Chapter 12

Due Diligence Guidelines –


5. Detailed Financial Review Process

5.1 Overview

5.1.1 The detailed financial review is scoped on a case-by-case basis, but normally entails a series of focused discussions with listing applicant’s management (and, most particularly, the Chief Financial Officer and other senior finance staff), framed by a detailed questionnaire and the purpose of which is:

(a) To elicit detailed information necessary to complete the sponsor’s understanding of the listing applicant’s financial position and performance; and

(b) To facilitate line item analysis and preparation of the Management Discussion & Analysis content of the listing document.

5.1.2 The meetings are normally preceded by preparation and distribution of a detailed line-item focused questionnaire. This questionnaire is usually prepared by the sponsor in conjunction with whichever law firm has the primary listing document drafting responsibility (in the common event that the sponsor itself is not primarily responsible for drafting). The sponsor should always take the lead in formulating the questionnaire.

5.1.3 It is preferable that the Reporting Accountant should be present at all MD&A meetings and discussions, and it is recommended that they are requested to attend. (The example form of Reporting Accountant’s arrangement letter appended to the currently applicable professional reporting standard makes express provision for the Reporting Accountant’s attendance at drafting meetings. See, Hong Kong Standard on Investment Circular Reporting Engagements 400 “Comfort Letters and Due Diligence Meetings” issued by the Hong Kong Institute of Certified Public Accountants (and related Technical Bulletin – AATB 3).)

5.1.4 There is no prescriptive format for meetings. They can be held (and combined) as and where most appropriate / convenient during the overall execution programme.

5.1.5 In cases where the financial statements are supplemented during the regulatory review process (e.g., where the initial draft is prepared while the audit of the latest reporting period remains ongoing), the initial round of meetings will invariably be supplemented by additional later meetings focused on the new information.

5.1.6 Supplemental discussions will always be required in any event for purposes of:

(a) Considering up to the latest practicable time developments subsequent to the audited track record period (see section 11 “Changes Subsequent to the Latest Balance Sheet Date” below); and

(b) “Bring-down” diligence (see section 16 “Timing and Bring-down” below).

5.2 Recommended Steps

5.2.1 While this financial review is always scoped on a case-by-case basis according to the detailed and specific circumstances of the listing applicant, it is possible to identify common categories of discussion as outlined in Appendix I.

5.2.2 Wherever and to the extent applicable, these areas should be addressed in discussion with the listing applicant’s management.

5.2.3 However, it must be understood that not every category noted in Appendix I will be applicable to all listing applicants.

5.2.4 With respect to developments and any changes since the last audited balance sheet date:

(a) The discussion(s) should always be updated / repeated so as to be valid up to the latest practicable time prior to publication of the listing document;

(b) The discussion is directly linked to the discussion on the listing applicant’s prospects (see immediately below); and

(c) See also sections 11 (“Changes Subsequent to the Latest Balance Sheet Date”) and 16 (“Timing and Bring-down”) below.

5.2.5 Regarding the listing applicant’s prospects:

(a) This discussion is primarily encompassed in Business Model Due Diligence (see Chapter 8 “Due Diligence Guidelines – Business Model”).

(b) Prospects should be evaluated against any indicators of deterioration in performance, and any significant changes to the historic operating model resulting from the IPO.

(c) The discussion should always address:

(i) the question of whether there is any adverse change which has taken place or is expected to take place in the near future, in the technological, market, economic, legal or operating environment in which the listing applicant operates; and

(ii) the effect of any significant change recently occurred or expected to take place in the revenue model or cost structure of the listing applicant.

(d) Reference should be made to prevailing regulatory guidance for any specifically identified / mandated disclosure requirements. See Exchange Guidance Letter GL41-12.

(i) Exchange Guidance Letter GL41-12 contains a non-exhaustive list of examples of disclosure required in case of any material adverse changes in various stipulated categories of financial, trading and operating metrics (or environment).

(ii) These areas should be addressed (adapted as applicable to the circumstances).

(e) The sponsor should also discuss anything which appears implausible compared to its analysis of peers and competitors, or other significant prevailing factors.

(f) As with the discussion(s) on changes since last audited balance sheet date, this discussion should always be updated / repeated so as to be valid up to the latest practicable time prior to publication of the listing document.

(g) See also sections 11 (“Changes Subsequent to the Latest Balance Sheet Date”) and 16 (“Timing and Bring-down”) below.

5.2.6 Sources and Substantiation of Input

(a) A primary purpose of the discussions is to elicit information relevant to preparation of the MD&A.

(b) To the extent information is intended to be used for this purpose, it will be necessary to understand its source and reliability.

(c) It is sensible to discuss whether financial data is from a source for which the Reporting Accountant will be able to provide “circle-up comfort” (See further section 10 “Unaudited Financial Content” below).

5.2.7 Form M113

(a) The information derived from these discussions will also form the basis for completion of Form M113 (part of the A1 filing materials) and calculation of the various financial ratios required in that form (and the explanation of any fluctuations).


HKCFEF Limited and the contributing law firms, accountants and sponsors are not offering these due diligence guidelines as legal, financial or professional advice or services and they should not be relied upon as such. These due diligence guidelines should not be used as a sole basis for any decision, action or inaction and are not meant to serve as a substitute for the advice of qualified professionals. See here for the full terms and conditions.

Reporting Accountant present at MD&A Meetings

Financial Review Process

Financial Statements Supplemented During Regulatory Review Process

Detailed Financial Review Process on Case by Case Basis

Bring-Down Diligence

Hong Kong Standard on Investment Circular Reporting Engagements 400 Comfort Letters and Due Diligence Meetings

Exchange Guidance Letter GL41-12

Form M113

Circle-Up Comfort

Management Discussion & Analysis meetings
Technical Bulletin AATB 3
listing applicant’s prospect
financial review scope

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