Accounts Notes: FINANCIAL DUE DILIGENCE

Friday 25 March 2011

FINANCIAL DUE DILIGENCE

Sometimes it is interpreted as complete Due Diligence review as it ascertain the financial implications of all other Due diligence reviews, yet its scope is less than over all Due Diligence reviews.
A full-fledged financial Due Diligence review includes the following:-
(1) BRIEF HISTORY OF TARGET AND BACKGROUND OF ITS PROMOTERS:-
How Company was set up, who were original promoters, its survival strategies in past, any regulatory requirement, history like nature of production, location, product/ service and markets, franchises, licenses, patents, R & D, legislation & regulation, information systems.
(2) ACCOUNTING POLICIES:-
Appropriateness, effect of recent changes in A/c policies, effect on overall profitability and their correctness. Areas where A/c polices of target are different from that of acquiring enterprise and their effect.
(3) Review of Financial Statement:-
In accordance with statute, relevant framework and A/c standards. Review the operating results, extraordinary items. Comparison of actual figures with budgeted figure. Trading results of last 4-5 years, valuation of intangible assets, special attention to over valued assets or hidden liabilities.
(4) Taxation:-
Regularity of payment of various taxes to government, tax affects of mergers.
(5) Cash Flow:-
Cash generating abilities and major trends.
(6) Financial Projections:-
For next 5 yrs with detailed assumptions and workings on optimistic, pessimistic and most likely basis. If projections are inappropriate highlight the areas.
(7) Management and Employees:-
Status of work force, staff and their demands etc. excess work force and implications, pay package, employee benefit PF, gratuity, E.S.I. leave and superannuation etc. to be taken care of.
(8) Statutory compliance:-
List of applicable laws, punitive charges etc.

Fine/Penalty-
Contents of Due Diligence Report
(i) Summary
(ii) History of Target
(iii) History of Promoters
(iv) Review of Operational D.D
(v) Review of Financial D.D
(vi) Review of Tax D.D
(vii) Review of Information system D.D
(viii) Review of Legal D.D
(ix) Review of Environmental D.D
(x) Review of Personnel D.D
(xi) SWOT Analysis
(xii) Suggestion