Deloitte's Roadmap: Initial Public Offerings | DART – Deloitte Accounting Research Tool

Preface

We are pleased to present the 2024 edition of Initial Public Offerings. Preparing for an IPO1 can be a complex, time-consuming, and often costly process. Accordingly, this Roadmap addresses financial reporting, accounting, and auditing considerations to help companies navigate challenges related to preparing an IPO registration statement and ultimately going public.

The SEC and FASB have continued to modernize their disclosure requirements for companies entering the public markets (e.g., by issuing final rules on SPAC transactions and climate-related disclosures as well as amendments to the segment reporting requirements). As they plan for their IPOs, registrants should ensure that they are ready to respond to changing conditions in the financial markets as well as the SEC’s and FASB’s new disclosure requirements.

Be sure to check out On the Radar (also available as a stand-alone publication), which briefly summarizes emerging issues and trends related to the accounting and financial reporting topics addressed in the Roadmap.

We hope you find this Roadmap useful as you prepare for your IPO.2 If you have questions or concerns, please visit Deloitte’s IPO Readiness and Execution Services site or contact a Deloitte partner listed in the contacts section of this publication.

Footnotes

1

For a list of abbreviations used in this publication, see Appendix F.

2

Note that this Roadmap is not a substitute for consulting with professional advisers on complex accounting and reporting questions and transactions associated with an IPO.

On the Radar

After a record-breaking year for initial public offerings (IPOs) and special-purpose acquisition companies (SPACs) in 2021, the market has remained slow for several years amid various challenges, including volatile markets; geopolitical conflicts; interest rate increases; inflation; and supply chain issues. However, interest rates and inflation have been moderating, and private companies are continuing to evaluate the methods used to go public. Such methods include (1) “traditional” IPOs, in which private companies sell their equity in a public underwritten offering, and (2) nontraditional IPOs, which have become more popular over the past several years. Nontraditional IPOs include those in which private operating companies choose to merge with SPACs to raise capital or use other financing alternatives, such as direct listings. Companies can also go public by registering debt securities, distributing shares in a spin-off transaction, or registering securities issued by real estate investment trusts (REITs).

Before a company commences a public offering of securities, it must file a registration statement with the SEC under the applicable securities laws. Both the form used to file the registration statement and the filing and review process will depend on the nature of the offering. Companies undertaking a traditional IPO can voluntarily submit a draft registration statement to the SEC staff for confidential, nonpublic review. The ability to submit confidentially is a significant benefit because it allows companies to keep potentially sensitive information from customers or competitors until later in the IPO process. Confidential initial submissions are subsequently filed publicly no later than 15 days before (1) a roadshow or (2) the requested effective date of the registration statement if no roadshow is planned.

Once submitted to or filed with the SEC, a registration statement is reviewed by the staff of the SEC’s Division of Corporation Finance (the “Division”), which will generally complete its initial review and furnish its first set of comments within 27 calendar days. The company then responds to each of the staff’s comments and reflects edits to the draft registration statement in an amended filing, which the staff will also review. A company can expect several rounds of comment letters containing follow-up questions on responses to original comments as well as additional comments on new information included in the amended registration statement. After the initial review, subsequent comments are typically furnished within two weeks. For more information about typical SEC staff comments, see Deloitte’s Roadmap SEC Comment Letter Considerations, Including Industry Insights.

Identifying the Required Financial Statements

A company must determine what financial statements are required in the registration statement. While this determination may appear straightforward, additional complexities may arise because a company may first need to determine the legal entity that will become the SEC registrant. For example:

A company may succeed to substantially all of the business of another entity (or the “predecessor”) for which financial statements are required.
A company may be a carved-out entity that previously existed only as a subset of a larger parent entity or may be a combination of individual entities joined to form a larger public company.
A company, a subsidiary, or a subset of subsidiaries may issue securities, guarantee securities, or otherwise have dividend restrictions that trigger requirements for the inclusion of separate financial statements or financial statement schedules in the IPO registration statement.

Further, a registrant may need to consider whether separate financial statements or pro forma financial information is required for “significant” business acquisitions, dispositions, or equity method investments.

The financial statement periods to be included in the IPO registration statement depend on the company’s characteristics and the timing of the document’s submission. Smaller reporting companies (SRCs) and emerging growth companies (EGCs) generally have the option of presenting only two years of audited annual financial statements in a traditional IPO, while all other entities must present three years. Further, under SEC regulations, the financial statements in an IPO must meet certain age requirements as of each registration-statement filing date as well as when the registration is declared effective; otherwise, the financial statements will be considered “stale.” In general, the financial statements in an IPO filing must not be more than 134 days old (i.e., the gap between the date of filing or effectiveness and the date of the latest balance sheet cannot be more than 134 days). However, third-quarter financial statements are considered timely through the 45th day after the most recent fiscal year-end, after which the audited financial statements for the most recent fiscal year are required. Thus, a company that fails to file a registration statement before one of these critical cut-off dates will be required to include additional financial statement periods in the registration statement; in such cases, there may be a significant delay in the company’s preferred IPO timeline.

A Public Entity’s Application of U.S. GAAP and SEC Regulations

Certain provisions of U.S. GAAP for public entities differ from those for nonpublic entities. Notably, public business entities (PBEs) are generally required to adopt new accounting standards before private companies. Although companies that meet the EGC criteria can elect to use private-company adoption dates for new accounting standards, other entities (i.e., non-EGCs) undertaking an IPO typically must use public-company adoption dates for all accounting standards.

In addition, a company undertaking an IPO must present financial statements that are consistent with public-entity accounting principles and must comply with the disclosure requirements for public entities for all periods presented. The following are examples (not all-inclusive) of topics for which the accounting principles or disclosures may apply to public entities but do not apply to nonpublic entities:

Earnings per share.
Segment reporting, including disclosures about significant segment expenses in accordance with recent amendments.
Temporary equity classification of redeemable securities.
Certain income-tax-related disclosures.
Certain disclosures related to pensions and other postretirement benefits.

Once a company is considered a PBE (even if it qualifies as an EGC and elects to use private-company adoption dates), it is no longer permitted to apply private-company accounting alternatives, such as the amortization of goodwill, or practical expedients permitted for non-PBEs, such as use of a risk-free rate for leases. Therefore, any previously elected private-company alternatives or non-PBE practical expedients would need to be retrospectively eliminated from the company’s historical financial statements before such statements can be included in its registration statement.

Further, public entities are subject to various SEC rules and regulations that may affect the financial statements and related disclosures (e.g., the additional disclosure requirements of Regulation S-X). Some of these requirements are broadly applicable, and some apply only to entities in certain industries. Therefore, a nonpublic entity’s previously issued financial statements will typically need to be revised for all periods presented to reflect the additional SEC disclosure requirements. However, an entity that meets the SRC criteria may be eligible to apply scaled disclosure requirements. SRCs generally do not have to apply the disclosure provisions of Regulation S-X in their entirety except when specified.

Audit Considerations for Public Companies

Audits of private companies are subject to AICPA auditing standards. However, auditors of issuers undertaking an IPO must apply PCAOB auditing standards and will need to perform additional procedures and issue a new auditor’s report that refers to these standards. Note that in a filing submitted for confidential review to the SEC, the auditor’s report will typically refer to both AICPA and PCAOB auditing standards.

Because the SEC’s and PCAOB’s independence rules are generally more restrictive than the AICPA’s, both the auditor and management, with oversight from the audit committee, need to determine whether (1) there is possible noncompliance with the SEC’s and PCAOB’s independence rules or (2) there are conflicts of interest before the entity undertakes an IPO.

Post-IPO Periodic Financial Reporting and Internal Control Requirements

After a registration statement is declared effective, a company is required to file quarterly reports on Form 10-Q and annual reports on Form 10-K. As a public company, a registrant must also file a current report on Form 8-K that discloses various material events that occur between its periodic reports. Registrants will also need to comply with many recent SEC rules, including those on executive compensation, clawback requirements, pay-versus-performance disclosures, cybersecurity disclosures, and climate disclosures.

A public company will need to address two types of controls and procedures in its post-IPO filings with the SEC:

Internal control over financial reporting (ICFR) — ICFR refers to procedures a company performs to reasonably ensure compliance with its policies related to preparing financial statements in accordance with U.S. GAAP and Regulation S-X. Management must annually file a report on the effectiveness of its ICFR. Moreover, non-EGC accelerated and large accelerated filers must generally include an auditor’s attestation report on the effectiveness of ICFR in their annual reports. However, all new public companies can apply a phase-in exception under which management’s report and the auditor’s attestation are not required before the second annual report (i.e., until a registrant has been required to file or has filed a Form 10-K for the prior fiscal year). Certain additional exceptions may also apply.
Disclosure controls and procedures (DCPs) — These are a broader set of controls that largely encompass ICFR and are designed to provide assurance that information that the registrant must disclose in reports that it files or submits under the Securities Exchange Act of 1934 (the “Exchange Act” or “1934 Act”) is recorded, processed, summarized, and reported within the periods specified.

Companies also must continue to comply, on a quarterly basis, with reporting requirements related to material changes to ICFR and DCPs. In addition, in quarterly and annual reports, the registrant’s principal executive and principal financial officer (typically the CEO and CFO) must file certifications prescribed by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act” or “Sarbanes-Oxley”).

SPAC Transactions

After increasing significantly in recent years, SPAC transactions have slowed down as well. If contemplating use of a SPAC transaction to go public, management should be aware of the differences between a traditional IPO and a SPAC transaction from a financial reporting and auditing perspective, as well as the impact of the SEC’s recent final rule amending the disclosure requirements for SPAC transactions, which took effect on July 1, 2024. The table below outlines the areas of potential differences between the two types of transactions.

Key Differences Between Traditional IPOs and SPAC Transactions
The ability to confidentially submit the registration statement/proxy statement
The requirement to include pro forma information
The potential requirement to include prospective financial information
The timing of the initial periodic reporting obligation after the IPO or SPAC transaction
The reporting requirements related to ICFR

This Roadmap addresses financial reporting, accounting, and auditing considerations to help companies navigate challenges related to preparing an IPO or de-SPAC registration statement and ultimately going public.

Contacts

Chapter 1 — Introduction to Initial Public Offerings

1.1 Key Laws That Govern the Securities Industry

Public companies are subject to a number of complex securities laws, many of which also affect the IPO process. The sections below introduce certain key securities laws relevant to securities offerings and public-company reporting.

1.1.1 Securities Act of 1933

The first major federal securities regulation passed was the Securities Act of 1933 (the “Securities Act” or the “1933 Act”). According to the SEC’s Web site, the two main goals of the Securities Act are to (1) “require that investors receive financial and other significant information concerning securities being offered for public sale” and (2) “prohibit deceit, misrepresentations, and other fraud in the sale of securities.” To accomplish those objectives, the 1933 Act addresses the registration requirements for securities and required disclosures in registration statements. Generally, an entity must register with the SEC all securities offered in the United States (i.e., a public offering) or “must qualify for an exemption from the registration requirements” (i.e., a private offering). Under the Securities Act, essential information must be provided to investors in a public offering. Such information includes (1) descriptions of “the company’s properties and business” and of “the security to be offered for sale” and (2) the company’s management and financial information (e.g., financial statements certified by an independent registered public accounting firm). The Securities Act also establishes a legal liability framework to protect investors from losses when there is “incomplete or inaccurate disclosure” of material information.

1.1.2 Securities Exchange Act of 1934

Shortly after the 1933 Act was signed into law, Congress passed the 1934 Act. The Exchange Act resulted in the creation of the SEC, an independent body whose mission, as stated on its Web site, is (1) “protecting investors”; (2) “maintaining fair, orderly, and efficient markets”; and (3) “facilitating capital formation.” The SEC is responsible for overseeing the U.S. securities markets and certain primary participants. Further, under the Exchange Act, the SEC has the power to enact and enforce securities regulations, including disciplinary rights (e.g., prosecution of insider trading), as well as to require that companies with publicly traded securities periodically report certain information.

Both the Securities Act and the Exchange Act have been subject to interpretation and numerous amendments since their enactment. For example, some amendments have resulted from legislation released in response to a financial crisis, such as the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”). Other amendments, such as those related to the Jumpstart Our Business Startups (JOBS) Act (enacted in 2012), are intended to open access to the public markets. Such additional legislation is summarized below.

