Principles for preparation of the pro forma profit and loss statement

a) Pro forma adjustments must be calculated on the assumption that the company restructuring or separation activities are completed on the beginning date of the period of the pro forma profit and loss statement.

b) The enterprise must not exclude from the pro forma financial statement items that are not regular or do not recur in the following periods if these items are not directly related to the company restructuring or separation activities which have been included in the profit and loss statements of the restructured or separated enterprises.

Article 6. Methods for preparation of pro forma financial statements

1. In cases of enterprise consolidation:

a) In cases where the consolidating companies have no subsidiaries:

- The pro forma balance sheet shall be prepared on the basis of aggregation of financial statements of the consolidating enterprises on the ending date of the period of preparing the pro forma balance sheet.

- The pro forma profit and loss statement shall be prepared on the basis of aggregation of the profit and loss statements of the consolidating enterprises for the same period as that of preparing the pro forma profit and loss statement.

- The enterprise shall exclude all debts, financial investments and other balances, revenues, expenses, profits, losses derived from the transactions among the parties to the consolidation.

b) In cases where one or some consolidated enterprises have subsidiaries and the consolidating enterprises must prepare consolidated financial statements:

- In cases where the purchase transaction is determined as the purchase of a business operation:

+ With regard to the consolidating enterprises that are under common control before the consolidation:

The pro forma balance sheet and the pro forma profit and loss statement shall be prepared as if the consolidating enterprises have no subsidiaries as prescribed at Point a, Clause 1 of this Article.

+ With regard to the consolidating enterprises that are not under common control before the consolidation:

. The enterprise shall determine the buyer in accordance with Vietnam's Accounting Standard No. 11 - Business Consolidation.

. The buyer shall record purchased assets, payables and potential liabilities incurred, including assets, payables and potential liabilities that have not been previously recorded by the seller in accordance with the Circular No. 202/2014/TT-BTC guiding the method for preparation and presentation of consolidated financial statements, Vietnam’s Accounting Standard No. 11 - Business Consolidation and relevant Vietnam’s Accounting Standards.

. The pro forma balance sheet shall be prepared on the basis of the buyer’s financial position statement on the ending date of the period of preparing the pro forma financial statement and the financial position statement of the seller shall be determined on the date of completing the consolidation transaction. The buyer shall record the assets and payables that can be determined and potential liabilities of the seller in the pro forma balance sheet of the buyer according to fair values; record corresponding goodwill value on the ending date of the period of preparing the pro forma financial statement.

. The pro forma profit and loss statement shall be prepared on the basis of aggregation of the profit and loss statements of the buyer and the seller for the same period as that of preparing the pro forma financial statement. The enterprise shall make the pro forma adjustments that reflect the direct impacts of the business consolidation transaction, including net asset adjustments at fair values, distribution of goodwill and other appropriate adjustments on the assumption that the consolidation transaction occurs on the beginning date of the period of the pro forma financial statement.

. The enterprise shall exclude all debts, financial investments and other balances, revenues, expenses, profits, losses arising from the transactions among the parties to the consolidation.

- In cases where the enterprise purchases a group of assets or net assets but the purchase does not constitute a business operation:

+ The pro forma balance sheet shall be prepared on the basis of the buyer’s financial position statement on the ending date of the period of preparing the pro forma financial statement. The buyer shall distribute the prices of such assets among the assets and payables that may be separately determined in the group of purchased assets based on their fair values of the seller on the date of completing the purchase for recognition in the pro forma balance sheet.

+ The pro forma profit and loss statement shall be prepared on the basis of aggregation of the profit and loss statements for the buyer and seller for the same period as that of preparing the pro forma profit and loss statement. When preparing the pro forma profit and loss statement, the enterprise shall make the pro forma adjustments that reflect the changes to depreciation of assets due to the distribution of the above-mentioned prices on the assumption that the consolidation transaction occurs on the beginning date of this reporting period.

+ The enterprise shall exclude all debts, financial investments and other balances, revenues, expenses, profits, losses arising from the transactions among the parties to the consolidation.

 2. In cases of enterprise merger:

a) In cases where the merging enterprise and the merged enterprises have no subsidiaries:

- The pro forma balance sheet shall be prepared on the basis of aggregation of financial position statements of the merging enterprise and the merged enterprises on the ending date of the period of preparing the pro forma balance sheet.

- The pro forma profit and loss statement shall be prepared on the basis of aggregation of the profit and loss statements of the merging enterprise and the merged enterprises for the same period as that of preparing the pro forma profit and loss statement.

