The financial considerations relevant to a company seeking admission to AIM can be split into two broad categories:

• private financial reports typically required as part of the IPO process; and
• public financial disclosures required within the admission document itself.

Private reports are typically commissioned to undertake historical financial due diligence, reviews of systems and controls and to assess the company's working capital position.

Public financial disclosures primarily revolve around disclosure of audited historical financial information and, where relevant, interim financial information, although pro forma financial information is often also included. Very occasionally, forecast financial information may also be included.

This chapter summarises the principal obligations and market expectations with respect to financial matters. Unless the context indicates otherwise, references to a company within this chapter also refer to its group if it has subsidiaries.

As part of the IPO process, the company's reporting accountants are typically commissioned to prepare a financial due diligence report on the company. This report is referred to as a 'long form' report and its primary purpose is to assist the Nomad in its assessment of the suitability of the company to be admitted to AIM.

The long form report is a detailed report on the company's business, focusing mainly on the company's financials and business operations. Sometimes a separate commercial due diligence report is commissioned, focusing on the company's business and market. The long form report excludes forecasts (which are covered in a separate report). The long form report is a private document, usually addressed only to the Nomad and the company itself. It is not made available to the wider public, or to potential investors.

The due diligence work undertaken for this exercise can be quite onerous for a company and can take a significant length of time. The company will need to supply significant amounts of data and explanations concerning its business and financial history and management should not underestimate the time and effort that it, and its finance department, will need to dedicate to this exercise. This will often occur concurrently alongside numerous other IPO-related work streams, all of which will be competing for management's attention alongside its need to run and monitor the company's day-to-day business. Prior to beginning the IPO process, management should consider whether the company has adequate internal resources to meet these competing needs or whether it should bring in additional temporary resource to help project manage the process.

It may be beneficial for the company to populate a data room with its financial information in advance of the work commencing. The company should request its reporting accountants to send them a preliminary information request list to assist them in this exercise.

The long form report is usually expected to provide detailed commentary on the company and its business. The actual scope of a long form report is agreed between the Nomad, the company and the reporting accountants. Although the report is normally comprehensive, in some circumstances the scope may be restricted; for example, where the company has not traded (as in a 'cash shell' or investing company) or where the Nomad is obtaining information from other sources, such as commercial or technical due diligence.

Although the scope in each instance will be bespoke, as illustrated in the box 'Typical contents of a long form report', a long form report will typically cover the company's:

• financial performance
• taxation position
• business operations
• financial reporting systems
• accounting policies; and
• management and employees.

The long form report will set out key financial or commercial risks and exposures identified during the due diligence exercise, highlighting any issues that need to be resolved before IPO. Whilst no two companies are alike, issues that often arise include:

• inadequate financial reporting systems and controls
• potential tax exposures
• concerns over items in the balance sheet (eg potentially irrecoverable receivables, obsolete inventories)
• trading risks (eg customer or supplier concentration); and
• over-reliance on key management.

Any significant issues identified during this exercise will usually be communicated to the company and the Nomad as they arise, rather than waiting until the formal written report is produced. Doing so maximises the time available to the company to rectify any matters. Also, if critical issues are incapable of resolution and it becomes necessary to delay or even abort the IPO, it is important that such issues are identified early before excessive time and costs have been incurred. Although, if the company has gone through a comprehensive grooming process, most critical issues should have been identified and rectified prior to the long form work commencing. In cases where the long form work is expected to take a number of weeks, it is often beneficial to schedule regular meetings with the reporting accountant to update on progress.

Prior to a draft of the long form report being sent to the Nomad, a copy is made available to the company for review. This allows management both to check the factual accuracy of the report and also to consider any key points raised and challenge any they disagree with, prior to its distribution to the Nomad.

