Creating SEC-Ready Financials for IPO: What to Know and Where to Start

As part of the IPO process, private companies must substantially update their existing financial statements for inclusion in an initial registration statement filing with the SEC.

Making these changes often necessitates a series of firsts for CFOs and controllers in their current roles, such as:

• Completing accounting policies/technical analysis and finalizing new disclosures in accordance with SEC Regulation S-X.
• The drafting of a Management Discussion & Analysis (MD&A).
• The implementation of a more robust financial reporting tool.

This work is imperative to IPO readiness and will require a core IPO team of internal, external, and third-party stakeholders to collaborate cross-functionally. As a result, a timely transformation of the financial reporting process and technology architecture must occur without disrupting the broader IPO timeline.

Here’s where pre-IPO companies should focus their most immediate financial reporting attention and resources to ensure a successful registration:

New Disclosures

Public companies are subject to increased disclosure requirements under SEC Regulation S-X. The footnotes and presentation of the initial registration statement matter.

The statement should consist of the following:

• Operating segments.
• Earnings per share (EPS).
• Presentation and disclosure of certain redeemable securities as temporary equity.
• Proposed adoption of new accounting guidance applicable to public companies.
• Accounting policy for Goodwill (if change from private company alternative is required).
• Certain income-tax-related disclosures.
• Certain disclosures related to pensions and other postretirement benefits.

Prior to finalizing new disclosures, pre-IPO companies must complete their accounting policy and technical analysis for each additional disclosure, which will extend the time it takes to prepare financial statements. Additionally, it’s essential that companies coordinate with their external auditor on completing incremental audit procedures around the S-X uplift. Again, this phase of the process will impact the overall IPO timeline, so understanding the time implications of these steps is key to IPO readiness.

Management Discussion & Analysis

Preparing the MD&A is a significant effort for private companies – it’s a new process and the output is subject to a high level of scrutiny from underwriters, executives, and the SEC. The MD&A receives the most comments from the SEC, meaning companies must have a detailed approach to MD&A preparation to reduce rework and delays.

Below are some MD&A best practices to follow:

• Identify a group of peer companies and review their MD&A with management to understand how your company will compare.
• Review comment letters received by peer companies and other registrants on their MD&A to avoid common pitfalls (e.g., lack of granularity on drivers of change in revenues).
• Finalize the operating segment structure with the executive team and with the auditors prior to drafting any version of the MD&A due to the downstream impact changes might cause.
• Prioritize the preparation of a draft MD&A early in the IPO process to facilitate timely feedback from the CFO, Investor Relations, SEC counsel, and others before it’s put into the registration statement for wider review. This will ensure broad organizational alignment.

Financial Reporting Tool

In general, private companies rely on manual financial reporting processes without the support of a reporting tool, which can lead to inefficiencies and control deficiencies.

It’s not uncommon for external auditors to issue deficiencies on internal controls over financial reporting (ICFR) to new registrants – a symptom of poor reporting processes or absence of critical reporting technology.

Cloud-based financial reporting tools offer an efficient and collaborative option for preparing private companies’ financial statements. Critically for prospective registrants, these tools also provide additional layers of quality assurance and review controls over the financial reporting process. Cloud-based reporting software can enable electronic SEC filings as well, eliminating the need for traditional financial printers and achieving greater efficiency when preparing a registration statement.

Ahead of the IPO process, CFOs and controllers should partner with technology stakeholders to align on the exact type of technology to implement, conduct vendor assessments, and optimize the reporting process architecture without extending the IPO timeline. Companies should have several months of experience using these new tools successfully and efficiently before going public to ensure continuity and change management in a public operating environment.

For more information on producing SEC-ready financials and accelerating your IPO-readiness journey, contact Biovell .