Page 333 - CA Final PARAM Digital Book.

the above, and based on the trend of operating results, the accountant has to advise the acquiring
enterprise, through due diligence report, on the indicative valuation of the business. The exercise to
evaluate the balance sheet of the company has to take into consideration the basis upon which
assets have been valued and liabilities have been recognized. The net worth of the business has to
be arrived at by taking into account the impact of over/under valuation of assets and liabilities.

➢ Cash Flow: A review of historical cash flows and their pattern would reflect the cash generating
abilities of the company and should highlight the major trends. It is important to know if the
company is able to meet its cash requirements through internal accruals or does it have to seek
external help from time to time. It is necessary to check:
Whether the company is able to honour its commitments to its trade payables, to the
banks, to government and other stakeholders;
How well is the company able to turn its trade receivables and inventories;
How well does it deploy its funds; and
Whether any funds are lying idle or is the company able to reap maximum benefits out of
the available funds.

➢ Statutory Compliance: This is one area that has to be examined in detail. It is important to make a
list of laws that are applicable to the entity as well as to make a checklist of compliance required
from the company under those laws. If the company has not been regular in its legal compliance, it
could lead to punitive charges under the law. The impact on such violations be quantified and
assessed in respect of entity; financial status and even on its governing concern status.

➢ Human Resources: In the Indian context, the status of work force, staff and employees is a complex
problem. It is important to work out how much of the labour force has to be retained. It is also
important to judge the job profile of the administrative and managerial staff to gauge which of
these matches the requirements of the new incumbents. The aspects whether all employee
benefits like PF, Gratuity, ESI and superannuation have been properly paid/funded. The pay
packages of the key employees will be thoroughly reviewed since this can be a crucial factor in
future employee costs.
(b)The contents of a due diligence report can be discussed under:

(Start of the Report)
➢ Terms of reference and scope of verification.
➢ Objective of due diligence.
➢ Brief history of the company including shareholding pattern.

(Legal DD Related)
➢ Assessment of possible liabilities on account of litigation and legal proceedings against the company
and suggestion on ways and means including affidavits, indemnities, to be executed to cover
unforeseen and undetected contingent liabilities.
➢ Status of franchises, license and patents.

(Operational / Commercial DD Related)
➢ Assessment of operating results.

(Environment DD Related)
➢ Assessment on Environment Related Policies
(Personnel DD Related)
➢ Assessment of Management Structure.
(Financial DD Related)
➢ Assessment of valuation of assets including comments on properties, terms of leases, lien and
encumbrances including status of charges, liens, mortgages, assets and properties of the company.
➢ Assessment of financial liabilities with special emphasis on Interlocking investments and financial
obligations with group/associates’ companies, amounts receivables subject to litigation, any other
likely liability which is not provided for in the books of account.
➢ Assessment of net worth.
(TAX DD Related)
➢ Assessment of taxation and statutory liabilities.
(IT DD Related)
➢ Assessment of Information Technology
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