Guidelines on Review and Verification of Financial Statements Submitted for Initial Public Offering 2082

Fiscal Year 2083.01.01
Guidelines on Review and Verification of Financial Statements Submitted for Initial Public Offering 2082

Pursuant to the special authority granted to the Board under Section 90 of the Securities Act, 2063, and in accordance with Clause (c) of Sub-section (1) thereof, there is a provision for the review and verification of the financial statements and financial projections submitted by entities seeking to issue securities and securities intermediaries by a qualified expert. Given that the Board's existing provisions for Initial Public Offerings (IPO) require the review of financial statements and projections of applicant entities to ensure transparency and proper conduct, the Board has formulated these guidelines to be implemented.

1. Review and Verification of Financial Statements

The financial statements submitted by the entity during the IPO process shall be reviewed and verified based on the following Securities Board guidelines.

1.1 General Guidelines

For entities applying for an Initial Public Offering (hereinafter referred to as "IPO"), the financial statements of the current fiscal year, the financial statements of the immediately preceding fiscal year, and any interim financial statements prepared in between shall be reviewed and verified if any of the following circumstances exist:

1.1.1 The following documents shall be reviewed and verified in relation to the financial statements of the immediately preceding fiscal year and interim financial statements:

(a) If the entity's sales revenue (sales directly related to the business) exceeds 75% of trade receivables and other similar amounts.

(b) If the entity has taxes, duties, and other payments due to the Government or government agencies, and upon allocating these amounts, it appears that the entity may not meet the minimum capital, net worth, and other financial requirements for the IPO.

(c) If the entity has taxes, duties, and other payments due to the Government or government agencies, and upon allocating these amounts, it appears that the entity's net worth or paid-up capital may fall below half of its previous level.

1.1.2 The following documents shall be reviewed and verified in relation to the financial statements of the immediately preceding two fiscal years:

(a) If transactions with related parties account for 30% or more of the entity's fixed assets/business assets.

(b) If there has been a change in the entity's accounting policies or accounting estimates (except where such changes are clearly justified by relevant standards), and it appears that such changes may cause the entity to fail to meet the minimum capital, net worth, and other financial requirements for the IPO.

(c) If transactions with related parties (excluding transactions with government agencies) account for 30% or more of the entity's total annual commercial sales.

(d) If the entity's non-operating income (excluding income directly related to the business) or reserves (excluding amounts transferred from profit/loss accounts) have caused it to appear that the entity may not meet the minimum capital, net worth, and other financial requirements for the IPO.

(e) If the auditor's report contains any qualifications, and upon allocating the amounts related to such qualifications, it appears that the entity may not meet the minimum capital, net worth, and other financial requirements for the IPO.

(f) If the financial statements have been restated for reasons other than the restatement of previous years' financial statements due to changes in accounting estimates in the auditor's report, and it appears that such restatement may cause the entity to fail to meet the minimum capital, net worth, and other financial requirements.

(g) If prior period adjustments (Prior Period Adjustment in Equity, Prior Period Error, etc.) have been made in the entity's financial statements, and it appears that such adjustments may cause the entity to fail to meet the minimum capital, net worth, and other financial requirements for the IPO.

1.1.3 The financial statements of the immediately preceding fiscal year shall be reviewed and verified based on the financial statements of the immediately preceding two fiscal years and interim financial statements if:

(a) After consolidating the circumstances in clauses (a) of sub-sections 1.1.1 and 1.1.2, it appears that the entity may not meet the minimum capital, net worth, and other financial requirements for the IPO.

(b) The circumstances in clause (a) of sub-section 1.1.1 and 1.1.2 exist in the entity's interim financial statements for the immediately preceding period.

(c) If, in the course of implementing the Companies Act, 2063, or if there are indications or suspicions of financial irregularities, or if events presented as IPO prospects may significantly impact the entity's financial position, or for other reasons, the Securities Board and the company promoter deem it necessary to review the financial statements.

1.2 Special (Sectoral) Guidelines

In addition to the general guidelines mentioned in sub-section 1.1, the following sector-specific guidelines shall apply to the entity.