1.1.3 Sarbanes-Oxley Act

Sarbanes-Oxley was passed in the wake of a number of large, public financial scandals, including those at Enron and WorldCom. On its Web site, the SEC states that Sarbanes-Oxley “mandated a number of reforms to enhance corporate responsibility, enhance financial disclosures and combat corporate and accounting fraud.” Among the most significant changes were mandating personal liability for certain executive officers; implementing protections for whistleblowers; and requiring management — and, in many circumstances, the external auditor — to report on the adequacy of a company’s ICFR. Sarbanes-Oxley also established the PCAOB to oversee and regulate the activities of the auditing profession.

1.1.4 Dodd-Frank Act

Dodd-Frank was enacted in response to a financial crisis that culminated in 2008. As discussed on the SEC’s Web site, the purpose of Dodd-Frank is to protect consumers from abusive financial services practices by reshaping various aspects of the U.S. regulatory system, including, but not limited to, “consumer protection, trading restrictions, credit ratings, regulation of financial products, corporate governance and disclosure, and transparency.”

1.1.5 JOBS Act

The JOBS Act, signed into law on April 5, 2012, significantly affects the financial markets and IPOs. The act indicates that its objective is to “increase American job creation and economic growth by improving access to the public capital markets for [EGCs].” The most notable change brought about by the JOBS Act is the creation of the EGC, a new type of issuer that may take advantage of numerous regulatory and reporting accommodations. The JOBS Act was subsequently amended by the Fixing America’s Surface Transportation (FAST) Act of 2015, which, among other provisions, expanded the accommodations given to EGCs. See Section 1.6 for more information about EGCs and Appendix C for a summary of key accommodations available to EGCs.

1.2 Types of Issuers

The requirements for an IPO can vary from company to company. Factors that may affect the requirements include:

Whether the company is a domestic issuer or a foreign private issuer (FPI) — This publication focuses on the IPO requirements for domestic issuers. The requirements for FPIs considering an IPO may significantly differ from those for their domestic counterparts. However, FPIs can elect to file under domestic rules if they wish. A U.S.-based company issuing shares will always be considered a domestic issuer; however, a foreign-based company may not always qualify as an FPI. For a summary of criteria for qualifying as an FPI and related accommodations, see Section 6100 of the SEC’s Financial Reporting Manual (FRM).
Whether the company qualifies as an SRC — A company may qualify as an SRC on the basis of its public float1 and its annual revenue. The SEC filing requirements for SRCs are scaled compared with those for larger companies. Section 1.5 and Appendix B include an overview of SRCs and the related accommodations. Other sections of this Roadmap generally do not specifically address the unique requirements for SRCs.
Whether the company qualifies as an EGC — A private company undertaking an IPO will generally qualify as an EGC if it (1) has total annual gross revenues of less than $1.235 billion during its most recently completed fiscal year and (2) has not issued more than $1 billion of nonconvertible debt securities over the past three years. As discussed above, EGCs are afforded many accommodations that can assist with the IPO process, many of which are addressed in the applicable sections of this Roadmap. Section 1.6 and Appendix C summarize these accommodations.

Once a company completes a public offering and becomes an SEC registrant, it will also need to determine its SEC filer status as a large accelerated filer, an accelerated filer, or a nonaccelerated filer, which will further affect the company’s filing obligations and deadlines. A company undertaking an IPO will initially be considered a nonaccelerated filer since large accelerated or accelerated filers must have filed at least one annual report and must have been subject to the requirements of Sections 13(a) and 15(d) of the 1934 Act for at least 12 months. Accordingly, a registrant generally cannot be considered a large accelerated or accelerated filer for its first Form 10-K filing as a public company. See Chapter 7 for further discussion of filer status and considerations related to the post-IPO impacts of each filer status.

Footnotes

1

Paragraph 1340.2 of the FRM defines public float as “[t]he aggregate worldwide market value of its voting and non-voting common equity held by non-affiliates.” Therefore, debt-only registrants are nonaccelerated filers.

1.3 Types of IPOs

An IPO represents a private company’s initial registration of debt or equity securities with the SEC. However, there are many ways in which a company can become public, including:

Sale of newly issued common shares to the public — The most common type of IPO is the registration and sale of common stock to the public by filing a registration statement on Form S-1 under the 1933 Act. This type of IPO will typically generate offering proceeds for the issuer and result in the registration and public trading of the issuer’s shares once the IPO is completed.
The exchange of debt securities previously issued in a private transaction for registered debt securities — Debt securities initially sold through a private placement offering (e.g., under Securities Act Rule 144A2) are subject to certain resale restrictions in accordance with the Securities Act. To facilitate greater liquidity, the securities issued in a private placement may include registration rights, which require the issuer to exchange the private securities for registered securities within a set period of time. This is often referred to as an “A/B” exchange offer, and the new securities are typically registered on Form S-4.
The registering of currently outstanding equity securities — In a manner similar to that in the scenario described above, registration may be a means of achieving liquidity for shares previously issued through private placements, such as Regulation A or D offerings. Under Section 12(b) of the Exchange Act, for a class of security to trade on a national securities exchange, it must be registered. Or, in contrast to a voluntary registration, an entity might otherwise be compelled to register outstanding shares under Section 12(g) of the Exchange Act, which contains certain size thresholds that trigger mandatory registration.3 In either circumstance, the class of securities is typically registered on Form 10.
The distribution of shares in a spin-off transaction by a public company — When a public company issues a subsidiary’s shares to its shareholders via a distribution, the subsidiary (or “spinnee”) becomes an independent entity. To facilitate the subsequent trading of the spinnee’s shares on a national securities exchange, a Form 10 may be used to register these shares.
The registering of securities that are issued by REITs, including “blind pool” offerings — A Form S-11 may be used to register shares in an SEC filing by REITs, whose business is acquiring or holding real estate for investment purposes. REITs may also file “blind pool” registration statements (typically also on a Form S-11) to sell securities to purchase real estate operations that are not identified.
The registering of securities that are issued by a SPAC — A Form S-1 may be used for the initial registration and sale of shares of a SPAC, a newly formed company that will use the proceeds from the IPO to acquire a private operating company (which generally has not been identified at the time of the IPO). To complete the acquisition of a private operating company, the SPAC may file a combined proxy and registration statement on Form S-4 (see Section 1.7.1 and Appendix D). Within four days of the closing of the acquisition of the private operating company, the SPAC must file a “super Form 8-K” that includes all of the information required in a Form 10 registration statement of the private operating company.

Other related transactions, including reverse mergers, put-together transactions, drop-down transactions, and split-offs, can similarly result in the registering of securities. When considering registering securities with the SEC for the first time, companies are encouraged to consult with their SEC legal counsel to determine the appropriate SEC form to use to register such securities. Regardless of the nature of the IPO transaction or the type of securities registered, upon effectiveness, the issuer will be “public” and will therefore be required to begin complying with the periodic reporting requirements of the Exchange Act (e.g., filing of Forms 10-K, 10-Q, and 8-K).

Footnotes

2

For a list of the titles of standards and other literature referred to in this publication, see Appendix E.

3

Registration of a class of security is generally required when (1) there are 2,000 or more record holders of an equity security (or, alternatively, 500 or more nonaccredited investors) and (2) a company has over $10 million in total assets.

1.5 Smaller Reporting Companies

1.5.1 What Are SRCs?

A registrant may qualify as an SRC on the basis of either a public float test or a revenue test. The thresholds for qualification as an SRC are as follows:

Criteria	Definition
Public float test	Less than $250 million of public float as of the last business day of the registrant’s second fiscal quarter
Revenue test	Less than $100 million of revenue as of the most recently completed fiscal year for which audited financial statements are available and public float less than $700 million as of the last business day of the registrant’s second fiscal quarter

For initial 1933 Act or 1934 Act registration statements, public float is measured as of a date within 30 days of the filing and is computed by multiplying the estimated public offering price of the shares by the sum of (1) the aggregate worldwide number of all shares outstanding held by nonaffiliates before the filing of the registration statement and, in the case of a Securities Act registration statement, (2) the number of such shares included in the registration statement.

A company may qualify as both an SRC and an EGC (see Section 1.6); however, unlike the five-year limit for qualifying as an EGC, there is no time limit for qualifying as an SRC. Investment companies, asset-backed issuers, and subsidiaries that are majority-owned by non-SRC registrants cannot qualify as SRCs. An issuer that becomes an investment company or qualifies as an asset-backed issuer is disqualified from being considered an SRC for its next filing. Registrants should consider consulting with their legal counsel when determining whether they qualify as SRCs.

1.5.2 Accommodations Applicable to SRCs

A key feature of reducing the reporting burden on SRCs is the scaling back of the requirements in both Regulation S-X and Regulation S-K.

SRCs may be eligible to apply the scaled disclosure requirements as part of their IPO. Under those requirements, SRCs do not have to disclose as many years of audited financial statements and MD&A as non-SRCs. SRCs are also exempt from the requirements for unaudited quarterly financial information after a retrospective accounting change as well as qualitative and quantitative information about market risk. See Chapter 4 for more information about the disclosure requirements in Regulation S-K. For a more detailed analysis of the scaled disclosure requirements for SRCs, see Appendix B. Topic 5 of the FRM also discusses the SEC staff’s views on many SRC-related issues. Other than within this section and Appendix B, this Roadmap generally does not specifically address SRC requirements.

Companies that qualify as SRCs may choose to apply the scaled disclosure requirements on an item-by-item (or an “a la carte”) basis. However, their disclosures should be consistent from year to year and must comply with federal securities laws, including those that require disclosures not to be misleading.

Connecting the Dots

In determining which scaled disclosure requirements to apply, eligible companies may wish to conduct outreach and consider the information needs of their investors and other financial statement users. Thus, eligible companies may consider weighing any potential cost savings associated with the scaled disclosure requirements against not disclosing information that investors may consider valuable.

1.5.3 Interaction of SRC and Accelerated Filer Status

After its IPO, a company could both (1) qualify as an SRC and be eligible for the scaled disclosure requirements available to such a company and (2) be an accelerated filer and subject to those requirements, including the shorter deadlines for periodic filings and the requirement to include in the company’s filings an auditor’s attestation report on ICFR, as required by Section 404(b) of Sarbanes-Oxley. See Chapter 7 for further discussion of filer deadlines and internal control requirements.

The table below further summarizes the initial assessment criteria for SRC status on the basis of public float and revenue levels in the context of the requirements in Section 404(b) of Sarbanes-Oxley.

Status	Definition		Sarbanes-Oxley Section 404(b) Requirement
Status	Public Float	Annual Revenues	Sarbanes-Oxley Section 404(b) Requirement
SRC and nonaccelerated filer	Less than $75 million $75 million to less than $700 million	No limit Less than $100 million	No No
SRC and accelerated filer	$75 million to less than $250 million	$100 million or more	Yes for non-EGCs; no for EGCs

1.7 Alternatives to Traditional IPOs

1.7.1 Special-Purpose Acquisition Companies

A SPAC is a newly created company that raises cash in an IPO and uses it to fund the acquisition of one or more private operating companies. After the IPO, the SPAC’s management looks to complete an acquisition of a target company within the period specified in its governing documents (e.g., 24 months). If an acquisition cannot be completed within this time frame, the cash raised in the IPO must generally be returned to investors. Because SPACs hold no assets other than cash before completing an acquisition, they are nonoperating public “shell companies” as defined by the SEC. If a target is identified and the SPAC is able to successfully complete the acquisition transaction, the private operating company target will succeed to the SPAC’s filing status as a result of the merger. On the closing date of the acquisition, the former private operating company, as the predecessor to the SPAC registrant, becomes a public company and must be able to meet all the public-company reporting requirements applicable to the combined company. Key SPAC-related considerations are discussed below; see Appendix D for a more detailed discussion of SPACs.

Changing Lanes

On January 24, 2024, the SEC issued a final rule related to the financial reporting and disclosure requirements for SPACs. The final rule aims to (1) “enhance investor protections in [IPOs] by [SPACs] and in subsequent business combination transactions between SPACs and private operating companies (commonly known as de-SPAC transactions)” and (2) “more closely align the treatment of private operating companies [target companies] entering the public markets through de-SPAC transactions with that of companies conducting traditional IPOs.” In summary, the final rule:

Provides new requirements related to a SPAC’s IPO registration statement and its subsequent de-SPAC registration/proxy statement, such as additional disclosure requirements related to the SPAC sponsor and financial projections.
Addresses certain liability matters by requiring the target company in a de-SPAC transaction to be a co-registrant with the SPAC in the de-SPAC registration/proxy statement.
Codifies, through new Article 15 of Regulation S-X, various requirements related to the financial statements included in SPAC IPO registration statements and de-SPAC registration/proxy statements as well as filings made after the de-SPAC transaction.

