A special-purpose acquisition company can sidestep some hurdles that come with a traditional initial public offering. However, when companies go public, there are a few caveats to consider with financial reporting, such as compliance with U.S. GAAP.
A special-purpose acquisition company (SPAC) is a method for going public that unlocks value and quickly gains you access to a significant amount of capital without some of the challenges that accompany a traditional initial public offering (IPO). SPACs have flooded the equity markets with liquidity, with 2021 promising to be a record year — over $100 billion has been raised through March 2021. However, before going public via SPAC, there are several items to consider including financial statements, which will need to comply with both public company U.S. GAAP and the rules established by the Securities and Exchange Commission (SEC). You’ll also have to prepare for an audit by an audit firm that’s registered with the Public Company Accounting Oversight Board (PCAOB). Here are a few considerations.
If you’ve never been audited
Clients often ask us, “If we’re only presenting two years of financial statements, why do we need to address our accounting before this time frame?” The reason is that certain transactions, such as business combinations and share-based payments, can affect financial reporting for years, and maybe even decades. Other examples of transactions that can have lasting financial statement impacts are sales of stock, related party transactions, debt agreements, and long-term revenue contracts. If you have these types of transactions in your history, it’s critical to start as early as possible — auditors will request white papers and an analysis of how such transactions should be accounted for.
If you have been audited
This group often asks, “Can’t I just send my audit opinion and be done?” Not likely. If you’ve complied with U.S. GAAP for private companies, you’ll be missing incremental U.S. GAAP disclosures for public entities as well as the incremental disclosures required by Regulation S-X. Because you’ve made additions to previously completed financial statements, there would need to be additional audit procedures performed.
If you’ve adopted any private company accounting alternatives
Financial statements filed with the SEC can’t contain private company accounting alternatives — any such accounting policies will need to be completely unwound, and public company U.S. GAAP must be adopted as of that date. This can be particularly troublesome. If you’ve elected private company alternatives related to business combinations and share-based payments, this will require additional work.
What about interim reporting?
Most private companies don’t prepare their quarterly financial statements on a U.S. GAAP basis. As a public company, you’ll be required to prepare quarterly financial statements, and the periods presented in a registration statements must also be reported on a quarterly basis. Why? Because when you go public, you’ll be presenting historical quarterly information and you don’t want unexpected delays in the ability to report these numbers. Your quarterly financial statements will need to be reviewed by your auditors, and you can expect that transaction being reported in the appropriate period will be an area of emphasis.
Importance of financial statements
The SEC has made it clear that management needs to produce accurate and timely financial statements. The financial statement reporting stage is critical to your future as a public company. Accounting policies adopted, methodologies for making significant judgments and estimates carry through to your transition to becoming a public company. If your financial statements aren’t in compliance with applicable reporting standards, then none of the subsequent steps needed to go public will be efficient. We’ve seen companies that have attempted to bootstrap this process with disastrous effect — once your auditors find errors, their next question will likely be, “What else is wrong?”
Don’t be afraid to ask for help
Financial statements filed with the SEC are required to comply with both U.S. GAAP and Regulation S-X requirements as adopted by the SEC. Unfortunately, most private companies don’t have in-house staff who can address these matters in an efficient and effective manner. Therefore, it’s very common to hire out this function.
But how do you find a qualified expert? Real-world experience with IPOs, SPAC transactions, and SEC issuers is a gating criterion. Additionally, find a provider that’s willing to commit to your filing timeline. SPAC transactions are occurring at a record pace, so agree on a completion date with wiggle room for the unexpected surprises. Emphasize quality to avoid issues down the road — accounting errors can be costly to both your bank account and reputation. And understand that, even if this service is hired out, you’ll be very involved. You’ll need to be able to explain the rationale for certain transactions, inventory and store all relevant agreements, and provide access to your ERP system.
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