- By Joseph Hassan, CFA, ASA
- May 3, 2021
Recently, the SEC has issued several Public Statements[1] highlighting a number of important financial reporting considerations for Special Purpose Acquisition Companies (“SPACs”). One recent statement focused on accounting considerations relative to complex financial instruments and specifically warrants.
By way of background, U.S. Generally Accepted Accounting Principles (“GAAP”) include guidance that entities must consider in determining whether to classify contracts that may be settled in its own stock, such as warrants, as equity of the entity or as an asset or liability[2]. SPACs have typically classified warrants on their balance sheets as equity. However, the accounting guidance requires an evaluation of the specific terms of the contract and also of an entity’s specific facts and circumstances.
To this end, in a recent Public Statement dated April 12, 2021[3], the OCA noted that it had evaluated fact patterns involving warrants issued by certain SPACs. In one example, issued warrants included provisions that provided for potential changes to the settlement amounts dependent upon the characteristics of the holder of the warrant. Such a fact pattern would preclude the warrants from being classified as equity and thus the warrants should be classified as a liability measured at fair value, with changes in fair value each period reported in earnings.
SPAC sponsors should consult with their auditors to determine if the current accounting treatment of warrants is appropriate, giving consideration to both the terms of the warrants and also materiality. To the extent a restatement may be necessary, or if fair valuations are required on a go-forward basis, sponsors should consider obtaining an independent fair valuation.
MPI can assist SPAC sponsors with determining the fair value of the warrant liability in connection with reclassification as a liability on the balance sheet both historically and prospectively as of each quarterly reporting date. MPI also provides a number of other valuation services useful for SPACs including fairness opinions and purchase price allocations, among others. Please contact us today if we may be of assistance.
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[1] Public statements represent staff views of the Division of Corporation Finance and the Office of the Chief Accountant (“OCA”). They are not rules, regulations, or statements of the SEC and have no legal force or effect. The statements may be viewed as guidance.
[2] Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 815-40.
[3] https://www.sec.gov/news/public-statement/accounting-reporting-warrants-issued-spacs
