Although an initial public offering, or IPO, is commonly viewed as a purely financial transaction, nothing could be further from the truth. In many cases, the IPO process will fundamentally transform the business and bring in wide-scale changes for its people, processes and technology. Depending on its current state of preparedness, a company should determine the changes needed to meet the standards expected by its chosen capital market.

Pre-IPO planning

While some companies are relatively well-prepared due to the presence of private equity investors, others may need more time to evolve from an owner-operated model. Depending on such factors and the exchange chosen, preparatory efforts may span several months.

When formulating the pre-IPO plan, companies should initially consider acting on some issues (such as financial statement requirements) and deferring other more irrevocable changes (such as legal structure or board composition) until the IPO prospects become clearer. Further, companies should find out how much can be reasonably achieved using internal resources, and whether external support is needed to reduce disruption and augment capabilities.

Internal controls

Companies hoping for an overseas listing in the future should start preparing, in advance, financial statements in accordance with International Financial Reporting Standards. Additionally, the management should start evaluating the impact of significant arrangements on the IFRS-based results. Further, companies should review their reporting policies and practices to see how they compare with peer group companies, and whether they can withstand the rigour of regulatory and investor scrutiny.

Our experience shows companies often underestimate the efforts required to prepare an IFRS financial statement for the first time, or do not fully understand its impact on material transactions. For example, for many private equity funded companies, IFRS may involve classifying funding arrangements as ‘liabilities’ as compared to ‘equity’ due to the presence of put options or repurchase arrangements. Unless identified at an early stage, such issues can become bottlenecks during the IPO process. Companies should also have a time-bound audit of these financial statements, closely monitored by the senior management.

Investment in appropriate ERP systems can ensure that financial information required for the IPO and post listing is readily available and accurate. Financial reporting processes, including consolidation systems, should be carefully evaluated to ensure the company can accurately meet its obligations around quarterly information.

The equity story

It is advisable for companies to start preparing their equity story sufficiently in advance. This would include determining how the management wants to present the company’s financial results. For example, some companies may want to position themselves as diversified organisations, and therefore present their results by market segments; others may organise their results by geography in order to denote a multinational organisation with exposure to multiple markets. The equity story and positioning will determine how the business and its information systems are organised and, consequently, the presentation of segment information in the financial statements. This will also largely drive other key components of the offering document, including the ‘Management Discussion and Analysis’.

Irrespective of the specific requirements of the chosen exchange, the company should seek to establish a basic internal control structure. This may include a formal risk assessment process, standard operating procedures and other documentation of internal controls, and effective internal audit.

Adequate preparation in these areas will help give the investment bankers, and their lawyers performing a due diligence on the company, the required comfort level early during the IPO process.

governance structure

As a company gets more visibility during its IPO journey, it may also need to consider changes in its entity and governance structure. Changes in the entity structure may be needed to meet legal requirements for overseas listings or tax considerations. Changes may also be needed to carve out businesses that are to be listed from the overall organisation; or to combine businesses that are separate legal entities into a single entity for listing. These changes may impact the financial statement and financial reporting requirements for the IPO.

Similarly, governance structures such as the Board of Directors may need to change to induct independent directors and form board committees such as the audit committee. The specific changes would depend on the requirements in the chosen market and the overall corporate governance philosophy within the company.

(Jamil Khatri is Global Head of Accounting Advisory Services, KPMG)

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