For more information about the final rule, see Deloitte’s February 6, 2024, Heads Up.

A SPAC’s shareholders are often required to vote on a merger transaction, so the SPAC may file a combined proxy and registration statement on Form S-4 to effect the transaction. These documents must include audited financial statements of the private operating target. The target’s financial statements must comply with SEC rules and regulations, including Regulation S-X and SEC Staff Accounting Bulletins (SABs), both of which govern presentation and disclosures in the financial statements. Further, because the private operating company is considered the predecessor to the registrant, financial statements included in Form S-4 or the merger proxy must be audited in accordance with PCAOB standards. In addition, the target’s financial statements cannot reflect Private Company Council (PCC) accounting alternatives or practical expedients applicable to non-PBEs and generally must reflect the adoption of new accounting standards on the basis of the dates required for public companies. However, we understand that the SEC staff will not object if a target uses private-company (non-PBE) adoption dates if (1) the SPAC is an EGC that has elected to defer the adoption of accounting standards by applying private-company adoption dates, (2) the target would qualify as an EGC if it were conducting its own IPO of common equity securities, and (3) the combined company will qualify as an EGC after the transaction (see paragraph 10120.2 of the FRM for a discussion of assessing EGC eligibility after the transaction). Chapter 3 provides further guidance on financial statement requirements.

Audited financial statements should generally be presented for both the SPAC and the target entity (or entities) for the three most recent fiscal years. However, there are two scenarios in which the SEC staff would not object when a registrant presents two years of annual financial statements rather than the otherwise required three years:

SRCs — In a manner consistent with the requirements described in paragraphs 1140.3, 5110.1, and 5110.3 of the FRM, a target may provide two years of audited financial statements rather than three years if the target would meet the definition of an SRC if filing a registration statement on its own.
EGCs — A target may provide two years of audited financial statements rather than three years if the target would qualify as an EGC if it were conducting its own IPO of common equity securities.

The SPAC and its target must also comply with the requirements related to the age of financial statements in SEC filings. For further interpretive guidance on the age of financial statements, see Section 2.4.3. Within four days of the closing of the acquisition, the combined company must file a Form 8-K (referred to as a “Super Form 8-K”) that includes all the information that would be required if the former private operating company had registered securities on Form 10. There is no 71-day grace period for providing audited financial statements of the formerly private operating company in the Super Form 8-K, as there may have been if the acquisition had been between two operating companies.8 Accordingly, the SPAC and the private operating target should take care to ensure that the acquisition is not closed until all the financial information required for the Super Form 8-K is available, including financial statements that comply with the SEC’s age requirements and are audited in accordance with PCAOB standards. Paragraph 12220.1 of the FRM provides more information about the requirements related to the Super Form 8-K.

Further, to avoid a gap or lapse in the target’s financial statement periods after a transaction, the combined company may need to amend its Super Form 8-K to provide updated financial statements of the target. For example, if the transaction closes soon after the target’s fiscal quarter or year-end, the Super Form 8-K generally will not include the target’s financial statements for the most recently completed period. In such a case, the combined company will need to amend its Super Form 8-K to provide the recently completed annual or interim period on or before the registrant’s due date for its Form 10-Q or Form 10-K for that same period.

In addition to the matters discussed above, entities considering a SPAC transaction should take into account key differences between the SEC reporting requirements related to traditional IPOs (sale of newly issued common shares to the public) and those for SPAC transactions, some of which are summarized in the table below.

Topic	Traditional IPOs (Sale of Newly Issued Common Shares)	SPAC Transactions9
Adoption dates of accounting standards	EGCs can irrevocably elect to defer adoption of new accounting standards on the basis of adoption dates used for private companies (non-PBEs).	The target company may defer adoption of new accounting standards only if (1) the SPAC is an EGC that has elected to defer the adoption of accounting standards by applying private-company adoption dates, (2) the target would qualify as an EGC if it were conducting its own IPO of common equity securities, and (3) the combined company will qualify as an EGC after the transaction.
Confidential or nonpublic submissions of the IPO document	Confidential or nonpublic submissions to the SEC staff are allowed for all companies undertaking an IPO (i.e., EGCs and non-EGCs). Such submissions, and any associated SEC comment letter responses, may continue to be submitted confidentially or nonpublicly until they must be filed publicly as described in Section 1.4.2.	The SEC staff may agree to review the initial nonpublic draft Form S-4 if it is submitted within 12 months of the SPAC’s IPO. However, SEC comment letter responses and all subsequent amendments must be filed publicly.
Pro forma information included in the IPO document	Pro forma information is not required unless the registrant has other transactions for which pro forma information is required in accordance with Regulation S-X, Article 11.	An entity must provide pro forma information for the accounting impact of the (1) SPAC transaction and (2) any other transactions for which pro forma information is required in accordance with Regulation S-X, Article 11.
Prospective financial information included in the IPO document	Prospective financial information (i.e., forecasted information) is generally not presented.	Prospective financial information generally must be presented if the boards of directors of the company and SPAC used such forecasted information in evaluating the transaction.
Initial quarterly periodic reporting obligation	The registrant becomes subject to the SEC’s periodic reporting requirements beginning with the first quarterly or annual period after consummation of the IPO. The first Form 10-Q, for the quarter after the most recent period included in the registration statement, is due on the later of 45 days after the effective date or the date the Form 10-Q would otherwise be due if the company had been a public filer. For example, if an IPO becomes effective on April 15, 20X1, and includes financial statements through December 31, 20X0, the first Form 10-Q required will be for the quarter ended March 31, 20X1, and must be filed 45 days after April 15, 20X1.	The combined company retains the previous SEC reporting obligations of the SPAC and must file financial statements for quarterly or annual periods that end before the close of the transaction on the basis of the SPAC’s filing deadlines, without reference to the closing date of the transaction, even if not included in the Super Form 8-K. For example, if the SPAC transaction closes on April 15, 20X1, the Super Form 8-K due within four days must only include annual financial statements through December 31, 20X0. The combined company retains the SPAC’s requirement to file a Form 10-Q for March 31, 20X1, for the SPAC and an amended Super Form 8-K with the financial statements of the target company for March 31, 20X1, by the relevant Form 10-Q due date (i.e., 45 days for nonaccelerated filers).
Ongoing reporting requirements related to ICFR	Management’s report and the auditor’s attestation on ICFR are not required before the second annual report. The auditor’s report may also not be required afterward to the extent that the registrant is an EGC or a nonaccelerated filer.	If the SPAC filed its first annual report before the close of the transaction, management’s report on ICFR is required in the next annual report after the close of the transaction. However, as noted in Section 215.02 of the C&DIs on Regulation S-K, the SEC may not object to the exclusion of management’s report (and the auditor’s report) on ICFR depending on the closing date of the transaction and other conditions. We recommend that management consult with its legal counsel and auditors before excluding reports on ICFR.

1.7.2 Reverse Mergers

Like de-SPAC transactions, reverse mergers allow private entities to become public companies without undertaking a traditional IPO. A reverse merger may involve a public operating company or a public shell company (e.g., a SPAC) (a reverse merger with a public shell company would largely be consistent with the reporting requirements outlined in Section 1.7.1). For a public operating company, a reverse acquisition occurs when the public company legally acquires another operating company and the target operating company is determined to be the accounting acquirer in accordance with ASC 805-40. The accounting acquirer (i.e., the target company) should be treated as the legal successor to the registrant’s reporting obligations as of the date of the acquisition.

Before an exchange of equity interests that completes a reverse merger, shareholders are often required to vote on the merger transaction. As a result, the legal acquirer may file a proxy statement on Schedule 14A or a combined proxy and registration statement on Form S-4 to effect the transaction. The accounting acquirer generally does not file a Form S-4 or Schedule 14A, since these forms typically reflect the legal form of the transaction rather than the accounting form. When determining the financial statements of the legally acquired (i.e., target) entity to include in Form S-4, registrants should refer to Item 17(b)(7) of this form, which states that financial statements included should be the same as those that “would be required in an annual report sent to security holders under Rules 14a-3(b)(1) and (b)(2) . . . if an annual report was required.”

A target’s premerger financial statements included in a related Form S-4, proxy statement, or both, may be audited in accordance with AICPA standards (unless the target is an issuer). However, once the financial statements are presented as the registrant’s historical financial statements (i.e., once the reverse merger is reported in an SEC filing), any reissuance of audited premerger target financial statements would have to be audited in accordance with PCAOB standards.

After the completion of a reverse merger, the registrant is required to file a Form 8-K with the SEC to report the transaction. In the event of a reverse acquisition, a Form 8-K, Item 2.01, must be issued within four business days of the consummation of the reverse acquisition. The Form 8-K should also include Item 4.01 if there is a change in independent accountants, Item 5.01 if there is a change in control of the registrant, and Item 5.03 if there is a change in the domestic registrant’s fiscal year-end.

Once available, the financial statements of the legal acquiree and pro forma financial information under Regulation S-X, Article 11, must be filed in a Form 8-K, Item 9.01. The Item 9.01 must be filed within 71 calendar days after the required filing date of the initial Form 8-K. The financial statements required for the legal acquiree include (1) the audited financial statements for the two most recently completed fiscal years and (2) unaudited interim financial statements for any interim period and the comparable prior-year period. If the registrant meets the definition of an SRC, only the audited financial statements for the two most recently completed fiscal years are required. Note that Regulation S-X, Rule 3-06, which allows a period of nine to twelve months to satisfy the one-year requirement, does not apply to the legal acquiree’s financial statements in a reverse acquisition. Instead, because the legal acquiree is the predecessor, the financial statements filed must be for the periods required by Regulation S-X, Rules 3-01 through 3-04.

After the transaction is consummated, the historical financial statements of the target become those of the registrant. Therefore, the target’s historical financial statements will replace those of the legal acquirer beginning with the filing of the financial statements that first include the transaction. For example, if the transaction closes on March 15, 20X4, the financial statements for the interim period ended March 31, 20X4, will first include the transaction. Therefore, the financial statements included in the March 31, 20X4, Form 10-Q and all future filings will represent those of the target and no longer the legal acquirer. The target’s financial statements would show the acquisition of the legal acquirer.

1.7.2.1 Sign-and-Close Transactions

Reverse mergers may be structured as “sign-and-close” transactions, which can be defined as transactions in which all agreements are signed at the close of the transaction. These transactions differ from the more common process in which a definitive merger agreement is signed several weeks or months before the closing date of the merger. National exchanges generally require a shareholder vote to approve a transaction in which 20 percent or more of a registrant’s outstanding common equity will be issued for a merger. The structure of sign-and-close transactions may be such that security holder approval is not required before the transaction because the transaction includes a mix of consideration comprising cash, common stock that is less than 20 percent of the registrant’s outstanding common equity, and convertible preferred securities. However, shareholder approval often would be required for the conversion of the convertible preferred securities into common equity at a later point.

On November 17, 2023, the SEC issued Question 151.02 of the SEC’s C&DIs on Proxy Rules and Schedules 14A/14C, which addresses a common scenario associated with sign-and-close transactions. If, after the acquisition, a registrant files a Schedule 14A of Regulation 14A proxy statement to obtain security holder approval of the conversion of the convertible preferred securities transferred as part of consideration paid, the registrant must consider whether acquisition-related information (including a target’s preacquisition financial statements) is required under Note A of Schedule 14A.

Note A of Schedule 14A states that when any matter to be voted on (e.g., the conversion of convertible preferred shares to the registrant’s common stock) involves another matter (e.g., the acquisition), information must be provided regarding the other matter if such information is required by other items of Schedule 14A. The staff noted that the requirement to include information regarding the involvement of another matter under Note A of Schedule 14A depends on whether a reasonable security holder would be substantially likely to consider such a matter important in making a voting determination. The staff believes that, when convertible preferred securities are exchanged as part of consideration paid in an acquisition, the subsequent authorization to convert said securities to common stock represents the registrant’s obligations as a part of the transaction. As a result, as indicated in C&DI Question 151.02, the staff believes that “authorization of additional shares of common stock is an integral part of the acquisition . . . [t]herefore, the proposal to authorize additional shares of common stock ‘involves’ the acquisition.” Accordingly, the staff believes that the registrant must include information regarding the acquisition within the proxy statement. However, such information may be omitted if it has already been disclosed or if the registrant’s historical filings include all necessary information regarding the acquisition. Therefore, even if a target’s financial information was not disclosed before the close of the transaction (on the basis that shareholder approval was not required), the information may be required in a proxy statement seeking approval to convert convertible preferred shares issued as consideration into common shares of the registrant.

