Special Purpose Acquisition Companies are publicly traded companies formed with the sole purpose of raising capital to acquire one or more unspecified businesses. The management team that forms the SPAC (the “sponsor”) forms the entity and funds the offering expenses in exchange for founder’s shares.
Previously, we discussed the accounting considerations for SPAC sponsors. Additionally, there are a number of considerations for target companies in preparing for the De-SPAC process, which is when the SPAC entity acquires a target company and completes the contemplated merger. Through the De-SPAC process, the target company becomes the operational public company.
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To fulfill many of the requirements for completing the merger transaction, the target company must supply all necessary information for the applicable SEC filings, including audited historical financial statements, including compliance with Regulation S-X and associated disclosures. Consequently, any prior audits performed under AICPA standards must be upgraded to PCAOB standards, in addition to completing any required interim reviews.
Internal Processes and Controls
Under SEC staff guidance, management may skip reporting on the internal controls of acquired businesses when it assesses internal control over financial reporting under Section 404(a) of the Sarbanes Oxley Act in the first Form 10-K following a material business combination. However, it is vital that management implement a plan to address these requirements as soon as practicable due to the amount of time and effort required to complete the process. Implementation efforts can require a robust risk assessment, additional hiring and training of personnel, and new processes or systems to support financial reporting and operational management. The company must also review its entity structure and organizational management, financial reporting close process, IT systems, investor relations, treasury functions, and internal or external SEC legal functions.
Technical Accounting Complexities and New Standard Implementation
There are a number of technical accounting complexities associated with a SPAC IPO and the subsequent De-SPAC process. The application of Accounting Standards Codification 805, Business Combinations, (ASC 805) to the merger transaction requires the accounting acquirer to be identified, which may be a challenging process requiring substantial judgment. The determination of the accounting acquirer has a significant impact on the basis of the financial statement presentation and which company’s financial statements are required to be reported at fair value in accordance with ASC 805 on the date of the merger transaction.
The SPAC and the continuing operating entity may enter into a number of financing transactions that may involve a number of financial instruments that can be highly complex. These instruments may include multiple classes of redeemable and non-redeemable stock, warrants, promissory notes to the sponsors for funds used to pay fees until completion of the SPAC IPO, and, in some deals, a forward purchase agreement, among others. Additional complexities arise if a PIPE commitment is obtained to finance a portion of the purchase price.
There are also important accounting standard differences between public and private companies to prepare for, including ASC 606, Revenue from Contracts with Customers, ASC 842, Leases, and ASC 326, Current Expected Credit Losses (CECL). These accounting standards and others have differing implementation dates for publicly-traded and non-publicly-traded entities. In addition, there are a number of private company accounting elections and practical expedients that may require the unwinding of historical accounting as well as increased disclosure requirements for new public companies.
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