1.2.1 Manufacturing and Processing Industries

(a) If the financial statements of the immediately preceding fiscal year show that sales revenue (sales directly related to the business) exceeds 75% of trade receivables and other similar amounts.

(b) If the financial statements of the immediately preceding two fiscal years show that transactions with related parties (excluding government agencies) account for 30% or more of total commercial sales.

(c) If the financial statements of the immediately preceding fiscal year show a significant difference (more than 30%) in the Gross Profit Margin compared to the average of the previous two fiscal years.

(d) If the financial statements of the immediately preceding fiscal year show a significant difference in the ratio of interest/financial expenses compared to the average of the previous two fiscal years' interest expenses, interest rates, and loan amounts.

1.2.2 Hotels and Tourism

(a) If the financial statements of the immediately preceding fiscal year show that sales revenue (sales directly related to the business) exceeds 50% of trade receivables and other similar amounts.

(b) If the financial statements of the immediately preceding two fiscal years show that transactions with related parties (excluding government agencies) account for 30% or more of total commercial sales.

(c) If the financial statements of the immediately preceding fiscal year show a significant difference (more than 30%) in the Gross Profit Margin compared to the average of the previous two fiscal years.

(d) If the financial statements of the immediately preceding fiscal year show a significant difference in the ratio of interest/financial expenses compared to the average of the previous two fiscal years' interest expenses, interest rates, and loan amounts.

1.2.3 Hydropower, Energy, and Energy Projects

(a) If, based on the financial statements of the immediately preceding fiscal year, transactions with related parties exceed 30% of the total project cost.

(b) If the financial statements of the immediately preceding two fiscal years show that the Internal Rate of Return (IRR) calculated using IFRIC-12 accounting differs significantly, and upon allocating such differences, it appears that the entity may not meet the minimum capital, net worth, and other financial requirements.

(c) If the financial statements of the immediately preceding fiscal year show a significant difference in the ratio of interest/financial expenses compared to the average of the previous two fiscal years' interest expenses, interest rates, and loan amounts.

(d) If the entity has invested in other projects within the minimum period prescribed for the main project, and the amount invested exceeds the amount raised through public issuance.

1.2.4 Investment Companies

(a) If the financial statements of the immediately preceding two fiscal years show that transactions with related parties (excluding government agencies) account for 30% or more of total commercial sales.

(b) If the financial statements of the immediately preceding two fiscal years show that the direct income of the investment company is different from the Securities Board's prescribed purpose, or differs significantly from the prescribed investment sectors.

(c) If the financial statements of the immediately preceding fiscal year show that more than 50% of the entity's net worth or paid-up capital is used for purposes other than its stated business objectives.

(d) If the financial statements of the immediately preceding two fiscal years show frequent changes in the entity's accounting policies, and upon allocating amounts related to such changes, it appears that the entity may not meet the financial requirements for the IPO, such as minimum capital, net worth, and paid-up capital.

1.3 Others (Applicable to all other cases not covered by the general circumstances in sub-section 1.1 and special circumstances in sub-section 1.2)

1.3.1 If there are queries or doubts regarding the financial statements submitted by the entity applying for the IPO, and it is deemed necessary to conduct a review and verification based on preliminary studies.

1.3.2 If the Government of Nepal, constitutional bodies, or parliamentary committees direct review and verification.

1.3.3 In other circumstances determined by the Board.

2. Qualifications of the Financial Expert for Review and Verification

2.1 A Chartered Accountant who has obtained a professional certificate from the Institute of Chartered Accountants of Nepal (ICAN) and has at least 10 years of experience, or a Chartered Accountant who has obtained a professional certificate from ICAN and has at least 5 years of experience after passing the Forensic Accounting and Fraud Detection (FAFD) examination conducted by ICAN.

2.2 The financial expert must have been a partner in a partnership firm for at least 5 years.

2.3 The expert must not have provided any audit or other financial advisory services to the entity concerned within the last two years.

