Chapter 12

Due Diligence Guidelines –

Financial

Appendix I – Common Categories of Discussion Topics

References in this Appendix to “sections” are to the relevant sections of this chapter.

1. Discussion on segments and geography:

(a) Identify applicable segment breakdown.

(b) Discuss what alternatives may have been possible or have been discussed / considered.

(c) Identify any significant geographical breakdown of the business.

2. Discussion on earnings:

(a) Focus on source and quality of earnings, and identification of any exceptional / distortive factors.

(b) Identify primary sources of revenue (primary lines of activity / products / services).

(c) Discuss the impact of seasonality on top line revenues and earnings.

(d) Identify any contribution from hedging or other financial or non-operational arrangements.

(e) Identify any acquisitions, and their impact.

(f) Identify any disposals or discontinuations and their impact

(g) Understand the composition of income statement line items:

(i) Revenue;

(ii) Cost of sales;

(iii) Administrative Expenses;

(iv) Other Expenses;

(v) Finance Revenue; and

(vi) Financing Costs.

(h) Identify any exceptional or other material non-recurring items.

(i) Understand accounting for earnings of non-wholly-owned affiliates and associates (see also, investment assets below).

(j) Discuss and understand trends.

3. Discussion on current assets:

(a) Understand treatment of inventories, including:

(i) Impairment charges;

(ii) Movements in levels;

(iii) Warranties and returns; and

(iv) Date of last physical check.

(b) Discuss order book and back-log:

(i) Understand any changes in back-log.

(c) Understand treatment of trade receivables, and related impairment provision(s):

(i) Identify and discuss changes from period to period; and

(ii) Examine age profile.

(d) Identify any discounting / factoring:

(i) Understand prepayments and/or deposits;

(ii) Understand any other receivables.

4. Discussion on investment assets:

(a) Consolidated subsidiaries.

(b) Unconsolidated associates.

(c) Real estate assets.

(d) Other material investment assets:

(i) Nature and materiality;

(ii) Book value versus real value.

5. Discussion on material intangible assets:

(a) Goodwill.

(b) Intellectual Property / brands.

(c) Other (if and as relevant).

6. Discussion on trade liabilities:

(a) Understand trade payables.

(b) Identify and discuss changes from period to period.

(c) Examine age profile.

7. Discuss financing liabilities and commitments:

(a) Discuss the listing applicant’s policies for managing its liabilities.

(b) Consider amounts due in less than 12 months.

(c) Consider other financing liabilities:

(i) Borrowings from banks;

(ii) Other commercial finance; and

(iii) Amounts due to shareholders and related parties.

8. Identify and discuss derivatives and any similar financial instruments:

(a) Discuss hedging policies.

(b) Identify all derivative transactions outstanding or subsisting or entered into during the track record period.

(c) Discuss hedging impact.

(d) Discuss purpose and impact of any swap, derivative or similar transaction entered into for any purpose other than hedging.

9. Identify and discuss commitments, contingencies and off-balance-sheet arrangements:

(a) Discuss policies for provisioning and reserves.

(b) Indentify and discuss:

(i) Leasing obligations / commitments;

(ii) Capital commitments;

(iii) Guarantees;

(iv) Approach to employee benefits and/or pensions (including share-based compensation);

(v) Litigation;

(vi) Environmental contingencies;

(vii) Other contingencies.

(c) Identify all off-balance-sheet transactions and liabilities (including relationships with non-consolidated entities).

(d) Discuss background, detailed arrangements and significance.

10. Discuss cash flow:

(a) Understand cash from operating activities compared to earnings before tax:

(i) Understand depreciation.

(ii) Understand finance costs.

(iii) Understand changes in working capital.

(b) Understand other material non-cash items not charged to profit & loss / income.

(c) Understand nature of investing activities:

(i) Capital expenditure;

(ii) Acquisitions / disposals;

(iii) Other.

(d) Understand nature of financing activities.

(e) Understand composition of cash and cash equivalents at beginning and end of the accounting period.

(f) Discuss seasonality / cyclicality (Refer also to Chapter 8 “Due Diligence Guidelines – Business Model”).

11. Discuss working capital and liquidity:

(a) Consider peak borrowings, debt service (including scheduled repayments and planned re-financings) and headroom.

(b) Address areas identified in Exchange Guidance Letter GL37-12 including:

(i) net current asset (liabilities) position;

(ii) the sources and uses of cash, and an analysis of the material changes in the underlying drivers;

(iii) factors that would have a material impact on the new listing applicant’s liquidity, potentially including:

(A) funds necessary to meet contractual obligations and operations and projects in progress or planned;

(B) commitments for (or anticipated) significant capital expenditures;

(C) the likelihood of future cash requirements associated with known trends and uncertainties; and

(D) relevant legal/ regulatory requirements and/or restrictions;

(iv) any plans to raise material external debt;

(v) material covenants related to outstanding debt (or covenants applicable to third parties in respect of guarantees or other contingent obligations), and the impact of debt covenants;

(vi) material extrinsic factors such as deterioration of the credit markets and/ or tightened monetary policies;

(vii) special considerations in the case where the listing applicant has net current liabilities, negative operating cash flows for most of the track record period, significant capital commitments, high gearing ratios and/or significant reclassification of long-term debt to short term

(c) See also sections 9 (MD&A) and 14 (Forecasts and Projections).

12. Identify material trends

(a) Consider consistency with expectations from business due diligence streams.

13. Discuss financial risk from external factors:

(a) Commodity prices.

(b) Interest rates.

(c) Forex.

(d) Inflation.

(e) Regulation.

(f) Political risk.

(g) Other.

14. Discuss tax charge / credits

(a) Discuss provisions and effective rates.

(b) Discuss due dates for payment.

(c) Identify and discuss any outstanding or unresolved claims, disputes or known uncertainties.

(d) See further section 15 (“Tax”).

15. Discuss developments and any changes since last audited balance sheet date

(a) Discuss business trends.

(b) Discuss financial results, trends and changes.

(c) Discuss material events and any significant matters of a non-recurring nature.

(d) See paragraph 5.2.4 in section 5 (“Detailed Financial Review Process – Recommended Steps”) and also sections 11 (“Changes Subsequent to the Latest Balance Sheet Date”) and 16 (“Timing and Bring-down”).

16. Discuss Prospects

(a) See paragraph 5.2.5 in section 5 (“Detailed Financial Review Process – Recommended Steps”) and also sections 11 (“Changes Subsequent to the Latest Balance Sheet Date”) and 16 (“Timing and Bring-down”).

17. Discuss Tax Issues

(a) See section 15 and Part 1 of Appendix II.