- The enterprise shall exclude all debts, financial investments and other balances, revenues, expenses, profits, losses arising from the transactions among the parties to the acquisition.

b) In cases where the merging enterprise or merged enterprise has subsidiaries and the merging enterprise must prepare a consolidated financial statement after the acquisition:

- In cases where the acquisition transaction is determined as the purchase of a business operation:

The pro forma balance sheet and the pro forma profit and loss statement shall be prepared in a similar manner to the case in which the consolidating enterprises have no subsidiaries and the purchase is determined as the purchase of a business operation as prescribed at Point b, Clause 1 of this Article.

- In cases where the enterprise purchases a group of assets or net assets but the purchase does not constitute a business operation:

The pro forma balance sheet and the pro forma income statement shall be prepared in a similar manner to the case in which the consolidating enterprises have no subsidiaries and purchase a group of assets or net assets but the purchase does not constitute a business operation as prescribed at Point b, Clause 1 of this Article.

3. In cases of enterprise acquisition (including the acquisition of assets that satisfies the definition of enterprise acquisition as prescribed in the Law on Competition):

- The pro forma balance sheet and the pro forma profit and loss statement shall be prepared in a similar manner to the case of enterprise consolidation prescribed at Point b, Clause 1 of this Article.

- In cases where there are transactions for increasing financial resources for completing the purchase, the enterprise shall make the pro forma adjustments to reflect the impacts of these transactions, such as principal and interest of loans for financing restructuring transactions.

 4. In cases of enterprise separation:

a) In cases where part of the assets is separated to establish a new enterprise which does not exist on the ending date of the period of preparing the pro forma financial statement, the enterprise is not required to prepare the pro forma financial statement but may use the financial statement of the same period as that of preparing the pro forma financial statement.

b) In cases where part of the assets is separated to establish a new enterprise which has been existing or is being establishing on the ending date of the period of preparing the pro forma financial statement:

- The pro forma balance sheet shall be prepared on the basis of aggregation of financial position statements of the separated enterprise minus (-) book values of the separated assets on the ending date of the period of preparing the pro forma financial statement.

- The pro forma profit and loss statement shall be prepared on the basis of the income statement of the separated enterprise minus (-) the part of the profit and loss statement of the separated assets in the same period as that of preparing the pro forma financial statement.

- The enterprise shall prepare and monitor detailed information in the administrative accounting system in service of determining the book values of separated assets on the ending date of the period of preparing the pro forma financial statement and the part of the profit and loss statement of the separated assets in the same period as that of preparing the pro forma financial statement.

5. In cases of asset sale:

a) In cases where the sold assets do not exist on the ending date of the period of preparing the pro forma financial statement, the enterprise is not required to prepare the pro forma financial statement but may use the financial statement of the same period as that of preparing the pro forma financial statement.

b) In cases where the sold assets have been existing or are being formed on the ending date of the period of preparing the pro forma financial statement:

- The pro forma balance sheet and the pro forma income statement shall be prepared in a similar manner to the case of enterprise separation, in which part of the assets are separated to establish a new enterprise that has been existing on the ending date of the period of preparing the pro forma financial statement as prescribed at Point b, Clause 4 of this Article.

- The pro forma adjustments shall reflect the impacts of the prices paid in reality on the date of completing the sale in the pro forma balance sheet and shall not reflect relevant tax effects, incomes and expenses in the profit and loss statement.

Article 7. Instructions for other contents

The average equity in the formula for calculation of return on equity (ROE) based on the pro forma financial statement shall be determined as follows:

1. The opening equity is the equity that is determined on the basis of the financial position statement of the year preceding the year in which ROE has to be calculated.

2. The closing equity is the equity that is determined by aggregating the opening equity as mentioned in Clause 1 of this Article with the profit after corporate income tax on the pro forma income statement of the year in which ROE has to be calculated, and will be adjusted according to the transactions that have occurred and directly affected the equity in the year in which ROE, including but not limited to transactions such as dividend payment in cash, increase in interests being held in subsidiaries, decrease in interests being held in subsidiaries that do not lose control.

Chapter III

ORGANIZATION OF IMPLEMENTATION

Article 8. Effect

This Circular takes effect from April 1, 2022.

Article 9. Organization of implementation

1. The Director of the Department of Accounting and Auditing Regulations, Chairman of the State Securities Commission, and relevant organizations and individuals shall be responsible for organizing the implementation of this Circular.

2. Any difficulties arising in the course of implementation should be reported to the Ministry of Finance for consideration and settlement./.

For the Minister

The Deputy Minister

TA ANH TUAN