Footnotes

8

Under Form 8-K, Item 2.01, a registrant is required to file a Form 8-K to announce a significant business acquisition within four business days of consummation and to include the required financial statements within 71 calendar days.

9

The discussion herein applies to SPAC transactions in which (1) a domestic SPAC merges with a domestic target and (2) the SPAC has identified only one target for the transaction. SPAC transactions result in additional complexity when foreign entities or multiple targets are involved. In addition, we have recently observed new structures in which either the target or a newly formed company acquires the SPAC (e.g., a structure frequently referred to as a “double dummy” transaction). Such transactions may be viewed as the IPO of the target and, thus, different considerations may apply (e.g., two years of financial statements may be appropriate if the target qualifies as an EGC, and the confidential filing process may be available for a longer period).

1.8 Offerings Made in Accordance With Regulation A

Regulation A, as amended in 2015 (also referred to Reg A or Reg A+), provides an exemption from the ordinary requirements of the Securities Act. This exemption allows U.S. and Canadian companies to raise up to $75 million in a 12-month period by issuing certain types of securities, including equity securities. Regulation A requires that certain disclosure documents be submitted via EDGAR and allows for the confidential review of offering documents. Two tiers of offerings are provided under Regulation A:

Tier 1, which consists of securities offerings of up to $20 million in any 12-month period, including no more than $6 million on behalf of the selling securities holders that are affiliates.
Tier 2, which consists of securities offerings of up to $75 million in any 12-month period, including no more than $22.5 million on behalf of the selling securities holders that are affiliates.

For offerings of up to $20 million, the issuer can elect whether to proceed under Tier 1 or Tier 2. All issuers that pursue offerings in accordance with Regulation A are required to submit an offering statement on EDGAR that may be reviewed by the SEC staff. Before an issuer can begin selling securities, its offering statement must be “qualified” by the SEC and the issuer must receive a “notice of qualification,” which is similar to a notice of effectiveness in registered offerings. The offering statement includes a disclosure document and financial statements. While disclosures required in the offering statement are “scaled” or reduced to be in line with the size of the company, many are similar in nature to disclosures required under Form S-1.

Tier 2 issuers are required to include audited financial statements in their offering documents and to file annual, semiannual, and current reports with the Commission on an ongoing basis.10 In accordance with the form requirements for Regulation A, separate forms are used for offerings (Form 1-A) and ongoing reporting requirements (Form 1-K, Form 1-SA, and Form 1-U for annual, semiannual, and current reports, respectively). Except for securities that will be listed on a national securities exchange upon qualification, purchasers in Tier 2 offerings must be either accredited investors or be subject to certain limitations on their investment. For more information about Regulation A offerings, see the “Amendments to Regulation A: A Small Entity Compliance Guide” page on the SEC’s Web site.

Footnotes

10

While a Regulation A Tier 1 issuer must provide financial statements in its offering document, such financial statements do not need be audited unless the issuer’s financial statements were already audited for other purposes. Regulation A Tier 1 issuers are not subject to ongoing reporting requirements.

Chapter 2 — Identifying the Required Financial Statements for the Registration Statement

2.1 Introduction

One of the more challenging aspects of preparing for an IPO is ensuring that the entity has identified the appropriate financial statements to include in the filing. There are many considerations related to determining the appropriate financial statements to include in the IPO registration statement. For example, management will need to identify and prepare the financial statements both for the registrant and for any predecessor entities (see Section 2.3). In addition to the complexities associated with identifying the required financial statements for the registrant and its predecessor(s), management must consider other potential financial statement requirements that may result in additional meaningful historical financial information for investors in the IPO. The specific requirements, discussed in greater detail below, could be related to significant acquired or to be acquired businesses and real estate operations (along with the related pro forma financial information), equity method investments, guarantors of registered securities, or entities that collateralize registered securities.

Before preparing the registration statement, entities are strongly advised to consult with their independent auditors and legal counsel to determine the appropriate financial statements to include. When the circumstances are particularly complex, registrants may wish to submit a prefiling letter to the Division to preclear the planned financial statement presentation and avoid surprises or potential delays during the SEC’s review of their IPO filing. Registrants may wish to seek modifications to their financial statement reporting requirements when the application of a rule results in the requirement to provide more information than the registrant believes is necessary. For example, a registrant may submit a prefiling letter, referred to herein as a Regulation S-X, Rule 3-13, waiver, in which it requests to omit the financial statements for a significant acquired business, real estate acquisition, or equity method investment. See Section 2.4.5 for more information about Rule 3-13 waivers.

2.2 Registrant Financial Statements

The first step in determining the financial statement requirements in an IPO is to determine the registrant. The registrant is typically the legal entity that is issuing securities in the IPO and filing the registration statement. Further, after the IPO, the registrant will need to comply with the ongoing public reporting requirements (e.g., annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K), as described in Chapter 7.

In many cases, an existing operating entity may proceed with an IPO in its current legal form and would be identified as the registrant. Alternatively, the existing operating entity may undergo a corporate reorganization before filing an IPO or before becoming a registrant. In other situations, a recently organized entity may be formed as the registrant, and there may be a plan to combine it with one or more operating entities before an IPO. All of these factors can affect which reporting entities’ financial statements are required in the IPO.

Although the registrant’s financial statements generally should be included in the IPO registration statement, sometimes they will not be sufficient on their own. An entity may need to carefully evaluate the formation, history, and legal structure of the entities or businesses involved in the IPO to determine which financial statements are required. For example, an entity may need to consider recently organized registrants (see Section 2.2.1), predecessor entities (see Section 2.3), carve-outs of existing legal entities (see Section 2.3.1), and “put-together” or “roll-up” transactions (see Section 2.3.2), all of which are discussed in more detail below.

2.2.1 Recently Organized Registrant Financial Statements

A recently organized entity (sometimes referred to as a shell company) with few or no historical operations may be formed as the registrant to acquire one or more operating companies upon or before the consummation of its IPO.

Generally, the financial statements of a recently organized registrant must be presented in the IPO registration statement even if it has no historical operations. In these cases, an audited “seed money” balance sheet of the newly formed registrant is presented, typically as of the date of incorporation, to show the initial capitalization of the entity. Statements of operations, comprehensive income, and cash flows may be omitted if there has been no activity other than the formation transaction. However, such financial statements must still comply with the form, content, and updating requirements of Regulation S-X. In some circumstances, such as when the registrant is capitalized on a nominal basis, a recently organized registrant’s financial statements may be omitted from a filing; in such cases, the registrant would provide a statement indicating that the recently organized entity has not commenced operations and has no (or nominal) assets or liabilities. For more information, see Section 1160 of the FRM. Further, paragraph 1220.4 of the FRM prescribes the related age requirements for situations in which a recently organized registrant’s financial statements are provided. When a recently organized registrant’s financial statements are included in an IPO filing, additional predecessor financial statements, as described in the paragraphs below, will almost always be required.

One type of shell company is a SPAC, which is a newly created company that raises cash in an IPO to fund the acquisition of one or more private operating companies within a specified period. Generally, the companies to be acquired will not be identified until later and the financial statements of the operating companies therefore are not included in the IPO of the SPAC. Financial statements of the operating companies will be included in a post-IPO filing. See Section 1.7.1 and Appendix D for more information regarding SPACs.

2.4 Financial Statement Periods Presented

An entity must include in its registration statement audited annual financial statements and related footnote disclosures for both the registrant and any predecessor(s). The number of periods to be included depends on the registrant’s status as an EGC or SRC. In addition, depending on the time that has elapsed between the most recent fiscal year-end and the filing of the registration statement, an entity may be required to include unaudited interim financial statements and related footnote disclosures. The periods to be presented for both annual and interim financial statements are summarized in the table below. See Sections 1110 and 1120 of the FRM for more information about the financial statement requirements for annual and interim reporting periods, respectively.

Financial Statement Requirement	Non-EGCs/SRCs	SRCs and EGCs3
Annual Financial Statements (Audited)
Balance sheet	2 years	2 years
Income statement	3 years	2 years
Comprehensive income	3 years	2 years
Cash flows	3 years	2 years
Changes in shareholders’ equity	3 years	2 years
Interim Financial Statements (Unaudited)
Balance sheet	As of the end of the most recent interim period after the latest fiscal year-end and the latest fiscal year-end	As of the end of the most recent interim period after the latest fiscal year-end and the latest fiscal year-end
Income statement	The period from the latest fiscal year-end to the interim balance sheet date and the corresponding period in the prior fiscal year	The period from the latest fiscal year-end to the interim balance sheet date and the corresponding period in the prior fiscal year
Comprehensive income	Same as income statement	Same as income statement
Cash flows	Same as income statement	Same as income statement
Changes in shareholders’ equity4	Same as income statement	Same as income statement

2.4.1 Periods Required for Predecessor Entities

As indicated in paragraph 1170.2 of the FRM, the annual and interim financial statements for the registrant and its predecessor should collectively be “as of” all dates and “for” all periods required by Regulation S-X, Articles 3 and 10, as shown in the table above. When the registrant and its predecessor have already combined as of the IPO filing, the predecessor’s financial statements are required for all periods before the succession (i.e., up to the date of the combination), with no lapse or gap in audited periods. However, if the registrant and predecessor have not yet combined as of the IPO filing, the predecessor would present all periods required as if it was the registrant.

2.4.2 Interim Financial Statements

Regulation S-X, Article 10, outlines the financial statement requirements for interim reporting. The interim financial statements and related footnotes may be presented on a condensed basis in a level of detail allowed by Article 10 but will always need to contain disclosure of any material matters that were not disclosed in the most recent annual financial statements. While the interim financial statements in an IPO registration statement may be unaudited, SEC regulations do not require that they be subject to a review under PCAOB standards by the registrant’s independent registered public accounting firm; however, a company’s underwriters will often require that such a review be performed for due diligence or comfort letter purposes. The interim-period information may be presented alongside the audited annual financial statements, with the interim information clearly marked as unaudited. Alternatively, the interim-period information may be presented as a separate set of unaudited financial statements. Because a company undergoing an IPO may not have historically prepared interim financial statements, the company should ensure that it has established proper controls and procedures for accurately preparing such information.

2.4.3 Age of Financial Statements

In accordance with Regulation S-X, Rule 3-12, the financial statements in an IPO must meet certain age requirements as of each registration-statement filing date as well as when the registration is declared effective; otherwise, the financial statements will be considered “stale.” In general, the financial statements in an IPO filing must not be more than 134 days old (i.e., the gap between the date of filing or effectiveness and the date of the latest balance sheet cannot be more than 134 days). However, third-quarter financial statements are considered timely through the 45th day after the most recent fiscal year-end, after which the audited financial statements for the most recent fiscal year are required. See Section 1220 of the FRM for additional details.

The table below provides the dates on which financial statements become “stale” for a calendar-year-end company undertaking an IPO during 2024 or 2025. That is, financial statements for the respective financial statement period can be included in an IPO registration statement up to the dates listed below. When filing an IPO registration statement after these dates, an entity must update financial statements and other financial information to comply with the SEC’s age requirements (i.e., an additional unaudited interim period or audited fiscal year would be required).

	First Quarter Ended March 31 (Unaudited)	Second Quarter Ended June 30 (Unaudited)	Third Quarter Ended September 30 (Unaudited)	Fiscal Year Ended December 31 (Audited)
Fiscal/calendar year 2024	August 12, 2024	November 12, 2024	February 14, 2025	May 14, 2025
Fiscal/calendar year 2025	August 12, 2025	November 12, 2025	February 16, 2026	May 14, 2026

2.4.4 Omission of Certain Financial Information From Draft Registration Statements

While each draft of a registration statement is generally expected to contain all information required by SEC regulations, there is an accommodation available to companies that allows them to omit financial statement periods in certain circumstances. This accommodation was initially granted to EGCs as part of the JOBS Act but was subsequently expanded by the SEC to include non-EGCs as well. Specifically, under the accommodation, a non-EGC may omit financial information from a nonpublic draft registration statement (see Section 1.4.2) for historical periods currently required if the company reasonably believes that it will not be required to include these historical periods at the time of the public filing. This provision is likely to apply when the SEC’s review process extends through a financial statement stale date. When a non-EGC files publicly for the first time, it must include all financial information required as of the public filing date.

