Key accounting issues for an AIM IPO

1
Key accounting issues for an AIM IPOGet Ready
for AIMLondon Stock Exchange7 November 2006

• Paul Watts
• Capital Markets Partner

2
Agenda

• Introduction
• About Baker Tilly and AIM
• Preparation for flotation
• Key accounting issues
• Tax considerations
• Continuing obligations and corporate governance

3
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.

4
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

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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

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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

7
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

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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

12
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 or
• Working capital report

• Required
• Forecasts 18 months to 3 years
• Integrated model of profit, cash flow and
  projected balance sheets
• Detailed assumptions
• Visibility
• Sensitivity analysis
• Growth strategy
• Includes funds to be raised
• Include IPO costs

13
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

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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

15
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)
Husband and wife each 1 year before Terminated FA 2004 (previously 1 year before)
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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 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 homes
• Groups Considered overall
• Control 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

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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

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Key accounting issues for an AIM IPOGet Ready
for AIMLondon Stock Exchange7 November 2006

• Paul Watts
• Capital Markets Partner