The use of a “special purpose acquisition entity” (SPAC) allows an alternative path to an initial public offering. SPACs have been incredibly popular lately with an explosion of transactions in 2020 that shows no signs of slowing in 2021. SPACs, like all other securities offerings, have risks. However, SPACS, and each of the parties involved, have unique risks. They also have unique accounting and financial reporting considerations, and since I work for a company that specializes in accounting training, that was the part that intrigued me the most! Last week’s post “SPAC: Is it a hack?” outlined the SPAC itself, the key players involved, and how a typical transaction works. This post continues the discussion to include accounting and financial reporting considerations.

In last week’s post we discussed the typical SPAC transaction in which the first steps are SPAC formation and the initial public offering of the newly formed SPAC. This part of the transaction is fairly straightforward and follows the process of a typical initial public offering. Since the SPAC really only contains cash at this point there aren’t many accounting considerations. However, there are some financial reporting and disclosure considerations, especially if the SPAC already has a target company acquisition in mind.

More significant accounting and financial reporting considerations arise in the next part of the SPAC transaction, the acquisition of the target company. One thing to keep in mind is that much of the burden of these considerations is on the target company. Making this more challenging is the shortened timeframe of many of these transactions. Let’s start with the accounting considerations. I’ve listed four, but there may be more depending on the target company and specifics of the transaction.

From a financial reporting perspective, there are even more considerations for the target company and the associated acquisition. One of the first considerations is whether the SPAC will be required to file a proxy statement or a combined proxy statement and Form S-4. The S-4 is required if the SPAC is registering additional securities as part of the transaction. Some of the financial reporting considerations in these filings include:

• Financial statements must comply with SEC rules and regulations, and FASB public company guidance, including effective dates for new standards
• Audits of financial statements must be performed in accordance with PCAOB auditing standards
• Generally, the proxy/registration statement must include audited annual financial statements for three years, and depending on the timing of the transaction, unaudited interim financial statements
• Consider whether the target company qualifies as a “Smaller Reporting Company” (SRC) or “Emerging Growth Company” (EGC). This will reduce the number of years of audited financial statements to two, along with providing other relaxed reporting requirements
• Include required pro forma financial information that reflects the transaction
• Consider whether, under SEC Regulation S-X Rule 3-05, any financial statements of businesses acquired, or to be acquired, by the target are required to be presented
• Consider whether separate financial statements or other summarized financial information of any equity method investees of the target company are required to be included in the filing under SEC Regulation S-X, Rules 3-09, 4-08(g), and 10-01(b)
• Evaluate rules on the age of financial statements and whether additional financial statements or updating is required as of the filing or effective date of the registration statement
• Consider requirements for other financial and nonfinancial information in the filing such as MD&A, selected financial data, etc.

In addition to the proxy statement and/or Form S-4 filing, a “Super 8-K” must be filed no later than four business days after the close of the target acquisition transaction. In addition to describing the completion of the transaction (Item 2.01), change in control (Item 5.01), and change in shell company status (Item 5.06), among other items, the Super 8-K must also include all the information that would be required in a Form 10 registration statement. While much of the information required by the Super 8-K will have already been included in the proxy statement, additional financial information may be required.

And finally, no discussion of accounting and financial reporting would be complete without mentioning internal controls over financial reporting (ICOFR). Once the transaction is complete, the combined entity must consider all public company requirements related to ICOFR, in addition to all other ongoing reporting requirements for registrants.

And there you have it, a summary of the key accounting and reporting considerations for SPAC transactions. As you can see by the length of this “summary” there are a lot of things to consider!

About GAAP Dynamics  

We’re a DIFFERENT type of accounting training firm. We don’t think of training as a “tick the box” exercise, but rather an opportunity to empower your people to help them make the right decisions at the right time. Whether it’s U.S. GAAP training, IFRS training, or audit training, we’ve helped thousands of professionals since 2001. Our clients include some of the largest accounting firms and companies in the world. As lifelong learners, we believe training is important. As CPAs, we believe great training is vital to doing your job well and maintaining the public trust. We want to help you understand complex accounting matters and we believe you deserve the best training in the world, regardless of whether you work for a large, multinational company or a small, regional accounting firm. We passionately create high-quality training that we would want to take. This means it is accurate, relevant, engaging, visually appealing, and fun. That’s our brand promise. Want to learn more about how GAAP Dynamics can help you? Let’s talk!

Disclaimer  

This post is published to spread the love of GAAP and provided for informational purposes only. Although we are CPAs and have made every effort to ensure the factual accuracy of the post as of the date it was published, we are not responsible for your ultimate compliance with accounting or auditing standards and you agree not to hold us responsible for such. In addition, we take no responsibility for updating old posts, but may do so from time to time.