Example 2-1

A non-EGC calendar-year-end company submits a draft registration statement in December 20X7 and reasonably expects to file publicly for the first time in April 20X8 when annual financial statements for 20X7, 20X6, and 20X5 will be required. In such a case, the company may omit its 20X4 annual financial statements from its nonpublic draft registration statement because the 20X4 annual financial statements will not be required at the time of the first public filing. However, for either a confidential submission or public filing more than 45 days after the 20X7 year-end, audited 20X7 financial statements must be included because those financial statements will be required at the time of the first public filing and the company must comply with the staleness requirements discussed in Section 2.4.3.

For non-EGCs, Question 101.05 of the SEC’s C&DIs on the Securities Act Forms clarifies that when evaluating which interim periods to include in a draft registration statement, companies may omit interim financial information if they reasonably believe that they will not be required to separately present such information at the time they publicly file their registration statement. As a result, many initial draft registration statements may not need to include interim financial statements when they are submitted nonpublicly.

Example 2-2

A non-EGC calendar-year-end company submits a draft registration statement in December 20X7 and reasonably expects to file publicly for the first time in April 20X8 when annual financial statements for 20X7, 20X6, and 20X5 will be required. In such a case, the company may omit its nine-month 20X7 and 20X6 interim financial statements from its nonpublic draft registration statement because the company will not be required to separately present those periods when it first publicly files its registration statement in April 20X8. The annual financial statements for 20X7, 20X6, and 20X5 will be required (1) when the registration statement is filed publicly for the first time in April 20X8 or (2) in any draft registration statement submitted more than 45 days after the 20X7 year-end.

Example 2-3

A non-EGC calendar-year-end company submits a draft registration statement in late August 20X7 and reasonably expects to file publicly for the first time in December 20X7 when nine-month 20X7 and 20X6 interim financial statements will be required. In such a case, the company may omit its six-month 20X7 and 20X6 interim financial statements from its nonpublic draft registration statement because the company will not be required to separately present those periods when it first publicly files its registration statement in December 20X7. The nine-month 20X7 and 20X6 interim financial statements, as well as the 20X6, 20X5, and 20X4 annual financial statements, will be required (1) when the registration statement is filed publicly for the first time in December 20X7 or (2) in any draft registration statement submitted more than 134 days after June 30, 20X7.

In addition, the Division updated Question 1 of its C&DIs on the FAST Act, and added a corresponding C&DI (Question 101.04) to the Securities Act Forms C&DIs, to clarify the interim financial information required in draft registration statements submitted by an EGC. Under the updated guidance, an EGC that submits a draft registration statement can omit interim financial information that it reasonably believes it will not be required to separately present at the time of the contemplated offering. However, the appropriate interim financial information would still be required in a registration statement that is publicly filed.

Example 2-4

A calendar-year-end EGC submits a draft registration statement in December 20X3. The company believes that its offering will commence in April 20X4, at which time its 20X3 annual financial information will be required. The company may omit its 20X1 annual financial information, as well as its 20X2 and 20X3 interim financial information, from the draft registration statement it submits in December 20X3.

If the company were to first file its registration statement publicly in April 20X4 when its 20X3 annual financial statements are required, it would not need to separately prepare or present interim financial information for 20X2 and 20X3. However, if the company were to publicly file its registration statement in January 20X4, before its 20X3 annual financial information is available, it may still omit its 20X1 annual financial information from this registration statement but would need to include its 20X2 and 20X3 interim financial information because, as indicated in Question 101.04 of the SEC’s C&DIs on Securities Act forms, that information ”relates to historical periods that will be included at the time of the public offering” (i.e., 20X3 annual financial statements).

Connecting the Dots

Non-EGC registrants would need to include all financial information required at the time the registration statement is publicly filed, and the SEC will not process a publicly filed registration statement if such financial information is omitted. This guidance differs from the relief provided by Section 71003 of the FAST Act, which allows EGCs to omit financial information (on Form S-1) that they reasonably believe they will not be required to include in the registration statement “at the time of the contemplated offering” (emphasis added). While Examples 2-1, 2-2, and 2-3 specify periods for non-EGCs, an EGC could also use similar accommodations.

A company that does not take advantage of the Division’s nonpublic review process and elects to publicly file its initial registration statement would not be allowed to omit from its initial registration statement financial information that it reasonably believes will not be required at the time of the contemplated offering. If a company believes that an accommodation would be appropriate in a registration statement that is publicly filed, reasonable requests for such an accommodation may be directed to the relevant office chief in the Division that is responsible for performing the review.

See Appendix C for a summary of benefits available to EGCs and non-EGCs.

2.4.5 Rule 3-13 Waivers and Other Requests

Regulation S-X, Rule 3-13, gives the SEC staff the authority to permit the omission or substitution of certain financial statements otherwise required under Regulation S-X when doing so is “consistent with the protection of investors.” For example, in an IPO, the registrant’s historical financial statements may exhibit significant growth. In this case, certain acquisitions may not be material to the registrant’s current operations. Therefore, when a registrant believes that the literal application of the significance test leads to the provision of financial statements for an acquired business under Rule 3-05 (or another requirement such as that for a significant equity method investment under Rule 3-09) that are not material, not relevant, or not meaningful to investors, the registrant may consider submitting — to the Division’s Office of the Chief Accountant — a Rule 3-13 waiver request to omit or substitute certain financial statements otherwise required by Regulation S-X. The staff has indicated that it is also available to discuss potential waiver fact patterns by phone before a registrant submits a waiver request. For additional guidance on Rule 3-13 waivers and other requests, see Appendix B of Deloitte’s Roadmap SEC Comment Letter Considerations, Including Industry Insights.

Footnotes

3

Some EGCs may also qualify as SRCs. See Section 1.5 and Regulation S-X, Article 8, for information and reporting requirements for SRCs. The two-year accommodation for EGCs is limited to an IPO of common equity. As clarified by the SEC in paragraph 10220.1 of the FRM, in an IPO of debt securities or the filing of an Exchange Act registration statement (e.g., a Form 10) to register securities, three years of audited financial statements will generally be required.

4

May be presented in a footnote to the financial statements. We believe that the analysis of changes in shareholders’ equity is required for each period for which an income statement is presented and, therefore, that both the year-to-date and corresponding interim period of the prior fiscal year are required.

2.5 Financial Statements of Businesses Acquired or to Be Acquired (Rule 3-05)

When a significant business acquisition is consummated, or it is probable that it will be consummated, the registrant may be required to file certain financial statements of the acquired business or to be acquired business (acquiree) in accordance with Regulation S-X, Rule 3-05. While existing registrants are subject to periodic reporting requirements for significant acquisitions,5 a company is not subject to such requirements before an IPO. Therefore, in the context of an initial registration statement, a company must evaluate recent consummated and probable acquisitions, as further described below.

The following factors govern whether and, if so, for what period, the acquiree’s financial statements are required for a consummated or probable acquisition:

Definition of a business — Regulation S-X, Rule 3-05, applies to an acquisition of a business. The definition of a “business” for SEC reporting purposes differs from the definition under ASC 805 for U.S. GAAP purposes and focuses primarily on the continuity of revenue-producing activities.6 Note that an acquisition can take many forms (i.e., acquisition of assets vs. acquisition of a legal entity) and that such forms typically will not affect the determination of whether the acquiree is a business.
When the acquisition was completed — The acquiree’s financial statements are not required once the registrant’s audited financial statements reflect the operating results of the acquiree for at least:
- Nine months if any of the results of the significance tests are greater than 20 percent but none are greater than 40 percent.
- A complete fiscal year if the results of any of the significance tests are greater than 40 percent.
As a result, acquisitions that occurred in the second or third back year of annual financial statements presented by the registrant will not need to be presented in separate preacquisition financial statements unless the omission of such financial statements would be misleading.
Significance — The highest level of significance based on the following three tests is used to determine the financial statements, if any, that an entity is required to provide in the registration statement:
- Investment test — The GAAP purchase price is compared with the total assets of the registrant on the basis of its most recent preacquisition annual financial statements. While the investment test stipulates the use of the aggregate worldwide market value (AWMV) of the registrant’s common equity (i.e., market capitalization) when available rather than total assets, companies undertaking an IPO would not yet have an observable AWMV and thus must use total assets. Once an entity completes its IPO, it should use its AWMV when performing the investment test. For example, if a registrant consummates an acquisition on March 15, 2024; completes its IPO on June 15, 2024; and consummates an acquisition on November 15, 2024, it should use total assets and AWMV to perform the investment test for the March and November acquisitions, respectively.
- Asset test — The registrant’s share of the acquiree’s total assets is compared with the registrant’s total assets on the basis of the most recent preacquisition annual financial statements of each company.
- Income test — The income test consists of an income component and a revenue component:
  - Income component — The registrant’s share of the acquiree’s pretax income from continuing operations7 is compared with the registrant’s pretax income from continuing operations on the basis of the most recent preacquisition annual financial statements of each company.
  - Revenue component — If both the registrant and the acquiree have material revenue in each of the two most recently completed fiscal years, the revenue component is calculated by comparing the registrant’s share of the acquiree’s revenue with the registrant’s revenue on the basis of the most recent preacquisition annual financial statements of each company. If either the registrant or the acquiree does not have material revenue for each of the two most recently completed fiscal years, only the income component should be used.
  - An acquiree will only be considered significant if both the income component and the revenue component (if applicable) exceed the significance threshold (i.e., 20 percent). When both components exceed the significance threshold, the lower of the two components is used to determine the number of periods for which the acquiree’s financial statements are required.

Pro forma financial information is generally required under SEC rules if the acquiree is deemed to be significant. The significance tests in Regulation S-X, Rule 1-02(w), can be quite complex. Entities are advised to consult with their independent auditors and legal counsel when applying the tests in special circumstances. For more information about pro forma financial information, see Section 4.4.

2.5.1 Preacquisition Financial Statements Required

The table below summarizes whether preacquisition financial statements are required for an acquiree on the basis of the timing of the acquisition and the significance threshold.8

Significance	Acquisition Closed Before the Most Recent Full Fiscal Year Presented	Acquisition Closed During the Most Recent Full Fiscal Year Presented	Acquisition Closed After the Most Recent Full Fiscal Year Presented	Probable Acquisition (Not Yet Consummated)
20 percent or less	No	No	No	No
Exceeds 20 percent but not 40 percent	No	If the acquisition closed during the first quarter, no; otherwise yes. See Section 2.5.1.1 for further details.	Yes — See Section 2.5.1.1 for further details.	No — See Section 2.5.1.2 for further details.
Exceeds 40 percent but not 50 percent	No	Yes — See Section 2.5.1.1 for further details.	Yes — See Section 2.5.1.1 for further details.	No — See Section 2.5.1.2 for further details.
Exceeds 50 percent	No	Yes	Yes	Yes

2.5.1.1 Grace Period

Financial statements of a significant acquired business that are not more than 50 percent significant (on the basis of any of the three tests) are not required in a registration statement that is filed or declared effective before the 75th day after the consummation of the acquisition. (See paragraph 2040.1 of the FRM and the discussion of Company D in Example 2-5.) However, any amendment to the initial registration statement filed 75 or more days after the consummation must include the required financial statements and pro forma financial information. Further, if the registration statement is declared effective during the grace period, the registrant must file on Form 8-K the required financial statements and pro forma financial information within 75 days of the closing of the transaction. These requirements may be accelerated if certain acquisitions are significant in the aggregate, as noted below.

2.5.1.2 Aggregate

Separate financial statements are generally not required in a registration statement for a significant probable acquisition whose significance does not exceed 50 percent or for a significant consummated acquisition whose significance does not exceed 50 percent within the grace period discussed above. However, an entity must perform an additional test to calculate the aggregate significance of the following categories:

Probable acquisitions whose significance does not exceed 50 percent.
Consummated acquisitions within the grace period whose significance is greater than 20 percent but not greater than 50 percent.
Any individually insignificant (i.e., the significance does not exceed 20 percent) businesses acquired since the end of the registrant’s most recently completed fiscal year presented.

The acquirees in all three of these categories are commonly referred to as individually insignificant acquirees, and if their aggregate significance exceeds 50 percent, the registration or proxy statement must include:

The audited preacquisition financial statements for the most recent fiscal year and interim period for any acquirees in categories 1 and 2 above whose significance exceeds 20 percent and that have not yet been filed.
Pro forma financial information to reflect the aggregate effects of all individually insignificant acquisitions (i.e., all three categories).

See Section 2.9 of Deloitte’s Roadmap SEC Reporting Considerations for Business Acquisitions for more information. In addition, companies should consult with their independent auditors and legal counsel in such circumstances.

