What you need to know before IPO

Planning to go public? Focus on these five complex areas to reduce the number of red flags.

You want to take your mid-market company public. Before you can reap the benefits—access to capital, improved financial status, higher visibility and increased employee motivation and retention—first you must create a coherent IPO (Initial Public Offering) plan that addresses the significant accounting issues you’re now facing. These five areas cause considerable headaches for companies looking to go public and should be addressed to minimize problems as your IPO date nears:

1. Registrant’s requirements 

Is restructuring on the table for your company before going public, for tax purposes or other business needs? If multiple entities combine to form a registrant (also known as a roll-up or put-together transaction), the company may need to complete additional financial statements if a “predecessor” entity exists. The registration statement then must include the predecessor’s financial information. Make sure to address this before your mid-market company finalizes its corporate structure as identifying the proper documents can be tricky. 

2. The problematic S-X rule 3-05  

The Security and Exchange Commission (SEC) requires a public company to include audited financial statements in its registration statements for any “significant” business that has been acquired or will be acquired. The significance of the acquisition must be determined to see what reporting requirements a company needs to complete—one-, two-, or three-years’ worth of audited statements. The SEC uses three tests/comparisons for this determination, taking into account investments, assets and income. The highest percentage of these tests determines the length of reporting requirements. 

Other problematic factors include young companies without the necessary years of reporting and unsophisticated financial documentation. Your company should also determine if it needs to meet S-X Rules 3-09 and 3-10, which require financial statements on equity method investments and subsidiaries, respectively. 

3. Unique KPIs

Your key performance indicators should effectively communicate the business’ performance, including historic trends, comparison to peer companies in the same industry and information necessary to understand likely future business developments. Management also should include any metrics not commonly found in the industry, especially since the SEC upholds guidelines that prohibit practices with non-GAAP (generally accepted accounting principles). 

4. Technical accounting issues  

These four areas have become the SEC favorites when it comes to added scrutiny. They involve new laws or may be subject to multiple or subjective interpretations, and without proper consideration, a company may even find themselves subject to issuing a restatement. Instead, get it right the first time by focusing on:

  • revenue recognition and new Financial Accounting Standards Board regulations
  • segment reporting for each line and operational geographic area of your business 
  • the issue of “cheap stock” and requirements under ASC 718 
  • impairment issues including global economic uncertainty, rapid shifts in interest rates and commodity prices. 

5. Pro forma financial information 

In addition to reports showing the impact of any IPO structuring transaction, other necessary items include:

  • disposition of a significant portion of a business
  • acquisition of one or more real estate operations
  • roll-up transactions
  • previous registrant entities
  • any financial events or transaction that would be material to investors

Since pro forma adjustments involve some degree of judgement, the SEC tends to question the results. Your financial team should determine whether any pro forma financial information will be required, and if so, consider using widely accepted metrics. 

KPMG can help you get your house in order

Going public can have tremendous advantages, but the process is complex and time-consuming. Plan early and understand all the challenges when contemplating an IPO. We’ll help you take control of the process, highlighting difficult accounting issues and developing an effective IPO strategy to avoid the most common accounting pitfalls and deliver long-term results.