Chapter 12

Due Diligence Guidelines –


6. Underlying Financial Statements

6.1 Standards

6.1.1 Regarding the preparation of a listing document, a sponsor should examine and consider the accuracy and reliability of the financial information, including reviewing the financial statements of major subsidiaries. [Paragraph 17.6(d)(v) of the Code of Conduct]

6.1.2 Similarly, paragraph 12(b) of Practice Note 21 provides that due diligence inquiries in relation to the new applicant’s compliance with the qualifications for listing include reviewing material financial information, including:

(i) financial statements of the new applicant; and

(ii) financial statements of all subsidiaries of the new applicant and other companies that are material to the group’s financial statements.

6.1.3 For listing applicants whose primary operations are conducted through PRC incorporated entities, as part of Stock Exchange Form M 104 (“Additional Information To Be Submitted with the Form A1”), the sponsor must at time of A1 filing provide a summary of the material findings of the sponsor and the Reporting Accountant in assessing whether the underlying financial information of the applicant group’s PRC companies used for the preparation of the Accountants’ Report is consistent with:

(i) all the relevant regulatory filings or reports filed with the appropriate competent government authorities; and

(ii) where applicable, the information on related party transactions as shown in the financial statements of the relevant related parties.

6.2 Guidance and Recommended Steps

6.2.1 As part of the sponsor’s preliminary financial review, the sponsor should normally request copies of (among other things):

(a) A detailed group structure chart for the listing applicant, showing its subsidiaries and all other entities in which the listing applicant or any of its subsidiaries has any ownership or other economic interest;

(b) Financial statements of the listing applicant;

(c) Financial statements of all subsidiaries of the listing applicant, and of all other entities which are or will be material to the listing applicant’s combined / consolidated financial statements; and

(d) Management accounts for (at least) the applicable track record period.

6.2.2 It is stipulated in the Listing Rules (see paragraph 12(b) of Practice Note 21 to the Listing Rules) that the sponsor should make reference to (among other things) the financial materials referred to in paragraph 6.2.1 above for the purpose of evaluating the listing applicant’s compliance with the qualifications for listing stipulated in the Listing Rules. See further below section 18 (“Quantitative Qualifications For Listing”).

6.2.3 Equally, sponsors should normally check for any audit qualifications in the financial statements of any material subsidiary or associated entity.

6.2.4 For PRC enterprises, the sponsor is specifically expected and required to evaluate consistency of financial statements filed with PRC regulators, and the listing applicant’s audited financial statements reflected in the Accountants’ Report.

6.2.5 This requirement (as to which see paragraph 6.1.3 above) necessitates retrieval of filings from PRC regulators including the AIC (Administration for Industry and Commerce) and relevant State and local tax bureaus. Retrieval must be performed in a manner that avoids the possibility of the listing applicant tampering with the materials and accordingly must be performed either by the sponsor or on its behalf by one of its advisers (usually its PRC lawyers). Paragraph 20 of Stock Exchange Form M104 requires the method of retrieval of such filings/reports to be disclosed in that form. The sponsor should discuss this exercise and related comparison (including any questions or areas of uncertainty) with the Reporting Accountant.

6.2.6 Beyond that, the general usefulness of such underlying financial statements (and management accounts) from a due diligence perspective is usually limited, and varies according to (among other things) (i) the size and composition of the listing applicant’s organisation and its group structure, (ii) the division of the overall business (and any applicable business segments and/or product lines) between particular subsidiary and associated entities and (iii) the function and materiality of particular subsidiaries and associated entities.

6.2.7 Depending on such questions, underlying financial statements may be more or less informative as to the financial condition or performance of parts of the listing applicant’s business. (It is specified in Paragraph 17.6(d)(v) of the Code of Conduct that the financial statements of major subsidiaries and internal financial records should be examined in the course of the sponsor’s evaluation of the accuracy and reliability of the financial information proposed to be included in the listing document).

6.2.8 However, the main source of such information (to the extent relevant to a particular listing applicant) will be the primary financial review process described above (see above sections 4 “Financial Review Process (Overview)”and 5 “Detailed Financial Review Process”).

6.2.9 It is not the role of the sponsor to re-perform or simulate the combination or consolidation exercise which is required for creation of the listing applicant’s combined / consolidated financial statements.

6.2.10 As part of its overall financial diligence, the sponsor should normally discuss the basis of consolidation with management and the Reporting Accountant, and these discussions should normally include enquiry as to what (if any) alternatives were considered or discussed with the listing applicant’s management (see section 3.5 above “Financial Content of the Listing Document – Guidance on Core Historical Financial Content, and Recommended Steps”).

6.2.11 Subject to that (and to general considerations noted in section 12 below (“Red Flags and Similar Irregularities”), the suitability and integrity of the combination / consolidation exercise is inherent in the audit of the combined / consolidated financial statements contained in the Accountants’ Report.

6.3 Tax Diligence

6.3.1 As part of the exercise noted in paragraphs 6.2.4 and 6.2.5 above, the sponsor should review PRC tax filings for consistency with the listing applicant’s audited financial statements (and the underlying financial statements of group entities). This review (including any questions or areas of uncertainty) should be discussed with the Reporting Accountant.

6.3.2 See further below section 15 (“Tax – Steps to Take (PRC Tax)”).


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.

Listing Applicants Compliance with Qualifications for Listing

Underlying Financial Statements

Financial Statements of All Subsidiaries of Listing Applicant

Accuracy and Reliability of Underlying Financial Statements

Financial Statements of Major Subsidiaries

Stock Exchange Form M104 Additional Information To Be Submitted with the Form A1

Management Accounts

Tax Diligence on Listing Applicants Audited Financial Statements

Accountants Report due diligence process

consolidated financial statements
financial review process due diligence

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