2.5.1.3 Periods of Preacquisition Financial Statements Required

If preacquisition financial statements are required, the significance level is used to determine the periods as follows:

Significance exceeds 20 percent but not 40 percent:
- One year of audited preacquisition financial statements.
- Interim unaudited financial statements (1) as of the acquiree’s last fiscal quarter-end completed before the closing of the acquisition and (2) for the year-to-date interim period ending on that date.
Significance exceeds 40 percent:
- Two years of audited preacquisition financial statements.
- Interim unaudited financial statements (1) as of the acquiree’s last fiscal quarter-end completed before the closing of the acquisition, (2) for the year-to-date interim period ending on that date, and (3) for the corresponding year-to-date interim period in the prior year.

Example 2-5

Assume the following:

Registrant A, a calendar-year-end company, is planning to file its initial registration statement on or around September 15, 20X6.
Registrant A does not qualify as an EGC.
Registrant A will include its historical financial statements for the following periods in its initial registration statement:
- Audited balance sheets as of December 31, 20X5, and December 31, 20X4.
- Audited statements of operations, comprehensive income, cash flows, and changes in stockholders’ equity for each of the three years in the period ended December 31, 20X5.
- Unaudited financial statements as of and for the periods ended June 30, 20X6, and June 30, 20X5.

Registrant A made the following acquisitions:

Company	Acquisition Date	Highest Level of Significance	Years Required	Financial Statements Required9
B	December 15, 20X4	60%	N/A	Because the acquisition of Company B occurred before the most recent full fiscal year presented by Registrant A, B’s preacquisition financial statements are not required.
C	January 15, 20X5	55%	2	Because Company C has not been included in A’s audited results for a complete fiscal year, A must provide two years of preacquisition financial statements: C’s financial statements as of and for the years ending December 31, 20X4, and December 31, 20X3.
D	July 15, 20X6	25%	1	While one year of audited financial statements will eventually be needed, as of the initial filing date, no financial statements of Company D are required on the basis of the accommodation for recently consummated business acquisitions, commonly referred to as the grace period, discussed in Section 2.5.1.1. In any amendment to the IPO registration statement filed 75 or more days after the acquisition date of July 15, 20X6, audited financial statements as of and for the year ended December 31, 20X5, as well as unaudited interim information as of and for the six-month period ended June 30, 20X6, would be required. In addition, if Company A completes its IPO during the grace period, the required financial statements and pro forma financial information must be filed on Form 8-K within 75 days of the closing of the acquisition.

2.5.1.4 Omitting a Balance Sheet for a Significant Business Acquisition

In accordance with Regulation S-X, Rule 3-05(b)(4)(iv), when the registrant’s audited balance sheet is for a date after the consummation of the acquisition, the separate balance sheet(s) of the acquiree may be omitted, since the acquiree’s balances are included in the acquiring company’s balance sheet. The registrant is still required to provide the acquiree’s statements of operations, comprehensive income, and cash flows for the appropriate periods.

Example 2-6

Registrant A acquires Company B on December 15, 20X7. Both A and B have a December 31 fiscal year-end. The highest level of significance for the acquisition of B is 35 percent. Registrant A plans to file an initial registration statement in March 20X8 that will include A’s audited financial statements as of December 31, 20X6 and 20X7, and for the three years ended December 31, 20X7. Registrant A is required to include B’s audited financial statements for one year in the initial registration statement.

Because A’s audited balance sheet as of December 31, 20X7, is for a date after the acquisition was consummated, B’s balance sheet may be omitted. Registrant A is still required to provide B’s statements of operations, comprehensive income, and cash flows for the appropriate periods.

2.5.2 Financial Statements Used to Measure Significance

To determine significance, a registrant generally compares an acquiree’s most recent preacquisition annual financial statements with the registrant’s most recent preacquisition audited annual consolidated financial statements. (For more information, see Section 2.3.1 of Deloitte’s Roadmap SEC Reporting Considerations for Business Acquisitions.)

Example 2-7

Registrant A acquires Company B on December 15, 20X4; Company C on January 15, 20X5; and Company D on July 15, 20X6. Registrant A and Companies B, C, and D have December 31 fiscal year-ends. Registrant A plans to file an initial registration statement on September 15, 20X6. Significance should be calculated for each acquisition as follows:

Compare C’s financial statements for the fiscal year ended December 31, 20X4, with A’s audited financial statements for the fiscal year ended December 31, 20X4.
Compare D’s financial statements for the fiscal year ended December 31, 20X5, with A’s audited financial statements for the fiscal year ended December 31, 20X5.

Registrants are required to test the significance of acquirees only during (1) the most recent full fiscal year presented in their audited financial statements and (2) the subsequent interim period through the date the initial registration statement is filed and declared effective by the SEC.

Because B was acquired before the most recent full fiscal year presented by A, B generally does not need to be tested for significance.

We understand that, provided that the following conditions are met, the SEC staff will not object if a registrant undertaking an IPO evaluates an acquiree’s significance by using pro forma financial information that reflects the effect of a prior significant acquisition or disposition consummated after its latest fiscal year-end for which audited financial statements must be presented:

Audited historical financial statements for the previous significant business acquisition are included in the registration statement.
Pro forma financial information reflecting the previous significant business acquisition or disposition is included in the registration statement.

If the registrant includes the financial statements and related pro forma financial information of the prior significant acquiree in a draft registration statement, it must ultimately provide them in a public filing as well. It would not be appropriate to use pro forma financial information to evaluate the significance of an acquiree if such information were only included in the draft registration statement but not the registration statement that was publicly filed.

If a registrant has used pro forma amounts to determine the significance of an acquisition (or disposition), the registrant must continue to use pro forma amounts to determine the significance of acquisitions (and dispositions) when performing all three significance tests and would do so through the filing date of its next annual report on Form 10-K or Form 20-F.

A registrant must also consider the other conditions discussed in Section 2.3.1.2 of Deloitte’s Roadmap SEC Reporting Considerations for Business Acquisitions when using pro forma financial information to evaluate the significance of an acquiree in an IPO/initial registration statement.

Example 2-8

Company M, a non-EGC calendar-year-end company, intends to submit a draft registration statement in July 20X9. Company M reasonably expects to file publicly in November 20X9 and to have its initial registration statement declared effective in December 20X9.

On March 15, 20X9, M acquires Company N, a nonregistrant whose fiscal year-end is also December 31. Because the significance of the acquisition of N exceeds 20 percent, M will be required to include N’s separate audited financial statements, as well as the related pro forma financial information, in its draft registration statement and, ultimately, in a public filing.

On June 15, 20X9, M acquires Company P, a nonregistrant whose fiscal year-end is also December 31. To measure the significance of the acquisition of P, M could use either (1) the pro forma information as of and for the year ended December 31, 20X8, that reflects the acquisition of N that is expected to be included in a draft registration statement in July 20X9 and publicly filed in November 20X9 or (2) its historical audited financial statements as of and for the year ended December 31, 20X8, that did not reflect the acquisition of N. Company M must use the option it elects for all three significance tests. If it elects to use the pro forma financial information, it must (1) prepare a pro forma balance sheet as of December 31, 20X8, that reflects the acquisition of N for use in the determination of P’s significance and (2) continue to use such information for future acquisitions and dispositions until it files its first Form 10-K (i.e., for the year ending on December 31, 20X9). On the basis of the investment, asset, and income test, the highest level of the significance of the acquisition of P is assumed to be:

Eighteen percent on the basis of M’s pro forma information as of and for the year ended December 31, 20X8, that reflects the acquisition of N.
Twenty-three percent on the basis of M’s historical audited financial statements as of and for the year ended December 31, 20X8, that did not reflect the acquisition of N.

If M were to use its historical audited financial statements, it would need to provide P’s separate financial statements, along with pro forma financial information, since the significance exceeds 20 percent. However, because M elected to use its pro forma information that reflects the acquisition of N, no separate financial statements of P are required since the significance of the acquisition of P does not exceed 20 percent.

If M’s IPO is delayed in such a way that M would be required to provide its audited financial statements for the year ended December 31, 20X9, when it first publicly files its initial registration statement, the significance of the acquisition of P must be evaluated by using M’s historical audited financial statements for the year ended December 31, 20X8. Company M is no longer able to use its pro forma financial information because the acquisition of P was not consummated after the latest fiscal year-end for which M’s audited financial statements must be presented (i.e., December 31, 20X9).

2.5.3 Form of Financial Statements

Preacquisition financial statements of the acquiree are generally prepared on the same basis as if the acquiree were a registrant, except that the level of significance is used to determine the number of years of audited financial statements. The financial statements must comply with Regulation S-X and SAB topics, including, but not limited to, requirements related to mezzanine equity (see ASC 480-10-S99-3A and SAB Topic 14.E) and separately presenting revenue from products and services (see Regulation S-X, Rule 5-03(b)). However, if the acquiree is not public, it does not need to comply with certain disclosure requirements that only apply to issuers, such as those related to segments or earnings per share (EPS).

Some accounting standards differentiate between the accounting disclosure requirements or adoption dates for PBEs and those for non-PBEs. Significant acquirees whose financial statements are included in a registrant’s filing under Regulation S-X, Rule 3-05, are considered PBEs under U.S. GAAP.10 Therefore, such acquirees should use PBE adoption dates and disclosure requirements when preparing their financial statements. However, in November 2019, the FASB issued ASU 2019-10, which provides a framework for staggering the effective dates of future major accounting standards and amends the effective dates of some new standards to give implementation relief to certain types of entities. The standard introduces a new “two-bucket” framework for determining the effective dates of future major accounting standards. Under the Board’s new framework, the buckets are defined as follows:

Bucket 1 — All PBEs that are SEC filers (as defined in U.S. GAAP), excluding SRCs (as defined by the SEC).
Bucket 2 — All other entities, including SRCs, other PBEs that are not SEC filers, private companies, not-for-profit organizations, and employee benefit plans.

Significant acquirees whose financial statements are included in a registrant’s filing under Rule 3-05 would qualify as “PBEs that are not SEC filers”; therefore, such acquirees should use Bucket 2 adoption dates and disclosure requirements when preparing their financial statements.

Management should be mindful of other accounting standards in which the adoption dates for PBEs differ from those for non-PBEs. While EGCs may not be required to use the PBE effective dates (see Section 1.6.2) in adopting certain accounting standards, this accommodation does not apply to acquiree financial statements under Rule 3-05.

In addition, such acquirees should comply with the accounting and disclosure requirements applicable to PBEs. Some standards permit practical expedients or elections for non-PBEs (e.g., the use of a risk-free discount rate in lieu of the incremental borrowing rate in the accounting for leases or the amortization of goodwill). However, these expedients and elections may not be used in financial statements that an entity prepares to meet the requirements of Rule 3-05. For example, at the October 2020 CAQ SEC Regulations Committee joint meeting with the SEC staff, the staff discussed a situation in which (1) an acquired company has adopted ASC 842 by using the risk-free-rate practical expedient and (2) a registrant must evaluate the acquired company for significance and, in some cases, provide this company’s separate financial statements. The SEC staff indicated that it would not object if a registrant uses financial statements that reflect the risk-free-rate practical expedient to measure significance, since doing so would result in greater ROU assets and, thus, a higher measure of significance when the asset test is performed. The staff noted that the risk-free-rate practical expedient should be “the only difference between those financial statements and a PBE set of financial statements” but clarified that financial statements provided in accordance with Rule 3-05 are PBE financial statements and thus may not reflect this expedient. Therefore, before providing such financial statements in accordance with Rule 3-05, a registrant would need to assess whether an adjustment to the PBE rate is material and must be revised.

Generally, the annual financial statements for a significant acquisition may be audited in accordance with AICPA standards.11 SEC regulations do not require registrants to audit or review interim financial statements provided under Rule 3-05. However, the company’s underwriters will often require that the interim information be reviewed by an independent registered public accounting firm for due diligence or comfort letter purposes.

2.5.3.1 Full Financial Statements

In some instances, the acquisition may constitute only a portion of a legal entity. If the acquired asset or group of assets represents substantially all of an entity, the entire entity’s full audited financial statements are generally required. In these circumstances, the registrant would remove any assets, liabilities, or operations not acquired in the pro forma financial information presented.

2.5.3.2 Carve-Out Financial Statements

If the acquired asset or group of assets does not represent substantially all of the selling entity, the selling entity’s financial statements may not be useful. Therefore, the audited financial statements should only represent the selected parts of the entity acquired, excluding the operations retained by the seller. These financial statements are often referred to as carve-out financial statements. Carve-out financial statements include, for the appropriate periods, balance sheets; statements of operations, comprehensive income, and cash flows; changes in stockholders’ equity; and the respective notes to the financial statements. The SEC staff believes that carve-out financial statements should reflect (1) all assets and liabilities of the acquired business even if the assets and liabilities that are directly related to the operation of the acquired business are not acquired or assumed as part of the acquisition and (2) all costs of doing business. For further discussion, see Deloitte’s Roadmap Carve-Out Financial Statements.

