Key accounting issues for
an AIM IPO
“Get Ready for AIM”
London Stock Exchange
7 November 2006
Paul Watts
Capital Markets Partner
Agenda
Introduction
About Baker Tilly and AIM
Preparation for flotation
Key accounting issues
Tax considerations
Continuing obligations and corporate
governance
2
About Baker Tilly
Baker Tilly
7th largest UK accounting firm
30 offices
2,000 staff
260 partners
www.bakertilly.co.uk
Baker Tilly International
8th largest network of independent accountancy firms worldwide
128 firms in 85 countries
$2bn fee income.
3
Baker Tilly and AIM
Winner of the Growth Company “AIM Accountant of the year” for the
years 2003, 2004, 2005 and 2006
Acted for over 150 companies that have sought an IPO (including 44 in
the last 12 months); have over 120 AIM audit and tax clients
Publish “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
4
Preparation for Flotation
Key issues
Suitability (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
5
Key accounting issues
In Admission Document
Historical 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 form
Financial reporting systems and procedures – declaration
Working Capital - declaration
Profit forecast - declaration
6
Regulatory framework
AIM Rules
Issued by London Stock Exchange (updated August 2006)
Draft new rules for companies and Nomads – consultation period
Prospectus directive (AIM PD)
Standards for Investment Reporting (SIRs) – issued by the UK
auditing practices board APB) under ISAs
SIR 1000 - General
SIR 2000 – Historical financial information
SIR 3000 – Profit forecasts / SIR 4000 – Pro forma financial information
Accounting standards
IFRS from 1 January 2007 for EEA companies
US GAAP, Canadian GAAP, Australian GAAP
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Historical Financial Information
3 years audited financial statements
Attached to admission document, or
Comparative table with audit reports (if no adjustments), or
Comparative table with Accountants (“audit”) report (most likely)
Material subsidiaries acquired in last 3 years
Standards for investment reporting (SIR 2000), requires ISAs
Last 2 years in NEXT GAAP
EU companies: IFRS/IAS ( for periods commencing 1 January 2007 )
Others: US, Australian, Canadian or IFRS
Accountants report likely to be required
Prior Year Adjustments
GAAP change
Nomad requests
Additional disclosures applying to listed companies
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Historical Financial Information
Interim accounts
If 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 than
18 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
10
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
11
Working capital
Statement by directors:
Required:
“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”
Forecasts 18 months to 3
years
Integrated model of profit,
cash flow and projected
balance sheets
Detailed assumptions
Visibility
Sensitivity analysis
Growth strategy
Board
memorandum/comfort
letter by reporting
accountants or
Working capital report
Includes funds to be raised
Include IPO costs
12
Tax considerations
Is the current structure tax-optimal?
Group structure
Issues arising from restructuring if not
CGT on transfers
Tax clearances
Shareholder/director personal tax planning
“Employment-related securities” rules
13
Tax considerations
Formal role as reporting accountants
Identify and quantify tax risks
Draft suitable disclosures for admission document/comfort letter
Responsibility for overall tax risks of structure
Tax due diligence
Identify 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)
EIS
VCT
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)
1 year before
* Husband and wife each
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Terminated FA 2004
(previously 1 year before)
Overview for Companies
EIS
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
(single company only)
Non qualifying
(less than 20%)
Groups
Control
Wholly for purposes of
carrying on a qualifying
trade (not investment) other
than insignificant
Property, banking, financial,
legal, royalties and licence
fees*, hotels, nursing homes
Considered overall
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 UK
80% in first year, balance next 12 months
EIS – 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 days
Not employed in overseas subsidiaries
New money only – not for vendors
Issue costs - apportion
Identification – recommend separate bank
accounts
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Continuing obligations
Annual audited accounts
Published within 6 months
IFRS
Half Yearly Reports
Announce to market - 3 months after relevant period (max)
Balance sheet, income statement, cash flow, certain notes
Comparatives for corresponding period in previous year
Need not be audited
No quarterly reporting requirements
20
Corporate governance
No mandatory requirements for AIM companies
Best practice based on combined code requirements
Principles:
Efficient management
Effective management
Entrepreneurial management
Code of Best Practice for AIM companies
Quoted Companies Alliance (QCA)
QCA Link: www.qcanet.co.uk
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Key issues - conclusions
Agree timetable, responsibilities and scope
Availability of historical audited accounts
Compliance with SIRs, ISAs, IFRS, AIM rules etc.
Provide checklists and templates
Board memoranda - working capital, financial reporting
Due diligence checklists
Structure issues
Legal and tax issues
Corporate governance
Look for solutions not problems
22
Key accounting issues for
an AIM IPO
“Get Ready for AIM”
London Stock Exchange
7 November 2006
Paul Watts
Capital Markets Partner