• analysis of historical trading performance over last three years
• analysis of historical cash flows in last three years
• analysis of balance sheet items
• analysis of financial trends, key performance indicators and risks
• financing arrangements
• capital expenditures
• contingent liabilities and off-balance sheet arrangements

• tax compliance status
• corporate taxes, sales taxes and employment taxes
• international tax structure and withholding taxes
• transfer pricing

• operational structure
• products and services
• markets and competition
• customers and suppliers
• trading terms
• production facilities
• research and development
• business premises
• insurance

• management information systems
• accounting procedures
• controls environment
• corporate governance

• assessment of accounting policies
• recent and planned changes in accounting policies

• key management personnel
• remuneration arrangements
• succession arrangements
• headcount metrics
• pension and other benefit obligations

It is important for public companies to have robust and reliable financial reporting procedures so that accurate information is readily available on a timely basis.

As part of their initial due diligence responsibilities and continuing obligations, Nomads are required to be satisfied that the directors have established procedures which provide them with a reasonable basis on which to make proper judgements on an ongoing basis as to the financial position and prospects of the company. Nomads are also required to be satisfied that the company has sufficient systems and procedures to enable its compliance with the AIM Rules. In turn, Nomads seek such confirmation from both the directors of the company and the reporting accountants. To provide comfort in this area, the reporting accountant will assess and comment on the company's financial reporting procedures, including its management information systems and its control environment. This work often forms part of the overall long form report, but may form part of a separate report to the company and the Nomad.

Typically, companies undertaking an IPO on AIM will not previously have been on a public market. Instead, they will have been managed, controlled and operated as private companies, sometimes with a dominant owner-manager. Life as a public company is very different in most cases, not just because of the presence of external stakeholders but also as a result of the need for compliance with rules and regulations governing public entities. Accordingly, whilst a company's systems and controls may have been appropriate for life as a private company, they may need to be strengthened prior to joining AIM.

Assessing the company's financial reporting procedures is considered one of the most important elements of due diligence for an IPO. A thorough pre- IPO grooming process should result in significant weaknesses being identified and addressed prior to the IPO process formally commencing.

A typical review of financial reporting procedures may include consideration of the following:

• high-level financial controls and extent of documentation
• risk identification and assessments undertaken by the company
• corporate governance framework l forecasting and budgeting procedures
• treasury operations and management l assessment of key accounting procedures and controls
• organisation of the finance function and sufficiency of resources
• reporting framework and frequency, timeliness and reliability of key information.

In accordance with the AIM Rules, the admission document is required to contain a statement from the company's directors as to the adequacy of working capital. This statement, which must be clear and unambiguous, requires the directors to confirm that the company has sufficient working capital to last at least 12 months from the date that it is admitted to AIM. The wording of the statement can vary but is typically phrased along the following lines:

'The directors are of the opinion, having made due and careful enquiry, that the company and its group has sufficient working capital for its present requirements, that is for at least 12 months from the date of admission.'

• Are the monthly income statements, balance sheets and cash flows integrated?
• Is it formula driven and easy to sensitise?
• Are the input cells easily identifiable?
• Does it include test cells/check cells as appropriate?
• Does the starting balance sheet position tie in to management or audited accounts?
• Does the management team buy in to the key underlying assumptions?
• Does it correctly calculate any covenant tests on debt facilities?
• Does it correctly account for varying tax rates, payment dates, withholding taxes and utilisation of tax losses in different jurisdictions?
• Does it take into account any restrictions on use or transferability of cash (eg between different security pools or jurisdictions)?

This working capital statement is considered one of the most important statements made within the admission document. Furthermore, the requirement for this statement to be made after 'due and careful enquiry' places a relatively onerous burden on the directors.

In order to substantiate the working capital statement, the company is expected to prepare a set of trading and cash flow forecasts. Although the technical requirement as per the AIM Rules is to give a statement covering 12 months from the date of admission to AIM, the forecasts prepared by the company should extend further than this – a period of at least 18 months is typical. Given the importance of the working capital statement, assessing the sufficiency of working capital over a longer period than technically required under the AIM Rules provides greater protection to the directors of the company when making the statement.