2.5.3.3 Abbreviated Financial Statements

In certain circumstances, carve-out financial statements may not be practicable to prepare, such as when the acquired asset or group of assets is a small portion or a product line of a much larger business and separate financial records were not maintained. In such instances, the SEC staff may allow registrants to provide abbreviated financial statements — that is, audited statements of assets acquired and liabilities assumed (in lieu of a full balance sheet), audited statements of revenues and expenses (in lieu of a full statement of operations), and footnotes to the abbreviated financial statements — to meet the financial statement requirements in Regulation S-X, Rule 3-05, provided that certain qualifying conditions and presentation and disclosure requirements are met. Registrants may present such abbreviated financial statements for an acquiree without seeking permission from the SEC staff when the following qualifying conditions in Rule 3-05(e) are met:

The assets and revenue (after intercompany eliminations) of the acquiree represent 20 percent or less of the assets and revenue of the seller as of and for the most recently completed fiscal year.
The acquiree’s financial statements have not been previously prepared.
The acquiree was not a separate entity, subsidiary, operating segment,12 or division during the periods for which its financial statements would be required.
The seller did not maintain the “distinct and separate accounts” that would be necessary to present financial statements that include the omitted expenses, and the preparation of such financial statements is impracticable.

When presented, abbreviated financial statements must also meet the presentation and disclosure requirements in Rule 3-05(e)(2).

The title of the statement of revenues and expenses must be appropriately modified to indicate that it omits certain expenses. The statement of revenues and expenses must include all direct revenues and direct expenses associated with the revenue-producing activities of the assets acquired and liabilities assumed. Typically, the only costs excluded are those not directly connected to the revenue-producing activity. For example, all related costs incurred by or on behalf of the acquiree for the periods required to be presented must include costs of sales or services, selling, distribution, and marketing as well as general and administrative expenses, depreciation and amortization, and research and development expenses. As noted in the response to Question 2 of SAB Topic 1.B, if the abbreviated financial statements include a reasonable allocation of costs directly related to the revenue-producing activity incurred by the seller on behalf of the business sold, the footnotes should contain management’s assertion that the method used to allocate those costs is reasonable. However, the registrant may exclude allocated corporate overhead expenses, certain interest expense (i.e., interest expense for debt that will not be assumed by the registrant), and income tax expense (collectively, “omitted expenses”). The auditor’s report on these financial statements would include an explanatory paragraph indicating the special purpose and incomplete nature of the presentation of the results of operations, as discussed in AICPA AU-C Section 805.24.

In accordance with Rule 3-05(e)(2)(iii), the footnotes to the abbreviated financial statements should include the following disclosures: (1) the nature of the omitted expenses and why they were omitted, (2) an explanation of why it is impracticable to prepare financial statements that include the omitted expenses, and (3) a statement that the financial statements do not indicate the acquiree’s future financial condition or operations because the omitted expenses have been excluded.

A registrant that presents abbreviated financial statements is not required to provide a statement of cash flows. However, information (if available) about the acquiree’s operating, investing, and financing cash flows must be included in the footnotes to the financial statements.

When the qualifying conditions are not met but a registrant nevertheless believes that such financial statements would provide sufficient disclosures for investors, the registrant may request a waiver from the SEC staff under Regulation S-X, Rule 3-13.

2.5.4 Other Considerations

In addition to the general financial statement requirements related to the consummation of a significant business acquisition, other considerations might affect the reporting requirements. The following table summarizes such potential considerations:

Topic	Considerations
Audited period less than a year	Regulation S-X, Rule 3-06, permits the use of an acquiree’s audited financial statements for a period of nine to twelve months to satisfy one year of financial statement requirements. For example, for a transaction that closes in the fourth quarter (e.g., November 15, 20X6) for which one year of audited preacquisition financial statements is required, a registrant could provide audited financial statements for the nine months before acquisition (e.g., the nine months ended September 30, 20X6) in lieu of audited financial statements for the prior fiscal year (e.g., the year ended December 31, 20X5) and unaudited information for the appropriate interim period (e.g., the nine months ended September 30, 20X6).
Related businesses	Related businesses must be treated as a single business acquisition in the assessment of significance. Businesses are related if (1) they are under common control or management or (2) their acquisitions depend on each other or on a single common event or condition. See Regulation S-X, Rule 3-05(a)(3)(i)–(iii).
Put-together transactions	When a put-together transaction13 occurs concurrently with an initial registration statement, a registrant must first determine which entity is the acquiring entity. It must then measure the significance of all other businesses in the put-together transaction against that of the acquiring entity. Since these acquired businesses are considered related under Rule 3-05(a)(3), a registrant must aggregate all the other businesses (besides the acquiring entity) in the put-together transaction and measure their significance against that of the acquiring entity as if they were a single acquisition.

2.5.5 Omission of Financial Statements of Acquired Entities From Draft Registration Statements

In a manner consistent with the accommodations discussed in Section 2.4.4, a company may omit from its draft registration statement Regulation S-X, Rule 3-05, financial statements (and the related pro forma financial information discussed in Section 4.4) if the company reasonably believes that those financial statements will not be required at the time of the public filing or contemplated offering, as applicable.

Example 2-9

A calendar-year-end company that plans to submit a draft registration statement in the fall of 20X7 completes a significant acquisition in the fourth quarter of 20X6. The acquisition is significant in such a way that one year of the acquiree’s financial statements would generally be required under Rule 3-05. The company plans to update its draft registration statement to include its 20X7 annual financial statements before a public filing in 20X8. Thus, after that update, the acquired business will have been part of the company’s audited financial statements for a sufficient amount of time (i.e., a full fiscal year) to eliminate the need for separate financial statements. In this scenario, the staff of the Division will not delay its review of the draft registration statement in the fall of 20X7 even though the acquiree’s financial statements and the related pro forma financial information are omitted from the submission.

Footnotes

5

Under Form 8-K, Item 2.01, a registrant is required to file a Form 8-K to announce a significant business acquisition within four business days of consummation and to include the required financial statements within 71 calendar days.

6

Regulation S-X, Rule 11-01(d), states, in part, “[T]he term business should be evaluated in light of the facts and circumstances involved and whether there is sufficient continuity of the acquired entity’s operations prior to and after the transactions so that disclosure of prior financial information is material to an understanding of future operations. A presumption exists that a separate entity, a subsidiary, or a division is a business.”

7

Regulation S-X, Rule 1-02(w), indicates that pretax income from continuing operations is “consolidated income or loss from continuing operations before income taxes (after intercompany eliminations) attributable to the controlling interests.”

8

A company may be able to omit the financial statements of an acquired business from its draft registration statement for certain periods. See Section 2.5.5 for more information.

9

Assumes that all acquired companies are calendar-year-end companies and that the registrant is not using the accommodation to omit the acquiree’s balance sheet, when applicable.

10

Paragraph BC12 of ASU 2013-12 states that an entity meets the definition of a PBE when it “is required by the SEC to file or furnish financial statements or does file or furnish financial statements with the SEC” (e.g., its “financial statements or financial information that is required to be or is included in a filing with the SEC [, such as the information required under Regulation S-X, Rules 3-09, 3-05, and 4-08(g)]”).

11

In certain cases, if an acquired company is identified as a predecessor (see Section 2.3), the audit must be performed in accordance with PCAOB standards.

12

In evaluating the “operating segment” condition above, a registrant should consider the definition of that term in ASC 280 or IFRS 8, as applicable. The operating segment condition for abbreviated financial statements applies to all acquired businesses, whether public or private. Accordingly, a company may have to evaluate whether the acquired entity would qualify as an operating segment under ASC 280, if relevant.

13

See Section 2.3.2 for more information.

2.7 Reporting Requirements for Equity Method Investees

Registrants with investments accounted for under the equity method (“equity method investees” [EMIs]) should consider the reporting and disclosure requirements in Regulation S-X, Rules 3-09, 4-08(g), and 10-01(b). These requirements ensure that investors receive relevant financial information about significant EMIs. For additional interpretive guidance on Rules 3-09, 4-08(g), and 10-01(b), see Deloitte’s Roadmap SEC Reporting Considerations for Equity Method Investees.

2.7.1 Separate Financial Statements (Rule 3-09)

For registrants that hold interests in EMIs (including any that are accounted for by using the fair value option14) that are considered significant, the investee’s separate financial statements must be included in the IPO registration statement. An interest in an EMI is considered significant if the results of either the investment test or the income test under Regulation S-X, Rule 1-02(w), exceed 20 percent for any annual period presented in the registrant’s financial statements. The following is a description of the investment test and income test:

Investment test — The registrant’s investments in, and advances to, the investee are compared with the registrant’s total assets as of the end of each fiscal year.
Income test — The income test consists of an income and revenue component.
- The income component is determined by comparing the absolute values of (1) the registrant’s equity in the investee’s pretax income or loss and (2) the registrant’s pretax income or loss.
- If both the registrant and the investee have material revenue in each of the two most recently completed fiscal years, the revenue component is calculated by comparing the registrant’s proportionate share of the investee’s revenue with the registrant’s revenue. If either the registrant or the investee does not have material revenue for each of the two most recently completed fiscal years, only the income component should be used.
An investee will only be considered significant in accordance with the income test if both the income component and revenue component (if applicable) exceed the significance threshold (i.e., 20 percent for Regulation S-X, Rule 3-09).

If the EMI’s financial statements must be included in the registration statement, they should be as of the same dates and for the same periods as the audited consolidated financial statements that the registrant is required to file (if the EMI and the registrant have the same year-end)15 and they must be audited for each year for which the results of either significance test exceed 20 percent. The EMI’s comparative financial statements for any years for which significance did not exceed 20 percent under either test must still be presented, but they may be unaudited. While periods for which the investment is not significant need not be audited, if such periods were audited, professional standards may require an auditor to state this fact in its report. If such periods were not audited, professional standards may also require an auditor to state this fact in its report and, therefore, that the auditor assumes no responsibility for them.

Example 2-13

Assume the following:

Registrant A does not qualify as an EGC or an SRC and has a nonpublic EMI, Company B.
In 20X5, 20X6, and 20X7, B was significant at the 15 percent, 18 percent, and 30 percent levels, respectively.
Registrant A and Company B both have December 31 year-ends.

Registrant A is required to present audited financial statements for B as of and for the year ended December 31, 20X7, and either audited or unaudited financial statements as of December 31, 20X6, and for the years ended December 31, 20X6, and December 31, 20X5.

2.7.2 Summarized Financial Information (Rule 4-08(g))

Under Regulation S-X, Rule 4-08(g), a registrant must disclose summarized financial information in the footnotes to its annual financial statements for all EMIs whose significance, individually or in the aggregate, exceeds 10 percent in accordance with any of the three significance tests in Regulation S-X, Rule 1-02(w). In addition to the income test and the investment test (described above), the third test required is the asset test, in which the registrant’s proportionate share of the total assets of the EMI(s) is compared with the registrant’s total assets.

Under Regulation S-X, Rule 1-02(bb), summarized financial information should include, at a minimum:

Current and noncurrent assets, current and noncurrent liabilities, and (if applicable) redeemable preferred stock and noncontrolling interests.
“Net sales or gross revenues, gross profit (or . . . expenses applicable to net sales or gross revenues), income or loss from continuing operations, net income or loss, and net income or loss attributable to the entity.”

Additional line items may be appropriate depending on the EMI’s industry as well as its specific facts and circumstances.

Summarized financial information must be included in the notes to the financial statements for all periods presented and may not be labeled as “unaudited.”

2.7.3 Summarized Interim Financial Information (Rule 10-01(b))

A registrant is not required to include separate financial statements of significant EMIs for interim periods. However, if the individual significance of any EMI is greater than 20 percent under the investment test or the income test as of and for the appropriate interim periods presented, the registrant must disclose summarized income statement information under Regulation S-X, Rule 10-01(b) (as described in Section 2.7.2), in its interim financial statements. However, such information need not be provided for any EMI that would not be required to file quarterly information with the SEC if it were a registrant (e.g., an FPI).

Footnotes

14

See Section 3.1.3.6 of Deloitte's Roadmap SEC Reporting Considerations for Equity Method Investees for guidance on application of the fair value option in these circumstances.

