Financial statements representation

A buyer who relies on the statements can ask the seller, through the agreement, to stand behind them. BDC’s guide to purchase agreements describes representations and warranties as where the vendor formally describes the condition of the business, and says the indemnity section sets the ground rules for the compensation the vendor pays if disclosures turn out to be inaccurate.

What the statements themselves say

BDC says the notes to the statements typically show which accounting standards the company follows, such as IFRS or ASPE, and whether the statements were prepared on a cash or accrual basis. Its guide also says the notes disclose the rules and assumptions made in preparing the statements. Federal corporations also have a statutory duty: the Canada Business Corporations Act (s. 155) has directors place prescribed comparative financial statements before shareholders at every annual meeting, subject to the exception in s. 155(2).

What to check in the draft

• Which statements are covered: annual, interim, or both, and which dates.
• Which standard is named, and whether the statements actually say they follow it.
• Whether the promise is given flatly or with a knowledge qualifier.
• Whether the statements were audited, reviewed or compiled by an accountant.

To test the numbers directly, see how to verify a seller’s financial statements.