Working capital, comfort letters and NTA: the CFO's workstream

Three deliverables, one data spine

The prospectus accounting workstream produces three artefacts that look separate in the document and are inseparable in practice.

• The working capital statement — the directors' opinion that the issuer has sufficient working capital for its present requirements, or, where it does not, an explanation of how the shortfall will be met.
• The reporting accountant's report on the historical financial information, together with the comfort arrangements the underwriters require before they will sign the document and close the deal.
• The net tangible assets (NTA) statement, usually read alongside a capitalisation and indebtedness table, describing the balance sheet as it will look after the offer.

All three derive from the same model, the same share count and the same net proceeds. When they drift apart — a stale share count in the cap table, a revised use of proceeds that nobody carried back into the working capital model — the inconsistency is visible to every reviewer at once.

The workstream does not start when the prospectus is drafted and does not end when it is approved. It starts with a dry run well before the first draft and finishes with a dated letter at closing. It sits inside the wider finance workstream described in our finance and reporting readiness guide, but its output is single-purpose: numbers an investor, a regulator and an underwriter can all test.

Building a defensible working capital forecast

Begin with the definition. Working capital means the cash and liquid resources the group can genuinely draw on: cash balances, committed undrawn facilities, and other resources that are actually available. Present requirements means the outflows it must meet: operating costs, committed capital expenditure, debt service, tax, and any committed distributions.

In the EU, the Prospectus Regulation and its delegated regulation require a working capital statement, and ESMA's guidelines on disclosure requirements set out how it is assessed and drafted, including counting amounts reasonably expected to be received or paid over at least the next 12 months from the date of approval of the prospectus, and including the impact of any firm commitment to acquire another entity inside that window. The same broad principle applies on UK regulated markets, where the FCA's prospectus rules and its primary market technical notes govern the statement, and the FCA's guidance is explicit that a clean statement cannot sit alongside risk factors suggesting the group may run out of money within the period.

Build the model to flow, not to reconcile

• Model monthly, not annually. A statement built from annual budget lines hides timing problems.
• Drive it from cash. Start at the last audited or reviewed balance sheet date and roll forward with a full indirect cash flow statement, a profit and loss account and a balance sheet that ties.
• Use the accounting policies applied in the historical financial information, not management's preferred internal presentation.
• Put every driver in one place: volume, price, gross margin, debtor days, creditor days, inventory days, payroll, rent, capex, tax payments and interest.

The first reviewer question is always the same: does the last actual month tie exactly to the numbers in the historical financial information? Break that tie and you lose the room.

Scenarios are the substance of the statement

A base case alone does not support a clean statement. Build three cases: the base case the business is managing to; a reasonable downside, meaning the coherent combination of the largest realistic sensitivities occurring together rather than a series of unrelated disasters; and, internally only, a deliberate stress case used to find the breaking point and size headroom.

Each case needs defined triggers and a monitoring routine, so that when the world moves you know which case you are in before the auditors ask. Sensitivities worth modelling explicitly include revenue timing, margin compression, currency, the working capital swing itself, covenant headroom and the withdrawal or non-renewal of a facility.

Headroom is where clean statements are won or lost

Common sources of trouble:

• Facilities that are uncommitted, short-dated or repayable on demand.
• Maturities falling inside the forecast window.
• Covenants defined differently from the definitions used in the prospectus.
• Factoring and invoice discounting treated as available when the eligibility criteria cannot be met on the assets in question.
• Shareholder loans assumed to be repaid or extended without evidence.

Document what each source requires, when it stops being available, and what could switch it off. If a source cannot be relied on, leave it out — the statement has to hold in the reasonable downside, not only in the base case.

Keep an assumptions register

One line per assumption: the assumption, its value, its source, its owner, the date it was set, and the basis for treating it as reasonable. This register is the evidence pack your reporting accountant and auditors test against, and it turns "why did that number change?" from a two-day exercise into a two-minute one. Map each line to a named finance owner in your workstream plan; the RACI tool is the natural place to keep it.

Clean or qualified

A statement is clean when the directors can say without qualifying wording that working capital is sufficient. Guidance in both the EU and UK discourages hedged language such as "will", "may" or "believe" in a clean statement, because it leaves the reader unsure when the resources become sufficient; the statement should simply say they are sufficient. If you find yourself wanting to attach assumptions, sensitivities or caveats, that is usually the signal that the correct answer is a qualified statement.

Where the statement is qualified, the disclosure normally has to cover four things: the timing of the shortfall, its approximate size, the action plan for closing it, and the implications if those actions fail. Managing a qualified statement is a disclosure project in its own right, and it needs to be consistent with the risk factors and the use of proceeds.

