Practical IPO Guide
Going public is a complicated, transformative, and time-consuming process. It requires careful planning and mobilization of company’s resources. Generally, IPO planning starts 12 to 20 months prior to the expected transaction close date.
Founder Shares Transferred to Anchor Investors
Some SPAC public offering transactions include an arrangement involving anchor investors. Anchor investors are typically known and respected investment firms (e.g. BlackRock, Inc.). Their involvement with the IPO transaction intended to build other investors’ confidence in the issuer and the transaction in question. Many SPACs raised a question of how to account for sponsor’s transfer of founder shares to anchor investors.
Accounting for Underwriter Overallotment Option
Many public offering transactions include a feature that allows the sale of additional debt or equity securities to underwriters of the offering company. The terms of the feature are that underwriters can purchase, at their discretion, specified amount of securities within certain amount of days following the transaction close at a price agreed on now.
Accounting for Redeemable Shares
Contingently redeemable shares issued by a SPAC may have to be classified as temporary (or mezzanine) equity in accordance with ASC 480-10-S99-3A. Securities classified as temporary equity are initially measured at fair value. Subsequent measurement depends on whether the securities are currently redeemable and, if not, whether the redemption event is considered “probable”.
SPAC Financial Close
SPAC financial close includes recording relevant entries in entity’s accounting system as well as preparation of, based on recorded entries, full set U.S. GAAP financial statements. The financial statements include primary forms, i.e. balance sheet, income statement, cash flow statement and statement of change in equity and footnotes to the financial statements.
SPAC Equity Forward Agreements
Some SPACs signed a forward purchase agreement (FPA), an arrangement that obligates SPAC to issue to its sponsor a specified amount of SPAC units in exchange for cash concurrently with closing of the business combination transaction. The agreement become effective concurrently with the IPO. SPAC units issuable under the terms of FPA include common stock and warrants.
SPAC Accounting Issues
If SPAC's management identify an appropriate target, it must then seek a shareholder approval the proposed acquisition transaction. Public shareholders who do not wish to invest in the proposed business combination have the right to redeem their shares. The redemption value is a pro rata portion of IPO proceeds held in the trust account plus interest income less income taxes and relevant expenses. The above redemption feature requires careful analysis of the requirements per ASC 480-10, Distinguishing Liabilities from Equity and, specifically, ASC 480-10-S99-3A. In many instances, SPACs have to classify equity units or shares subject to contingent redemption as temporary or mezzanine equity.
Accounting for SPAC Transaction Cost
For stock classified as equity, direct and incremental costs related to its issuance should be accounted for as a reduction stock issuance proceeds. Specific incremental costs directly attributable to a proposed or actual offering of equity securities incurred prior to the effective date of the offering, may be deferred and charged against the gross proceeds of the offering when the offering occurs, however, transaction costs of an aborted offering may not be deferred. In a classified balance sheet, deferred offering costs are reported as part of short-term assets.
Accounting for SPAC Warrants
As part of the IPO, SPACs issue its founders warrants, i.e., equity-linked instruments that give SPAC’s founders an option to buy additional shares of the entity in the future at the price agreed in the warrant agreement. The warrants issued to sponsors are referred to as “private”. Warrants are also issued to public investors in connection with their purchase of SPAC’s IPO shares. Terms of private and public warrants have certain differences.
SPAC Process and Lifecycle
SPAC or a special purpose acquisition company is a shell company listed on a stock exchange with the purpose of acquiring a private company and, therefore, making it public without going through the traditional IPO process. SPAC process differs from tradition IPO in a way that the target that eventually becomes the public company is not involved in SPAC’s formation and IPO.
Government Grants: PPP Loans, ERC Program
The Coronavirus Aid, Relief, and Economic Security (CARES) Act provided substantial funds as economic incentives to qualifying businesses. Two main programs established as part of the CARES Act are Paycheck Protection Program (PPP) and Employee Retention Credits (ERC). U.S. GAAP does not have specific accounting guidance relating to government grants. Generally, reporting entities account for government assistance by analogy to IAS 20, Accounting for Government Grants and Disclosure of Government Assistance.
Impact of ASU 2020-06 on accounting for convertible debt
New guidance removes accounting models for beneficial conversion features (BCF) and cash conversion features (CCF). Under the revised guidance, the embedded conversion features is separated from the host contract only if the conversion feature: a) is required to be accounted for under Topic 815, Derivatives and Hedging, or b) results in substantial premiums accounted for as paid-in capital.