It is important for the company to build a robust forecast model. In most cases, this should be a monthly forecast with integrated monthly income statements, balance sheets and cash flows. As far as possible, the model should be formula driven, with clearly identified input cells to allow sensitivities to be run easily. Some companies will need to construct a new model; other companies will already have or be able to adapt an existing model, such as one used for budgeting purposes. Management should not underestimate the importance of ensuring the forecast model is robust, built on reasonable assumptions and easily sensitised. The model should reflect the key business and financial drivers for the company and also be consistent with the business plan as set out in the admission document. Investing time on the model up front will save time and cost during the latter stages of the IPO process, when pressures are at their highest.

A selection of things to consider when preparing a robust working capital model are set out in the box 'Tips for preparing a robust working capital model' above.

The directors of the company should also prepare a working capital memorandum summarising all relevant information available to them to support the working capital statement in the admission document. It should include a summary of the key assumptions used in the forecasts and an analysis of the headroom between forecast cash flows and the cash facilities available to the company.

Bank and other lending facilities can be taken into account, but only to the extent they are committed. For instance, it is not normally appropriate to include an overdraft repayable on demand within any forecast facilities; nor is it appropriate to assume any committed bank debt expiring in the forecast period will be rolled over. Therefore, if the forecasts rely on bank facilities, the company will need to ensure committed facilities are available for the entire working capital period under review.

Type of issuer	Choice of accounting standards
Incorporated in European Economic Area	IFRS as adopted by the European Union (or national GAAP if not a parent company)1
Incorporated outside European Economic Area	IFRS as adopted by the European Union US GAAP Canadian GAAP Australian IFRS Japanese GAAP

The reporting accountants will prepare a report on the company's forecasts. This report is referred to as a 'working capital report' and its primary purpose is to provide comfort to the Nomad and the directors of the company as to the adequacy of working capital. The working capital report is a private report, usually addressed to the Nomad and the company itself. It is not made available to the wider public, or to potential investors.

In carrying out this work, the reporting accountant will undertake a series of detailed checks and review procedures on the company's forecasts. These will include checking the model for errors or inappropriately applied assumptions and considering the reasonableness of key assumptions, taking into account historical trends and known changes in the business. The report will highlight key risks and vulnerabilities within the forecasts and the impact of applying appropriate sensitivities on working capital headroom and covenant tests.

A draft of the working capital report is made available to the company's management for review prior to it being sent to the Nomad, giving management an opportunity to challenge any findings they disagree with. However, significant issues identified during the work are usually communicated to the company as they arise, allowing the company to amend its model or, should working capital be inadequate, seek additional sources such as bank finance or increased fundraising at IPO.

An issuer is required to include audited historical financial information on itself in an admission document. In addition, it may also include pro forma financial information and forecast financial information in its admission document, although the latter is rare in practice.

Most admission documents prepared by companies seeking an IPO on AIM fall outside the scope of the Prospectus Rules published by the Financial Services Authority. However, under certain circumstances they can be caught within its scope (these circumstances are discussed in the chapter 'Legal work and due diligence'). An admission document caught by the Prospectus Rules must be approved by the UK Listing Authority at the Financial Services Authority and must include certain information which is not required in an admission document that falls outside that regime; for example, the potential need for pro forma information.

The AIM Rules require audited historical financial information to be included in an admission document covering three consecutive financial years prior to IPO. If a company has not existed for three years, then the requirement is limited to those years it has been in existence. The directors of the issuer are responsible for preparing this financial information.

At least the last two years of this audited financial track record need to be presented and prepared in a form consistent with the accounting standards and policies to be adopted in, and legislation applicable to, the issuer's next set of annual financial statements to be published after the admission document. The AIM Rules restrict the choice of accounting standards that may be adopted once a company is admitted to AIM, depending on its country of incorporation and whether it is a standalone company or the parent of a group. Except in rare circumstances, the last two years of audited financial information published in the admission document will need to be presented in accordance with one of the suites of Generally Accepted Accounting Principles ('GAAP') shown in the box 'Allowable GAAP'.