What the reporting accountant and auditors need

The report on the historical financial information

The reporting accountant reports on the historical financial information included in the document, applying the reporting framework required for the prospectus, and normally reviews the interim period. Agree the mechanics before numbers are pulled: which periods are audited, which reviewed, how the interim period is derived, which entity is the reporting entity, and how the group perimeter changed over the period covered.

Comfort letters

In a US offering the underwriters receive a comfort letter from the issuer's independent accountants, prepared under the accounting profession's standard for letters to underwriters. The letter records the procedures performed, confirms the accountants' independence and the coverage of the audited and reviewed periods, gives negative assurance on changes since the latest balance sheet date covered by the document, and provides "circle-up" comfort that figures in the document agree to the accounting records or are arithmetically accurate. Its practical purpose is to help the underwriters build their due diligence defence under Section 11 of the Securities Act of 1933.

The operational point that catches finance teams out: comfort is normally limited to information expressed in money amounts, or percentages derived from them, that comes from accounting records subject to the issuer's controls over financial reporting, or is derived from those records by analysis or computation. Everything else — KPIs, volumes, subscriber numbers, market data, order book claims — sits outside comfort and must be supported by your own traceability pack. Build that pack anyway: source system extract, reconciliation to the reported figure, named owner, dated. Our prospectus financial information checklist covers the underlying schedules.

Two letters are typical in US offerings: one dated at or near the effective date, and one bring-down at closing, with drafts possibly requested at each filing date. Diary them backwards from pricing and treat the accountants' capacity as a hard timetable constraint. In EU and UK offerings the equivalent assurances come from the reporting accountant and follow the underwriters' requirement list rather than a single fixed standard, so agree the scope of comfort early with the banks.

Constructing the net tangible assets statement

Net tangible assets are equity less intangible assets. Deduct goodwill, brands, capitalised development costs, purchased intangibles, deferred tax assets and similar items, on the basis of the policy you state. The exclusions are the statement — say clearly what has been left out and why.

Then apply the transaction adjustments: net proceeds, offer costs, conversion or redemption of instruments, capitalisation of reserves, share issues and the post-offer debt position. Present the statement as at a stated date and as adjusted, with each adjustment described.

Practical rules:

• Anchor to the same cut-off date as the capitalisation and indebtedness table, and keep it recent. In the EU, capitalisation and indebtedness information is prepared specifically for the prospectus and the cut-off has to fall within the window set by the delegated regulation and ESMA's guidance; practices differ by jurisdiction and change over time, so confirm the current expectation with your competent authority or advisers.
• Split the indebtedness table short-term versus long-term, and guaranteed versus unguaranteed or secured versus unsecured, with definitions footnoted.
• Reconcile to the same share count used in the cap table and dilution disclosures.
• Use the same net proceeds figure that appears in the use of proceeds section and in the working capital model.
• Have the reporting accountant agree the derivation and the arithmetic, even where the statement is not separately audited.

Running the iterative review cycle without losing the timetable

Timetables usually break in one of four places: a number changes after the marketing draft is printed; the use of proceeds changes and invalidates the working capital statement; a newly drafted risk factor contradicts a clean statement; or comments arrive in waves and the finance team re-answers the same questions from scratch each time.

Controls that hold:

1. One financial core. A single model and a single master numbers file, released once per prospectus draft. Every downstream document pulls from it.
2. Freeze windows and a change log. Numbers freeze before each draft; any change after the freeze needs a written reason, an owner and a reviewer.
3. Pre-agreed cut-offs. Cut-off conventions, rounding conventions and the treatment of immaterial items agreed with the reporting accountant in advance.
4. A dry run before the first draft. Run the full working capital exercise, sensitivity analysis and assumption register while the timetable is still comfortable, so the first real draft is a review rather than a discovery.
5. Restricted change rights. A short list of people who can request a number change, and one person — usually the CFO or group financial controller — who approves it.
6. A consistency test before every release. Trace share count, net proceeds, use of proceeds, pro forma net debt, NTA and working capital headroom through every section, and check each liquidity-related risk factor against the statement.

The CFO's role in the cycle

The CFO is the owner of two judgement calls that no adviser can make: whether the working capital statement is clean or qualified, and whether the assumption register is defensible as it stands. Both are re-tested every time the prospectus is updated, which means the workstream needs a standing rhythm — model refresh, scenario check, assumption review, consistency test — rather than a one-off project plan.

Keep the working capital model, the funds-flow model, the cap table and the NTA statement on the same release cadence, and the iterative review cycle stops being a source of timetable risk. Let them fall out of step, and every reviewer will find the gap before you do.