Treasury Today Country Profiles in association with Citi

Treasurers taking key role in IPO

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Treasurers about to go through an IPO take note: you will have a significant role to play as reporting under IFRS demands closer attention to your financial instruments. Treasury Today talks to Ernst & Young Global about the impact of going public.

When a private company embarks on an initial public offering (IPO), its reporting obligation increases considerably. Where the move to International Financial Reporting Standards (IFRS) is mandatory – as it is for the public issuance of shares or bonds in a European Union country – the presentation of consolidated financial statements is likely to take on the increased challenge of conversion from existing GAAP reporting to the global standard. This can have a major bearing on the reporting duties of the treasurer.

“The treasury function is significantly impacted by a convergence to IFRS, particularly in relation to determining how financial instruments are affected by the IPO,” states Peter Wollmert, E&Y Global Financial Accounting Advisory Services (FAAS) Leader. Existing hedging strategies will have to be reassessed under the new guidance to ensure they still operate as intended, he reports. And complex financial instruments, such as derivatives, will also need to be recognised and measured under IFRS.

“Hedging arrangements that currently look fantastic under national GAAP might not look as attractive under IFRS, and treasury is often tasked with making relevant amendments to aid a more attractive IPO,” notes Wollmert. “With the upcoming change to IFRS 9 the treasury function will need to consider the impact of conversion to IFRS under the old IAS 39 and under this new standard.” IFRS 9 will be effective for annual periods beginning on or after 1st January 2018.

Restructuring for IFRS

In reality, the broader accounting implications vary greatly for organisations looking to launch an IPO. This can be shaped by either the country the organisation is based in or the peer practices of the industry sector in which the business operates. Because of this variance, Wollmert urges organisations looking to go down the IPO path to carry out an impact assessment as early as possible to understand how significant the implications are for their business across all relevant functions.

The practical requirements of restructuring to meet IFRS guidelines involve a number of considerations, ranging from accounting systems and business structure through to remuneration and resource planning. “One of the first priorities has to be looking at whether existing reporting systems are designed to capture the right data for reporting under IFRS,” notes Wollmert. “Changing the system architecture to support the new requirements is often something that needs to be factored into the process.”

Stakeholder communications will also be a key part of the conversion process. Any element of financial reporting currently based on national accounting standards will need to be updated and appropriate messaging about any conversion impacts will be required. As an example, Wollmert says banking covenants previously made under the old accounting framework may need to be revised. Management reporting may also need to be updated and other stakeholders, like owners, suppliers and customers should be kept informed.

Resource planning is also another practical requirement. “There is often a long-lead time required to get everything ready for an IPO, even down to training the finance function to report under a new set of accounting standards.”

Timing of the conversion

“Time management is a critical component of preparing for an IPO as there are often lots of work streams attached to getting ready for a listing,” notes Wollmert. Consideration should be given up front to determine an appropriate project plan in order to ensure the finance team has sufficient time and resources to deliver on plan. The nature and timing of the financial reporting required should then be one of the first priorities once the overall IPO plan has been established.

Depending on where a business decides to list will also impact on the process, as stock exchanges globally all have different requirements for historical and current financial information (including comparative periods presented) and, warns Wollmert, gathering the data required will be a lengthy process.

Whilst the IFRS conversion for the initial listing documentation is a one-off exercise, after the IPO there will be ongoing IFRS reporting requirements. These are usually on a quarterly or semi-annual basis at a minimum but a business must disclose every event that materially affects it, whether good or bad, ‘as promptly as possible’ – typically within 10 days. Accordingly, says Wollmert, it is important to ensure financial reporting processes and controls that are in place “are fit for purpose”.

Capturing new data

IFRS typically requires more disclosure than under local accounting standards, as well as a change in the recognition, measurement and presentation of various items. This will have a significant impact on how financial statements appear. “In the initial phase, an IPO is essentially about providing the best story to the market,” comments Wollmert. “Ensuring your financial reports present the right messages is a key practical step in preparing for an IPO.”

On an ongoing basis, IT systems will need to capture and report this new information. Frequently, there are gaps in the data required and thus updating systems to ensure all the right information is gathered is critical. It is far easier to capture data in real-time than to go back and do this retrospectively.

Financial processes and controls will also be fundamentally impacted by the change. For example, the statutory and group reporting processes, alongside the consolidation itself, will need to be redesigned accordingly. Subsidiaries around the world might currently report under their own local accounting standards or their parent company national standards, so deciding whether subsidiaries will change to reporting under IFRS or whether group finance will convert all local reporting is a factor to consider, says Wollmert.

“Sometimes organisations see IFRS conversion as an opportunity to undergo a wider conversion at the subsidiary level – facilitating consistency across the group – while others choose to convert at group level and not spend the time or resources on upskilling their people regionally.”

Market needs

A number of technical issues around compliance may arise when, for example, a company is looking to list in more than one country. In such a case, it is important to understand that each stock exchange around the world will have different listing requirements, both as part of the initial listing and on an ongoing basis.

“The key point when considering any listing is assessing the long-term impact on compliance requirements and risk management,” says Wollmert. “Companies must be prepared for the high resource and cost requirements of trading equity instruments on any exchange globally, and assessing this readiness will be a key part of any successful IPO process.”

Furthermore, he notes that financial statements and other filings will come under increased scrutiny from stakeholders, such as investors. “IPO candidates must be aware of this heightened interest and be ready to respond appropriately.” This interest does not stop at the numbers – the new investors in the business will be interested in the business as a whole, including risk management and corporate governance.

Global benefits

IFRS is internationally recognised by investors, suppliers and customers, right across the world. Currently, 116 jurisdictions worldwide require IFRS reporting for some or all of their domestic publically accountable entities, including the EU, Australia, Canada, Brazil and many Asia-Pacific countries. Under many circumstances, Foreign Private Issuers are also permitted to use IFRS in the US.

“Whilst it requires greater disclosure, which may increase the burden of reporting, the detailed guidance and consistency provided by IFRS means that external stakeholders will understand clearly what picture an organisation is trying to represent,” explains Wollmert. As such, many organisations choose to report under IFRS rather than US GAAP as it is more flexible and allows more judgments to be made about the numbers that best represent the business.

“As IFRS means you can align subsidiaries and group all under one set of accounting standards, many organisations find this useful, particularly as the quality of reporting under IFRS in comparison to national GAAP is also better.” In the long run, the extra demands placed on treasurers will be more than offset by the benefits of consolidated financial statements. But, notes Wollmert, the changes likely to be implemented by an organisation looking to go public will still require “a significant amount of work”.