2.4 The financial expert must declare that there is no conflict of interest with the entity concerned, the securities issuer, or the company promoter.

3. Duties and Responsibilities of the Expert for Review and Verification

3.1 The expert shall analyze the circumstances applicable to the entity as mentioned in sub-section 1 (Guidelines on Review of Financial Statements).

3.2 Based on the necessity arising from the analysis in sub-section 3.1, the expert shall conduct a detailed analysis of the following and more:

3.2.1 Examine transactions with related parties in the financial statements of the immediately preceding two fiscal years and verify if they are at Arm's Length Price.

3.2.2 Verify the authenticity of changes in accounting policies and unusual changes in accounting estimates in the financial statements of the immediately preceding two fiscal years.

3.2.3 Examine the balances of debtors/creditors in the financial statements of the immediately preceding two fiscal years and verify if adequate provisions have been made for any losses.

3.2.4 Examine contingent liabilities and commitments (Going Concern) and verify if they are properly accounted for and disclosed.

3.2.5 Examine unusual transactions, such as abnormal expenses and incomes, verify their authenticity, and confirm if they are at Arm's Length Price.

3.2.6 Verify the basis for share valuation to be issued in the prospectus according to the Securities Act and relevant rules, and examine the reliability of the estimates used in the valuation.

3.2.7 Analyze qualifications and specific items mentioned in the auditor's report of the immediately preceding two fiscal years and verify their financial impact.

3.2.8 Analyze the sales, expenses, assets, and liabilities of the immediately preceding two fiscal years.

3.2.9 Verify violations of direct tax provisions applicable to the company (as per the Income Tax Act related to securities) and analyze their financial impact.

3.2.10 Determine if any additional documents or statements are required for the preparation of the prospectus.

3.2.11 Analyze the allocation of transactions for the year, reclassifications, and their authenticity.

3.3 Examine the entity's Going Concern status.

3.4 Examine the Projected Financial Statements prepared by the company. Verify if projections are based on historical achievements, industry conditions, management capability, resource availability, market reach, network availability, and reliable estimates, and verify the next year's projections.

3.5 Unless otherwise mentioned, the expert shall analyze any important information obtained regarding the IPO.

3.6 The financial expert shall submit a report to the Board containing the analysis and verification of the subjects mentioned in sub-sections 3.2, 3.3, 3.4, and 3.5, along with the analyzed financial statements.

3.7 The expert shall maintain confidentiality regarding the information, documents, and statements obtained during the review of financial statements. The expert shall provide necessary statements if requested by the Board.

4. Duties and Responsibilities of the Securities Issuer and Company Promoter Regarding Review and Verification

4.1 When submitting to the Board for the IPO, the company shall conduct a preliminary examination of the company's financial position based on the guidelines in sub-section 1, along with a Due Diligence Certificate, and submit the statements to the Board.

4.2 Upon receiving information that the financial statements of the entity need to be reviewed and verified by the Securities Issuer and Company Promoter, the company shall appoint a financial expert listed with the Institute of Chartered Accountants of Nepal and submit the application to the Board.

4.3 The Securities Issuer and Company Promoter shall submit the recommendation of the appointed financial expert to the Board along with the application mentioned in sub-section 4.2.

4.4 The Board shall appoint one expert from among those recommended, considering the qualifications, scope of work, and service scope of the recommended financial experts under these guidelines.

4.5 The appointed expert shall submit a report to the Board within 30 days of receiving approval from the Board for the review and verification of the entity's financial statements. If unable to submit within 30 days, the Board shall be informed of the reason, and an extension of up to 10 days may be granted.

4.6 The entity shall bear the remuneration and other expenses related to the financial expert.

4.7 The Securities Issuer and Company Promoter, and the entity shall provide necessary assistance to the financial expert during the review and verification of financial statements, including providing required documents, statements, site inspection, and other work.

(a) If an entity that has submitted documents for the Initial Public Offering of securities receives an Adverse Opinion or Disclaimer Opinion from the auditor in the auditor's report of the immediately preceding fiscal year, such entity is not eligible for the Initial Public Offering.