Due Diligence: Process of Investigation performed by investors into details of potential investment
1. Applicability: HILAR
- Hand Over of Charge within in the same group from one management to another management
- Recommendation for Investment
- Recommendation for advancing a Loan/credit
- Acquiring a controlling interest in a company
- Corporate Restructuring
2. Importance of Due Diligence: VINC
- Verify that transactions complies with investment or acquisition criteria
- Identify potential defects in the target and avoid a bad business transaction
- Gain Information for valuing assets and or Negotiating Price Concessions
- Confirm that the Business is what it appears to be
3. Areas/Classification of Due Diligence: FILE CPT
- Financial Due Diligence - Analysing books of accounts and financial information
- Information System Due Diligence - computer systems
- Legal Due Diligence - Review Legal Aspects
- Environmental Due Diligence - Studying the Entity's Environment
- Commercial Due Diligence - Evaluation from commercial and operational perspectives
- Personal Due Diligence - Entity's Personal Policies
- Tax DUe Diligence - Evaluate the Tax Affect
4. Scope of Financial Due Diligence: CHAPTERS
- Cash Flow - PreDICT
- Review Historical Cash Flows and their Pattern
- How well does it Deploy its funds
- Are there any funds lying Idle or is the company able to get maximum benefits out of the available funds
- Is the company able to honor its Commitments to the trade payables
- How well the company able to turn its trade receivables and inventories
- Brief History of the Target and Background of its Promoters
- Significant Accounting Policies
- Financial Projections
- Taxation
- Management and Employees
- Review of Financial Statements - COBRE (Similar to Cobra)
- Compare the actual figures with budgeted figures
- Objective is to look specifically for any hidden liabilities or over valued assets
- Benchmark normal operating profits against other similar companies
- Applicable Financial Reporting Framework
- Extraordinary Item of Income or Expense that might affect operating results
- Statutory Compliances
5. Examples of Hidden Liabilities: - SUBCELLS + WTP
- Company agreed to pay liabilities of Subsidaries
- Unfunded Gratuity/Superannuation/Leave Salary liabilities/ incorrect gratuity valuations
- Agreement to Buy Back shares at stated Price
- Letter of Comfort given by company not disclosed in the balance sheet
- Environmental Problems
- All Litigations
- Future Lease Liabilities
- Show Cause notice which has not matured into demands
- +
- Warranty Liabilites
- Tax Liabilities
- Pending Final Assessment of Customs
6. Examples of Over-Valued Assets: NEUROPIL
- Investments at Cost though NRV is lower
- Infructurous Project Expenditure
- Uncollectable Receivables
- Capitalisation of Revenue Expenditure
- Obsolete Inventories
- Obsolete Plant and Machinery
- Intangible Assets of No Value
- Litigated Assets and Property
7. Contents of a Due Diligence Report - SHOE + FRONTALS + SOFA
- Share Holding Pattern
- Brief History of the Target
- Objective and Scope of Due Diligence
- Executive Summary --> Introudction
- +
- Financial Liabilities
- Review of Components of Due Diligence
- Operating Results
- Net Worth
- Taxation and Statutory Liabilities
- Valuation of Assets
- Possible Liabilites on account of litigations and legal proceedings
- Management Structure
- +
- Swot Analysis
- Financial and other Obligations
- Comment on Future Projections
- Status of Charges, Liens, mortgages, Assets and properties of the company
- Suggestions on various aspects to be taken care of
Note: Above information is only informative and for remembering purposes only. For detailed information it is always advisable to refer ICAI Study Material
CAclubindia