When a company is determining which accounting standard to use, it should be mindful of what current and future investors may demand as well as market practice. It is common practice for AIM companies to generally report in International Financial Reporting Standards ('IFRS').

A company essentially has two choices when including audited financial information in its admission document:

• it can reproduce its last three sets of audited financial statements and the audit reports thereon; or
• it can publish specially prepared historical financial information covering the three years and instruct its reporting accountant to issue a report thereon (effectively a special purpose audit report).

Reproducing the last three sets of audited financial statements is only an option if no adjustments to the previously published financial statements are required to comply with the regulations (such as the requirement that the last two years are presented in a form consistent with the accounting standards and policies that will be adopted in the next published annual financial statements). Therefore, this option would not normally be acceptable in cases where the issuer needs to adopt a new suite of accounting standards post-IPO (such as a requirement to transition to IFRS). It also assumes that there were no audit qualifications. Moreover, Nomads and brokers often prefer the alternative route of including specially prepared historical financial information with a new audit opinion by the reporting accountants. This is because doing so effectively 'refreshes' the old audit opinions, which may not have been given in contemplation of an IPO, and also allows the three year financial track record to be presented as one set of financial statements, making it easier for potential investors to compare the different periods. As a result, it is more usual practice to see specially prepared historical financial information in an admission document than it is to see the reproduction of existing financial statements.

A simplified decision tree for determining whether existing financial statements or specially prepared historical financial information should be included in the admission document is set out in the box 'Presentation of audited financial information' on page 33.

The reporting accountant, which will issue an opinion on the specially prepared historical financial information for inclusion in the admission document, does not have to be the company's auditor. However, when carrying out its work, a reporting accountant will typically review the audit working papers of the auditors for the past periods. In order to do this, the past auditors will need to grant the reporting accountant access to their audit working papers. This is usually done on a 'hold harmless' basis (ie a no liability basis), with the company indemnifying the auditor as a condition of granting access.

If access to existing audit files is not granted, the reporting accountant would be obliged to re-audit the financial statements of the company from scratch, which would likely have significant time and cost implications for the IPO process. As a result, where a company is intending to use a reporting accountant that is different to its firm of auditors (or where it has had a change of auditor during the three-year track record period), it is important for the company to establish as early as possible in the process whether the auditor or auditors concerned are willing to grant access to their audit working papers. It would be unusual for a UK audit firm to not grant such access, as they understand the reporting accountant process and, through appropriate hold harmless arrangements, that they would not be exposing themselves to additional risk. However, such concepts are not always as well understood by foreign firms of auditors. The granting of access may also depend on the state of relations between the company and its auditor or ex-auditor.

The permitted time gap between the date of the latest annual audited financial information and the date that the admission document is published depends on whether any interim financial information for the intervening period which is included in the admission document has itself been audited. The last annual audited financial information may not be older than:

• 18 months from the date of the admission document if audited interim financial statements are included in the admission document; or
• 15 months from the date of the admission document if unaudited interim financial statements are included in the admission document.

Notwithstanding these regulatory limits, Nomads and brokers often wish to include more recent audited information than this. This is particularly the case where the company is looking to raise new funds at the time of admission, as investor expectations would need to be taken into account.

For instance, if a company included audited annual financial statements for the three years ended 31 December 2009 and audited interim financial statements for the six months ended 30 June 2010 in its admission document, then the latest date that admission document could be published would be 30 June 2011. However, in practice, many investors would expect to see audited annual financial statements for the year ended 31 December 2010 in such a document.

