Key accounting issues for an AIM IPO “Get Ready for AIM” London Stock Exchange 7 November 2006 Paul Watts Capital Markets Partner.

Key accounting issues for an AIM IPO

“Get Ready for AIM”London Stock Exchange7 November 2006 Paul Watts

Capital Markets Partner

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Agenda

Introduction

About Baker Tilly and AIM

Preparation for flotation

Key accounting issues

Tax considerations

Continuing obligations and corporate governance

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About Baker Tilly

Baker Tilly7th largest UK accounting firm

30 offices

2,000 staff

260 partners

www.bakertilly.co.uk

Baker Tilly International8th largest network of independent accountancy firms worldwide

128 firms in 85 countries

$2bn fee income.

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Baker Tilly and AIMWinner of the Growth Company “AIM Accountant of the year” for the years 2003, 2004, 2005 and 2006Acted for over 150 companies that have sought an IPO (including 44 in the last 12 months); have over 120 AIM audit and tax clientsPublish “Taking AIM”, annual survey of AIM market Are represented on the London Stock Exchange AIM Advisory Group (the only practicing accountant)Have specialists in the tax benefit legislation and as such are authors of A Guide to AIM Tax Benefits – a joint London Stock Exchange and Baker Tilly Publication

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Preparation for Flotation

Key issuesSuitability (profit trends)

Corporate structure

Non-core assets

Board and management

Employee benefits & share options

Accounting policies and financial controls

Tax

Investor relations and corporate governance

Business plan

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Key accounting issues

In Admission DocumentHistorical financial information

Working capital statement

Profit Forecast (rarely)

Pro – forma financial information (sometimes)

To Company and Nomad

Financial due diligence - long form report

Aim Application formFinancial reporting systems and procedures – declaration

Working Capital - declaration

Profit forecast - declaration

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Regulatory framework

AIM RulesIssued by London Stock Exchange (updated August 2006)Draft new rules for companies and Nomads – consultation periodProspectus directive (AIM PD)

Standards for Investment Reporting (SIRs) – issued by the UK auditing practices board APB) under ISAs

SIR 1000 - GeneralSIR 2000 – Historical financial informationSIR 3000 – Profit forecasts / SIR 4000 – Pro forma financial information

Accounting standardsIFRS from 1 January 2007 for EEA companiesUS GAAP, Canadian GAAP, Australian GAAP

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Historical Financial Information

3 years audited financial statementsAttached to admission document, orComparative table with audit reports (if no adjustments), orComparative table with Accountants (“audit”) report (most likely)Material subsidiaries acquired in last 3 yearsStandards for investment reporting (SIR 2000), requires ISAs

Last 2 years in NEXT GAAPEU companies: IFRS/IAS ( for periods commencing 1 January 2007 )Others: US, Australian, Canadian or IFRS

Accountants report likely to be requiredPrior Year AdjustmentsGAAP changeNomad requestsAdditional disclosures applying to listed companies

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Historical Financial Information

Interim accountsIf published must be included

Required if admission document dated more than 9 months after audited year end

May be unaudited (but Nomad often requires them to be audited)

Audited accounts no older than18 months from date of document if audited interims

15 months if unaudited interims

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Long Form Report

Introduction

Executive Summary

History and business

Trading Results

Financial Position

Future Prospects

Management and staff

Sales and Selling

Purchasing

Accounting Systems and controls

Taxation – direct and indirect, employment

Other – environmental – insurances

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Financial reporting procedures

Company declaration:“Procedures have been established which provide a reasonable basis for the directors to make proper judgements as to the financial position and prospects of the Issuer and its group”

Board Memorandum / Accounting procedures manual (template can be provided)

Comfort letter / report by reporting accountants

New procedures often required to be implemented to supplement existing ones

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Working capital

Statement by directors:“in their opinion having made due and careful enquiry, the working capital available to it and its group will be sufficient for its present requirements that is for at least twelve months from the date of admission”

