Attack of the SPACs
Attack of the SPACs

Attack of the SPACs

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.

Accounting consideration


Accounting for
share-settleable earn-out arrangements

Often the SPAC and target company enter into an “earn-out” arrangement. These arrangements may be with the target’s shareholders, SPAC sponsors, or both. Typically in an
earn-out arrangement, the combined company issues additional shares of common stock if certain targets are met during a specified period after the merger, or a specific event occurs. These arrangements have complex accounting considerations and often fall under the guidance of ASC 815-40, Derivatives and HedgingContracts in an Entity’s own Equity, rather than ASC 718, Share-based Payments. Careful analysis is required to determine whether these instruments are liability or equity classified, among other considerations.

Identifying the acquirer

ASC 805, Business Combinations requires that one of the combining entities be identified as the acquirer. Usually this is straightforward, and the acquirer is the one transferring cash/other assets or issuing equity interests. However, sometimes legal acquirer (the entity transferring cash or issuing equity interests) is NOT considered the acquirer for accounting purposes. This is known as a reverse acquisition. In a typical SPAC transaction, the SPAC is the legal acquirer, but careful analysis must be made to determine whether it is also the accounting acquirer or whether a reverse acquisition has occurred. Reverse acquisitions have unique accounting considerations. ASC 805 includes guidance on making this determination.

Is “it” a business?

Once the accounting acquirer has been determined, consideration must be given to whether a business has been acquired. If a business has been acquired, the transaction is accounted for as a business combination under ASC 805. If the SPAC is determined to be the accounting acquirer, it must determine whether the target company is a business. In most cases it will be. However, if the target company is determined to be the accounting acquirer, then it must determine whether the SPAC is a business. Often the SPAC is not a business since its only pre-combination assets are cash and investments.

Presentation of reverse recapitalizations

If the target company is determined to be the accounting acquirer and the acquiree (SPAC) is not a business (therefore the transaction is not a business combination), then a reverse recapitalization has occurred. U.S. GAAP does not have specific guidance on the presentation of reverse recapitalizations, however, guidance on reverse acquisitions is often applied by analogy. Applying this guidance means that the financial statements of the combined company represent a continuation of the financial statements of the target.


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!


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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.

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