Companies should also bear in mind that slippage in IPO timetables is not uncommon. Therefore, at the outset of the process, it is sensible to ensure that the age of the financial information planned to be included in the admission document, when compared to the expected date of publication of the admission document, allows for potential slippage in the timetable. Otherwise, the company may find itself having to undergo an additional audit late on in the IPO process.

Whilst the basic requirements concerning the inclusion of audited historical financial information appear simple, in practice the financial disclosure requirements can be more complicated.

This is especially the case where a company has made (or will make) substantial acquisitions or disposals pre- IPO. For instance, depending on the size of an acquisition, there may be a requirement to include audited historical financial information on the acquired entity for all of, or part of, the same three-year track record period as needed for the issuer. Alternatively, it may be necessary to restate past audited financial information to take account of subsidiaries or divisions not forming part of the group on IPO.

In cases where one or more businesses are being combined for the IPO, multiple sets of financial statements may be required. An issuer is required to present the financial information for all of these businesses under common accounting standards and policies so that the historical financial information is comparable; this may require past audited information to be restated or translated into a different GAAP.

The issuer's own financial information may also need translating from its previous GAAP to its future GAAP. For instance, a company that previously reported under German GAAP may need to restate its financial statements into IFRS. Such GAAP translations can cause complications where the new GAAP requires disclosures of information that was not required under the old GAAP and, thus, for which data may not have been captured at the time.

Some companies may not have been subject to audit historically, in which case a full audit will need to be conducted on each of the periods covered by the historical financial information. This may be problematic for the earlier years, as supporting documentation may not be readily available. This issue may be particularly relevant where there is a need to show financial information for a subsidiary for periods prior to its acquisition. If the company (or a material acquired subsidiary) has not been subject to audit historically then it is worthwhile commissioning an audit before the IPO process formally begins, in order to reduce delays once the process starts.

Any audit opinions on the historical financial information included in the admission document (whether via reproduction of past audited accounts or via a special purpose opinion) must be unqualified. If past audited accounts were qualified, the cause of the qualification will need to be resolved pre-IPO and a new unqualified opinion obtained. There are a number of accepted conventions that have been developed for the preparation and presentation of historical financial information in an admission document and guidance has been published to assist companies when preparing such information. A company should seek advice from its reporting accountant on how to regard and interpret these conventions and how to deal with difficult areas. The reporting accountant will recommend options on how to deal with such situations based on its previous experience and market practice and will discuss, as necessary, particular issues with the Nomad.

Management should ensure that they allow sufficient time to prepare financial information for the admission document, especially if it involves translating past sets of accounts to a different GAAP such as IFRS. Time to audit any specially prepared information also needs to be built into the IPO timetable. The earlier this work commences, the better.

The box, 'Matters which may complicate financial disclosure' sets out a non-exhaustive list of factors to consider when including historical financial information in the admission document. If any of the factors are applicable, management should discuss the matter with the reporting accountant and Nomad.

There are two circumstances when interim financial information is required to be included in an admission document:

• where the company has already published interim financial information (eg quarterly or half-yearly results) since the date of the last audited annual financial information; or
• where the admission document is dated more than nine months after the end of the last audited annual financial information included in it.

If the admission document is dated more than nine months after the end of the last audited annual financial information, the required interim financial information must cover at least the first six months of the following financial year and must include comparative information for the same period in the prior financial year.

Although interim financial information included in an admission document does not necessarily need to be audited, the Nomad or broker may request that it be audited in order to meet market expectations and assist marketing efforts with respect to any fund raising.

Admission documents often include pro forma financial information on the issuer. The purpose of this pro forma financial information is to show the impact of transactions (such as an acquisition or a fundraising) on the company.

If the admission document has to comply with the Prospectus Rules then the inclusion of pro forma information is mandatory if the transaction is over a certain size. In all other cases, there is no requirement to include pro forma information; instead, the Nomad would typically determine whether or not such information should be included, taking into account market practice and the interests of investors.

The most common type of pro forma information included in an admission document is a pro forma net asset statement, which illustrates the impact of transactions on a company's balance sheet. A pro forma income statement may also be included, although this is less common.

