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Key accounting issues for an AIM IPO
“Get Ready for AIM”London Stock Exchange7 November 2006 Paul Watts
Capital Markets Partner
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Agenda
Introduction
About Baker Tilly and AIM
Preparation for flotation
Key accounting issues
Tax considerations
Continuing obligations and corporate governance
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About Baker Tilly
Baker Tilly7th largest UK accounting firm
30 offices
2,000 staff
260 partners
www.bakertilly.co.uk
Baker Tilly International8th largest network of independent accountancy firms worldwide
128 firms in 85 countries
$2bn fee income.
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Baker Tilly and AIMWinner of the Growth Company “AIM Accountant of the year” for the years 2003, 2004, 2005 and 2006Acted for over 150 companies that have sought an IPO (including 44 in the last 12 months); have over 120 AIM audit and tax clientsPublish “Taking AIM”, annual survey of AIM market Are represented on the London Stock Exchange AIM Advisory Group (the only practicing accountant)Have specialists in the tax benefit legislation and as such are authors of A Guide to AIM Tax Benefits – a joint London Stock Exchange and Baker Tilly Publication
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Preparation for Flotation
Key issuesSuitability (profit trends)
Corporate structure
Non-core assets
Board and management
Employee benefits & share options
Accounting policies and financial controls
Tax
Investor relations and corporate governance
Business plan
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Key accounting issues
In Admission DocumentHistorical financial information
Working capital statement
Profit Forecast (rarely)
Pro – forma financial information (sometimes)
To Company and Nomad
Financial due diligence - long form report
Aim Application formFinancial reporting systems and procedures – declaration
Working Capital - declaration
Profit forecast - declaration
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Regulatory framework
AIM RulesIssued by London Stock Exchange (updated August 2006)Draft new rules for companies and Nomads – consultation periodProspectus directive (AIM PD)
Standards for Investment Reporting (SIRs) – issued by the UK auditing practices board APB) under ISAs
SIR 1000 - GeneralSIR 2000 – Historical financial informationSIR 3000 – Profit forecasts / SIR 4000 – Pro forma financial information
Accounting standardsIFRS from 1 January 2007 for EEA companiesUS GAAP, Canadian GAAP, Australian GAAP
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Historical Financial Information
3 years audited financial statementsAttached to admission document, orComparative table with audit reports (if no adjustments), orComparative table with Accountants (“audit”) report (most likely)Material subsidiaries acquired in last 3 yearsStandards for investment reporting (SIR 2000), requires ISAs
Last 2 years in NEXT GAAPEU companies: IFRS/IAS ( for periods commencing 1 January 2007 )Others: US, Australian, Canadian or IFRS
Accountants report likely to be requiredPrior Year AdjustmentsGAAP changeNomad requestsAdditional disclosures applying to listed companies
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Historical Financial Information
Interim accountsIf published must be included
Required if admission document dated more than 9 months after audited year end
May be unaudited (but Nomad often requires them to be audited)
Audited accounts no older than18 months from date of document if audited interims
15 months if unaudited interims
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Long Form Report
Introduction
Executive Summary
History and business
Trading Results
Financial Position
Future Prospects
Management and staff
Sales and Selling
Purchasing
Accounting Systems and controls
Taxation – direct and indirect, employment
Other – environmental – insurances
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Financial reporting procedures
Company declaration:“Procedures have been established which provide a reasonable basis for the directors to make proper judgements as to the financial position and prospects of the Issuer and its group”
Board Memorandum / Accounting procedures manual (template can be provided)
Comfort letter / report by reporting accountants
New procedures often required to be implemented to supplement existing ones
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Working capital
Statement by directors:“in their opinion having made due and careful enquiry, the working capital available to it and its group will be sufficient for its present requirements that is for at least twelve months from the date of admission”
Board memorandum/comfort letter by reporting accountants orWorking capital report
Required:Forecasts 18 months to 3 years
Integrated model of profit, cash flow and projected balance sheets
Detailed assumptionsVisibility
Sensitivity analysis
Growth strategy
Includes funds to be raised
Include IPO costs
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Tax considerations
Is the current structure tax-optimal?Group structure
Issues arising from restructuring if notCGT on transfers
Tax clearances
Shareholder/director personal tax planning
“Employment-related securities” rules
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Tax considerations
Formal role as reporting accountantsIdentify and quantify tax risks
Draft suitable disclosures for admission document/comfort letter
Responsibility for overall tax risks of structure
Tax due diligenceIdentify and quantify tax risks and compliance
Corporation tax
PAYE
VAT
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Tax benefits of AIM
Quoted, but unquoted!
Tax breaks for cost of investment (smaller companies only)
EISVCT
10% CGT rate on exit after two years – UK tax payers
Relief from inheritance tax - UK domiciled individuals
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Overview for Investors
EIS VCT
Limit per annum £400,000* £200,000*
Initial Income Tax Relief (new subscriptions only)
20% 30% 2006/7 only
(was 20% up to 2003/4 and 40% for 2004/5 and 2005/6)
CGT on disposal
Holding period
Nil
3 years
Nil
5 years
CGT deferral (unlimited EIS only)
(new subscriptions only)
3 years after Terminated FA 2004 for gains reinvested in CCT shares issued on or after 6 April 2004
(previously 1 year after)
* Husband and wife each
1 year before Terminated FA 2004
(previously 1 year before)
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Overview for CompaniesEIS VCT
New Funds Unlimited £1 million per VCT
Securities New ordinary shares New ordinary shares
Preference shares or loans min 5 years
Gross assets £7 million before
£8 million immediately after
£7/15* million before
£8/16* million immediately after
*old limits apply where VCT funds raised prior to 6 April 2006
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Company Qualifying Criteria
Purpose/Existence Wholly for purposes of (single company only) carrying on a qualifying
trade (not investment) other than insignificant
Non qualifying Property, banking, financial, (less than 20%) legal, royalties and licence
fees*, hotels, nursing homesGroups Considered overallControl Not controlled by another
company* Except where the Company has itself derived the greater part of the IP by value or is actually a product or service
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Use of Funds Consider restrictions on VCT/EIS funds
Wholly for purposes of qualifying business activity wholly or mainly in the UK80% in first year, balance next 12 monthsEIS – above applies to ALL cash proceeds of all issues on same day whether EIS or not. Recommend separate issues of EIS/non EIS shares on separate daysNot employed in overseas subsidiariesNew money only – not for vendorsIssue costs - apportionIdentification – recommend separate bank
accounts
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Continuing obligations
Annual audited accountsPublished within 6 monthsIFRS
Half Yearly Reports Announce to market - 3 months after relevant period (max)Balance sheet, income statement, cash flow, certain notesComparatives for corresponding period in previous yearNeed not be auditedNo quarterly reporting requirements
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Corporate governance
No mandatory requirements for AIM companiesBest practice based on combined code requirements
Principles:Efficient management
Effective management
Entrepreneurial management
Code of Best Practice for AIM companiesQuoted Companies Alliance (QCA)
QCA Link: www.qcanet.co.uk
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Key issues - conclusions
Agree timetable, responsibilities and scopeAvailability of historical audited accounts
Compliance with SIRs, ISAs, IFRS, AIM rules etc.
Provide checklists and templatesBoard memoranda - working capital, financial reporting
Due diligence checklists
Structure issuesLegal and tax issues
Corporate governance
Look for solutions not problems
Key accounting issues for an AIM IPO
“Get Ready for AIM”London Stock Exchange7 November 2006 Paul Watts
Capital Markets Partner