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Getting ready for an IPO

Financial reporting
considerations

March 2014

PwC

Agenda
Topic
Getting IPO-ready
How is Hong Kong different from other capital markets?
Financial track record
Performance measurement
Corporate governance
Hong Kong due diligence process

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Getting IPO-ready

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What the market looks for financial reporting

and governance
financial
track record

To what extent does the business have published

and filed accounts covering three years?
International investors prefer international financial
reporting and auditing standards.

performance
measurement

The quality and standard of reporting demanded by

investors and regulators is high. Investors require
accurate financial and non financial information to
be produced efficiently and on a timely basis

corporate
governance

Compliance with international standards of

corporate governance is regarded by investors as a
sign of quality and is particularly important in more
sophisticated markets.

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Assessing IPO Readiness from a financial reporting

perspective

Structure
Financial history
Financial control and
governance
Taxation
Business planning &
forecasting

Private

IPO ready

A collection of legacy
businesses

Efficient tax and legal

structure

Local GAAP

IFRS 3-year record

Informal, owner
managed

Robust governance
framework

Unidentified exposures

Compliance and disclosure

Cash based annual

budget

Reliable working capital

forecasts, longer-term
strategic plans

Management information Standalone local GAAP

Integrated IFRS, well

defined KPIs

Related party transactions Opaque and confusing

Transparent and arms

length

Legal title to assets

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Assumed

Confirmed

Common issues and pitfalls

Lack of
t ransparency

Lack of reliable
financial data of
accept able quality

Rely ing heavily

on adv isors

Dealing with
minority
int erests

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Poorly art iculated

st rategy and equity
st ory

Lack of int egration

bet ween
account ing and
budget ing

Inadequate appreciation of
required corporate
gov ernance st andards

Pract ical
difficulties of a
foreign listing

Transactions
wit h related
part ies

Inability to prepare
quality and t imely IFRS
financial information

Ineffect ive ongoing

inv estor and market
communication post IPO

Underest imating
addit ional burden
on key executives

Managing the process

Prospectus drafting
IFRS track record
Working capital

Big bang

Financial reporting procedures

Historical financial and legal diligence

Prospectus drafting
IFRS track record Years 1 & 2
Build working capital model

IFRS track record Year 3

Working capital review

Internal control assessment

Historical financial and legal diligence

Diligence top up work

or step by step

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IPO readiness
An IPO Readiness assessment is a powerful tool if carried out at an early stage
Its purpose is to identify gaps and suggest remediation actions
It considers the following, inter alia:

External and internal financial reporting processes, resources and timelines

Assessment of complex IFRS accounting and disclosure matters

Identification of Key Performance Indicators and ongoing collation and

monitoring of these

Risk management framework

Related and connected party transactions

Management remuneration (including benchmarking)

Pre-IPO tax structuring, including new holding company (if applicable)

Assessment is tailored to each individual company and type of market

Key output is an IPO road map to help transform your company into a
public entity

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How is Hong Kong different from

other markets?

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How is Hong Kong different from other markets?

Timing and ease of approval for listing

Relatively high retail investor base (35%)

Regulators keen to protect retail investors
Rigorous and challenging regulator review
Can take from 1 to 3 months depending on specific issues encountered

Size of fund raising and valuation

Fewer number of juniors but concentration of mid and large cap companies
Valuations are comparable to other capital markets
Type of reserves/ resources
Must have at least indicated resources(for mineral companies) or
contingent resources(for petroleum companies)
Portfolio must be meaningful and of sufficient substance to justify listing
Early stage exploration assets are not eligible for listing
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Financial track record

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Financial track record - requirements

No track record requirement

Usual requirement for 3 years of audited financial information

which must be less than 6 months old
Must have meaningful portfolio of indicated resources and
sufficient working capital for 125% of current requirements (i.e.
next 12 months)
Track record requirement can be waived if its directors and senior
managers, taken together, have sufficient experience relevant to
the exploration and/or extraction activity that the mineral
company is pursuing (individuals relied on must have at least 5
years experience)
Companies that are already in production will not be considered
favourably unless they have development activity on hand and
can demonstrate a path to commercial production
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Financial track record common areas of difficulty

Valuation
and impairment of
licences

Stripping
costs

Pre-production Depreciation
of development
revenue and
assets
costs

Joint
arrangements

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Mining
reserves

Decommissioning
liabilities

Accounting
for E&E
activities

Determination
of start of
commercial
production

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Financial track record - acquisitions

Acquisitions made during the track record
period
If material acquisition made during track record period then preacquisition financial information must also be presented
Exchange may require listing applicants to aggregate a series of
transactions and treat them as if they were one transaction if they are all
completed within a 12 month period

Acquisitions made or proposed after the end of

the track record period
Separate historical financial information is required for any business or
subsidiary acquired, agreed to be acquired or proposed to be acquired
since the date to which the accountants report has been made up
Listing rules are silent on materiality so technically even small
acquisitions require a separate accountants report

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Performance measurement

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Key mining industry metrics

The measures that move

the market

How important are the below buckets of information to your analysis and how adequate is the data that you currently receive?
On a scale of 0 to 100, where 0 is not at all important and 100 is very important

100

96

93

93

92

91

90
80
70
60

75

79

75
69

65
60

57

Tonnes/oz produced
Tonnes/oz sold
Average realised price
Cash costs
Proven69 and probable
60 57
reserves

49

50

43
37

40

38

31

30
20
10
0

Importance
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Adequacy

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Required non-financial disclosure requirements

Different disclosure requirements for producing and non-producing assets

Producing

Must provide a detailed

estimate of its cash costs per
appropriate unit covering
prescribed areas

Exploration

Required disclosure of plans to

proceed to production with
indicative dates and costs
Plans must be supported by a
scoping study and the opinion
of a competent person

Such disclosures are included in the prospectus usually in the competent

persons report or MD&A (not included in audited financial information)
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Implications.

Need awareness of regulatory and investor expectations

for performance measurement disclosures
Market expectations may be over and above what is
required under financial reporting standards
Need to ensure sufficient processes in place to record and
report accurate and verifiable data in sufficient detail
May require investment/improvement in financial and
operating systems

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Corporate governance

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Internal controls
A public company must have appropriate controls to enable the
listing applicants directors to make a proper assessment of the
financial position and prospects of the new applicant and its
subsidiaries before and after listing.
Therefore any control weaknesses must be identified and addressed
prior to listing.
Hong Kong sponsor investment bank likely to request due diligence
to be performed on listing applicants internal controls to meet listing
rule obligations.
This will include identification and testing of key financial controls at
a point in time at key locations.

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Typical scope areas to be covered

Areas to consider:
Board and Committee Structures
Control Environment
Risk Assessment
Information and Communication
Monitoring
Control Activities

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Hong Kong due diligence process

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Requirement to conduct due diligence

Sponsor must consider Practice Note 21
(PN21) of the Listing Rules in determining
the reasonable due diligence inquiries
PN21 sets out the Exchanges expectations
on the due diligence that sponsors will
typically perform.
PN21 is not a set of prescribed minimum
procedures that are applicable to all issuers.

Internal
controls

Financial
history

Financial
forecasts

Each new applicant is unique and so will be

the due diligence steps necessary for the
purpose of its listing application.
Sponsor must exercise its judgment as to
what investigations or steps are appropriate
for a particular new applicant and the extent
of each step.
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Suitable to bring to
market?

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Presenter

Pauline Leung
Partner, Capital Market Services Group
PwC Hong Kong

E mail: pauline.pw.leung@hk.pwc.com
T el.:
+852 2289 1809

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Questions?

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