The first half of 2023 saw global Initial Public Offering (IPO) volumes drop by 5% from the previous half-year results, with proceeds falling 36% year-over-year (YOY).
Understanding the roadmap from concept to IPO is crucial for navigating the complicated landscape of growing your company. Here is a look at five accounting areas to focus on during the process to ensure a successful IPO.
1. Registrant’s Financial Statements
Before an IPO, the company’s management may need to consider restructuring for tax or business reasons. The process may involve combining several transactions or entities, forming a “predecessor,” a broadly defined entity under Rule 405 of SEC’s regulation C.
Ending up with a predecessor adds another layer of complexity, requiring additional financial information in the registration statement. Additionally, they must decide which entity will be the predecessor based on size, value, and order of acquisition.
2. SEC S-X Rule 3-05
SEC S-X Rule 3-05 requires public companies to provide audits of financial statements of any major business acquisitions in their SEC registration statements.
The SEC requires this to determine the significance of the acquisition and will do this using the investment, asset, and income tests. They will gauge the importance of the acquisition by considering the highest score on any of the tests.
Pre-IPO companies must carefully consider the impact of this rule before making any acquisitions because even though the acquisition might score lowly in one test, it might perform highly in another.
That will compel the SEC to demand production of further financial statements, which can be problematic for conventional acquisitions that typically target smaller companies.
3. Define Key Performance Indicators
Companies seeking to go public must include a management discussion and analysis (MD&A) section in their IPO registration statement.
The MD&A gives a narrative account of the financial statements and other statistical data, which helps investors understand how the business performs.
Key Performance Indicators (KPIs) are essential to meeting management’s reporting requirements, and companies should choose and create KPIs that effectively communicate performance and offer insight into financial statements.
4. Technical Accounting Issues
Pre-IPO companies must pay special attention to specific technical accounting issues to ensure compliance and prevent complications throughout the IPO process.
These accounting issues generally involve new rules, contradictory interpretations, or SEC scrutiny, and proactively addressing them reduces the risk of complicated comment periods or issuing restatements. Some of the issues include:
Cheap stock
Revenue recognition
Segment reporting
Impairment issues
Companies must address these concerns per generally accepted accounting principles (GAAP) to achieve accurate financial reporting.
5. Pro Forma Financial Information
Pro forma financial information is a key accounting area of an IPO because it shows how certain transactions impact historical financial statements.
Companies may need to provide the information during crucial company events like dispositions, acquisitions, roll-up transactions, or structure changes.
The registration statement should include a shortened pro forma income statement and balance sheet. Pre-IPO companies need to understand situations that call for pro forma financial information and prepare such statements using generally accepted metrics and assumptions.