Board memorandum/comfort letter by reporting accountants orWorking capital report

Required:Forecasts 18 months to 3 years

Integrated model of profit, cash flow and projected balance sheets

Detailed assumptionsVisibility

Sensitivity analysis

Growth strategy

Includes funds to be raised

Include IPO costs

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Tax considerations

Is the current structure tax-optimal?Group structure

Issues arising from restructuring if notCGT on transfers

Tax clearances

Shareholder/director personal tax planning

“Employment-related securities” rules

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Tax considerations

Formal role as reporting accountantsIdentify and quantify tax risks

Draft suitable disclosures for admission document/comfort letter

Responsibility for overall tax risks of structure

Tax due diligenceIdentify and quantify tax risks and compliance

Corporation tax

PAYE

VAT

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Tax benefits of AIM

Quoted, but unquoted!

Tax breaks for cost of investment (smaller companies only)

EISVCT

10% CGT rate on exit after two years – UK tax payers

Relief from inheritance tax - UK domiciled individuals

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Overview for Investors

EIS VCT

Limit per annum £400,000* £200,000*

Initial Income Tax Relief (new subscriptions only)

20% 30% 2006/7 only

(was 20% up to 2003/4 and 40% for 2004/5 and 2005/6)

CGT on disposal

Holding period

Nil

3 years

Nil

5 years

CGT deferral (unlimited EIS only)

(new subscriptions only)

3 years after Terminated FA 2004 for gains reinvested in CCT shares issued on or after 6 April 2004

(previously 1 year after)

* Husband and wife each

1 year before Terminated FA 2004

(previously 1 year before)

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Overview for CompaniesEIS VCT

New Funds Unlimited £1 million per VCT

Securities New ordinary shares New ordinary shares

Preference shares or loans min 5 years

Gross assets £7 million before

£8 million immediately after

£7/15* million before

£8/16* million immediately after

*old limits apply where VCT funds raised prior to 6 April 2006

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Company Qualifying Criteria

Purpose/Existence Wholly for purposes of (single company only) carrying on a qualifying

trade (not investment) other than insignificant

Non qualifying Property, banking, financial, (less than 20%) legal, royalties and licence

fees*, hotels, nursing homesGroups Considered overallControl Not controlled by another

company* Except where the Company has itself derived the greater part of the IP by value or is actually a product or service

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Use of Funds Consider restrictions on VCT/EIS funds

Wholly for purposes of qualifying business activity wholly or mainly in the UK80% in first year, balance next 12 monthsEIS – above applies to ALL cash proceeds of all issues on same day whether EIS or not. Recommend separate issues of EIS/non EIS shares on separate daysNot employed in overseas subsidiariesNew money only – not for vendorsIssue costs - apportionIdentification – recommend separate bank

accounts

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Continuing obligations

Annual audited accountsPublished within 6 monthsIFRS

Half Yearly Reports Announce to market - 3 months after relevant period (max)Balance sheet, income statement, cash flow, certain notesComparatives for corresponding period in previous yearNeed not be auditedNo quarterly reporting requirements

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Corporate governance

No mandatory requirements for AIM companiesBest practice based on combined code requirements

Principles:Efficient management

Effective management

Entrepreneurial management

Code of Best Practice for AIM companiesQuoted Companies Alliance (QCA)

QCA Link: www.qcanet.co.uk

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Key issues - conclusions

Agree timetable, responsibilities and scopeAvailability of historical audited accounts

Compliance with SIRs, ISAs, IFRS, AIM rules etc.

Provide checklists and templatesBoard memoranda - working capital, financial reporting

Due diligence checklists

Structure issuesLegal and tax issues

Corporate governance

Look for solutions not problems

Key accounting issues for an AIM IPO

“Get Ready for AIM”London Stock Exchange7 November 2006 Paul Watts

Capital Markets Partner