The directors of the issuer are responsible for preparing any pro forma financial information. Guidance has been published to assist companies when preparing pro forma information and a company should also seek advice from its reporting accountant. Where pro forma information is included and the admission document has to comply with the Prospectus Rules, the reporting accountant is required to report publicly on the pro forma information.

If the admission document does not need to comply with the Prospectus Rules, a public report is not required on any pro forma information included in it. However, the pro forma information itself must still comply with Annex II of the Prospectus Rules.

It is rare for forecast financial information to be included in an admission document. Doing so gives investors an obvious target to attack should the company not meet its expectations and increases risk for the directors of the company, who are responsible for all information in the admission document.

There are times when a Nomad may advise the company to include forecast financial information. Such a recommendation may be made where the historical track record does not convey a transformation in the profitability of a business. However, Nomads and companies generally resist including such information unless deemed essential to the success of a fundraising.

In the rare cases that forecast financial information is included, it would typically take the form of a profit forecast (the forecast profit for a period not yet completed) or a profit estimate (the estimated profit for a completed period not yet audited). Guidance has been published to assist companies when preparing such forecasts and the company should also seek advice from its reporting accountant.

If a profit forecast or profit estimate is included in an admission document, the reporting accountant is typically asked to report on the information, as the company's Nomad is required to confirm to the company that the forecast has been made after due and careful enquiry by the company's directors. A statement must also be included in the admission document that the forecast has been made after due and careful enquiry. In cases where the admission document has to comply with the Prospectus Rules, such a report by the reporting accountant is compulsory and has to be published in the admission document alongside the forecast.

Given the risks associated with publishing a profit forecast or estimate, the work undertaken by a reporting accountant to substantiate the disclosures may be substantial and would need to be reflected in the IPO timetable.

There is a requirement for the company to disclose in its admission document whether there have been any significant changes in its financial or trading position between the balance sheet date of its latest published financial information and the date of the admission document.

Management will need to carry out a review in the latter stages of the IPO process to identify any such changes. This review should include consideration of the latest available management accounts and flash trading figures, together with consideration of such matters as changes in banking facilities, crystallisation of contingent liabilities, new post balance sheet events and other relevant developments. A final review should be carried out as close as possible to the date of the admission document to identify any late changes.

The reporting accountant will also perform specific procedures in order to identify any undisclosed significant changes in the company's financial or trading position.

Should there be any material changes to the information in the admission document (or any new material factors which come to light) a supplementary admission document may be required between the publication of the initial admission document and the admission date. This may delay the admission date.

• Have consolidated accounts been prepared historically for the issuer?
• Have the past financial statements been audited?
• Were any of the past audit opinions qualified?
• Have there been any material acquisitions in, or subsequent to, the three-year track record period?
• Have there been any material disposals in, or subsequent to, the three-year track record period?
• Is there a need to translate the exisiting financial statements into a different GAAP?
• Will there be, or has there been, any group restructuring pre-IPO (eg divisions carved out of larger groups)?
• Have there been any changes in accounting policies during the three-year track record period?
• Are the financial statements of any acquisition targets prepared under standards and policies consistent with those of the issuer?

To summarise, a company seeking admission to AIM will typically need to undergo due diligence on its historical financials and business operations, its systems and controls, and its trading and cash flow forecasts. The exact scope of this due diligence is subject to agreement between the company, its Nomad and the reporting accountants. In addition it will also need to publish an audited financial track record, and possibly other financial information about itself or recently acquired subsidiary undertakings, in its admission document. The specific requirements for this published financial information are set out in the AIM Rules (primarily driven by Schedule 2 to those rules, together with the continuing obligation to publish financials in accordance with Rule 18 and Rule 19). Although they appear relatively straightforward, they can sometimes be complicated to apply in practice and a company should seek advice early on in the process as to the exact requirements.