15

In accordance with Rule 3-09(b)(2), if the EMI and the registrant have different fiscal year-ends, the separate financial statements of the EMI may be as of the investee’s year-end.

Chapter 3 — Financial Statement Preparation and Disclosure Requirements

3.2 U.S. GAAP for Public Entities

The term “public entity” generally refers to an entity that files its financial statements with the SEC. However, there are multiple definitions of this term in U.S. GAAP. In an attempt to reduce complexity and diversity in practice related to this term, the FASB issued ASU 2013-12 in December 2013. The ASU added the following definition of PBE to the ASC master glossary:

A public business entity is a business entity meeting any one of the criteria below. Neither a not-for-profit entity nor an employee benefit plan is a business entity.

It is required by the U.S. Securities and Exchange Commission (SEC) to file or furnish financial statements, or does file or furnish financial statements (including voluntary filers), with the SEC (including other entities whose financial statements or financial information are required to be or are included in a filing).
It is required by the Securities Exchange Act of 1934 (the Act), as amended, or rules or regulations promulgated under the Act, to file or furnish financial statements with a regulatory agency other than the SEC.
It is required to file or furnish financial statements with a foreign or domestic regulatory agency in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer.
It has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market.
It has one or more securities that are not subject to contractual restrictions on transfer, and it is required by law, contract, or regulation to prepare U.S. GAAP financial statements (including notes) and make them publicly available on a periodic basis (for example, interim or annual periods). An entity must meet both of these conditions to meet this criterion.

An entity may meet the definition of a public business entity solely because its financial statements or financial information is included in another entity’s filing with the SEC. In that case, the entity is only a public business entity for purposes of financial statements that are filed or furnished with the SEC.

At the time ASU 2013-12 was issued, this definition of a PBE did not supersede any similar existing definitions in the Codification (e.g., “public entity” or “publicly traded company”). It first applied to the U.S. GAAP amendments made as part of the FASB’s private-company decision-making framework developed in collaboration with the PCC. Since that time, the FASB, EITF, and PCC have begun using this new PBE definition in newly issued accounting and reporting guidance that affects public entities differently from private entities or for which the required effective date for PBEs differs from that for entities other than PBEs.

In an IPO, a registrant must present financial statements that are consistent with public-entity accounting principles and must comply with disclosure requirements for public entities for all periods presented. Examples of topics for which the accounting principles or disclosures may apply to public entities but do not apply to nonpublic entities include EPS; segment reporting; temporary equity classification of redeemable securities; and certain disclosures related to business combinations, income taxes, and pensions and other postretirement benefits. For a more detailed discussion of accounting considerations for entities preparing for an IPO, see Chapter 5.

Connecting the Dots

Entities should consider using a GAAP checklist that incorporates SEC requirements in assessing the completeness and accuracy of disclosures. Using an SEC-compliant GAAP checklist well in advance of preparing financial statements may make it easier for an entity to draft new required disclosures and to document management’s judgments in preparing such disclosures.

3.4 PCC Accounting Standards and Practical Expedients Available to Non-PBEs

The PCC uses the private-company decision-making framework to advise the FASB on the appropriate accounting treatment for private companies. Nonpublic companies may have elected to apply alternative accounting standards developed by the PCC and issued by the FASB. On its Web site, the FASB states that the PCC was formed in 2012 and is an advisory body whose mission is to review and propose “alternatives within GAAP to address the needs of users of private company financial statements.” As a result of the PCC’s activities, the FASB has issued accounting standards that have allowed private entities to elect alternative accounting policies intended to reduce the complexity and cost of financial reporting while maintaining decision-useful information for investors. Once a company (even if it qualifies as an EGC) is considered a PBE, it is no longer permitted to apply private-company accounting alternatives. Therefore, any previously elected private-company alternatives would need to be retrospectively eliminated from the company’s historical financial statements before such statements can be included in its IPO registration statement.

Similarly, several accounting standards permit non-PBEs to use certain practical expedients. For example, non-PBEs are permitted to omit disaggregation of revenue disclosures in accordance with ASC 606 as well as to use a risk-free rate in measuring their lease liabilities. Companies undertaking an IPO are considered PBEs and thus may not reflect any of these practical expedients in their financial statements filed with the SEC. EGC status only allows companies to defer adoption of new standards. Once it adopts a new standard, even an EGC must comply with the requirements of that standard that apply to PBEs.

An entity should use caution in implementing the alternative accounting policies applicable to private entities if it expects that it may undergo an IPO or that its financial statements may be included in another company’s IPO in the future (e.g., financial statements of an acquiree under Regulation S-X, Rule 3-05 — see Section 2.5.3).

3.5 Changes in Accounting Principles

The presumption that an entity should not change an accounting principle, once adopted, in accounting for events and transactions of a similar type is basic to the preparation of financial statements. An entity may change an accounting principle only if management can justify that the newly adopted accounting principle is both acceptable and preferable. Factors that may justify that an accounting treatment is preferable include authoritative literature, changes in the structure and economics of principal transactions, industry practice, business judgment, and business planning. However, industry practice, in and of itself, may not always demonstrate that an alternative principle is preferable. Ultimately, whether a change is preferable depends on the entity’s facts and circumstances, and the burden of justification rests with the reporting entity.

Once a company is public, a change in accounting principle generally also results in the need for a preferability letter. A preferability letter is a letter issued by the entity’s independent auditors and included in an SEC filing stating that the auditor has also concluded that the accounting change is preferable. If a change in accounting is made in conjunction with an IPO, the preferability letter is not required because the entity was not yet public on the date the change was made. The determination of whether a change in accounting policy is a change in accounting principle involves judgment and careful consideration of the facts and circumstances.

3.6 Regulation S-X

Regulation S-X contains many requirements related to providing specific disclosures on the face of the financial statements or in the footnotes thereto. Some of these requirements are broadly applicable, and some apply only to entities in certain industries. The most significant broadly applicable requirements are contained in Article 4, which addresses disclosures related to topics that include, but are not limited to, restrictions that limit the payment of dividends by the registrant, summarized financial information of subsidiaries not consolidated, income taxes, and related-party transactions.

Industry requirements may also apply. These requirements can affect both presentation (e.g., specific financial statement line items) and disclosures (e.g., requirements to include supplemental schedules). The following sections of Regulation S-X contain the bulk of the industry-specific requirements:

Article 4, “Rules of General Application” (includes specific requirements for oil- and gas-producing activities).
Article 5, “Commercial and Industrial Companies.”
Article 6, “Registered Investment Companies and Business Development Companies.”
Article 7, “Insurance Companies.”
Article 9, “Bank Holding Companies.”

By default, an entity is subject to the requirements for commercial and industrial companies in Article 5, unless another article applies. Under Article 5, a registrant must provide various line items and disclosures, when applicable, in its balance sheet and income statement. For example, under Article 5, Rule 5-03(b), an entity may be required to state separately, on the face of the income statement, revenues (and associated cost of revenues) related to (1) product sales, (2) rentals, (3) services, and (4) other revenue activities. A registrant must comply with these SEC requirements in addition to any GAAP requirements.

At the 2021 AICPA & CIMA Conference on Current SEC and PCAOB Developments, the SEC staff discussed income statement presentation and noted that as companies evolve, some business models may not clearly be subject to the SEC’s financial statement presentation requirements in Regulation S-X, Article 5, Article 7, or Article 9. Therefore, the staff has accepted income statement presentations in accordance with a hybrid of Article 5 and either Article 7 or Article 9 if such presentation is more appropriate given the registrant’s facts and circumstances. For example, the staff has not objected when a registrant in the financial technology industry with material lending activity presents its financial statements by applying a hybrid of Articles 5 and 9.

SRCs are eligible to apply the scaled requirements in Regulation S-X, Article 8, when preparing their financial statements. SRCs typically are not required to apply the disclosure provisions of Regulation S-X in their entirety unless Article 8 indicates otherwise. See Section 3.6.2 and Appendix B for more information about the disclosure requirements for SRCs.

3.6.1 Financial Statement Schedules

As discussed above, a registrant may need to include certain financial statement schedules in its initial registration statement in accordance with Regulation S-X. Regulation S-X, Article 12, covers the form and content requirements for these schedules. For example, a registrant under Regulation S-X, Article 5, may need to include Schedule II, “Valuation and Qualifying Accounts,” to illustrate, by major asset class, a rollforward of all valuation and qualifying accounts and reserves (e.g., allowances for bad debt, valuation allowance on deferred tax assets [DTAs]) for each period for which an income statement is presented. Inventory allowance is not typically considered a valuation and qualifying account because a write-down of inventory to the lower of cost or market at the close of a fiscal period creates a new cost basis that subsequently cannot be marked up on the basis of changes in underlying facts and circumstances in accordance with SAB Topic 5.BB.

While they may be presented separately, any required schedules are considered part of the financial statements and must be audited. Many registrants prefer to include the schedule information in the footnotes to the financial statements in lieu of furnishing separate schedules. A registrant also needs to provide any schedules applicable to predecessor entities in the registration statement. Financial statement schedules are not needed for financial statements that are required under Regulation S-X, Rule 3-05, for business acquisitions. However, when a registrant is required to provide financial statements for EMIs in accordance with Regulation S-X, Rule 3-09, the form and content of those financial statements must be in compliance with Regulation S-X, including the requirement to include financial statement schedules if applicable.

3.6.2 Article 8, “Financial Statements of Smaller Reporting Companies”

As explained in Section 1.5.2, SRCs may be eligible to apply scaled disclosure requirements. Regulation S-X, Article 8, addresses the scaled financial statement disclosure requirements for SRCs. SRCs are generally not required to apply the disclosure provisions of Regulation S-X in their entirety except when Article 8 specifically indicates otherwise. However, SRCs are expected to provide all information required by any applicable industry guides. Further, although Article 8 does not contain any explicit disclosure requirements that apply to the financial statement schedules described in Regulation S-X, Article 5, Topic 5 of the FRM provides disclosure guidance for SRCs. This guidance advises issuers to consider whether additional disclosure in MD&A may be appropriate if, for example, the restricted net assets of an SRC’s consolidated subsidiaries are a significant proportion of consolidated net assets and the amount and nature of those restrictions have a material impact on liquidity. See Appendix B for more information about the disclosure requirements for SRCs.

SRCs may also have additional time to adopt recently issued accounting standards that include the “two-bucket” framework. See Section 3.3 for more information.

3.8 Retrospective Items and “To-Be-Issued” Accountant’s Report in an IPO

In anticipation of an IPO, an entity may wish to present — retrospectively in its financial statements — certain transactions that occur after the date of such financial statements. Such retrospective presentation may include a change in reportable segments (also see Section 4.9 of Deloitte’s Roadmap Segment Reporting), a stock split (also see Section 5.6.2.1), a legal reorganization (also see Section 5.2.3), the reporting of a discontinued operation under ASC 205-20, and certain accounting changes resulting from the adoption of a newly issued standard (also see Section 3.3). In such limited circumstances, the entity may be able to present the transaction retrospectively in its financial statements earlier than normally permitted and would include a “to-be-issued” accountant’s report, sometimes referred to as a “legend opinion,” on such financial statements.

A to-be-issued accountant’s report is a draft report in the form that will be used when the registration statement is declared effective by the SEC. The draft report includes a preface (or legend), signed by the auditor, stating that it expects to be in a position to issue the report in the form presented before the registration statement is declared effective by the SEC. The draft report that follows such a signed legend does not include the accountant’s signature, since the underlying event discussed in the legend has not yet occurred and thus cannot be audited as of the date of the preface (or legend).

The registration statement cannot be declared effective until the preface (legend) is removed and the accountant’s report is finalized. Entities are encouraged to consult with their independent accountants if they believe that the requirements noted above are met. Once the preface (legend) is removed, auditors typically would need to dual-date their audit opinions related to the retrospective event.

Connecting the Dots

The most common use of a to-be-issued report in an IPO registration statement is to reflect a stock split that has been approved by the board of directors but has not been filed with the state in which the company is incorporated. It will be finalized by the state shortly after the amended registration statement is filed but before the IPO is completed. SEC preclearance is not required in such circumstances. Registration statements that are filed after the board of directors’ approval and the state filing do not need to include a preface (legend).

Alternatively, assume that an entity enters into a transaction to dispose of a component or group of components that meets the discontinued-operations criteria in ASC 205-20 after the date of the entity’s most recent financial statements but before the IPO registration statement is filed. While professional standards would normally not permit an entity to recast prior periods before issuing financial statements for a period that includes the change, an entity may be able to do so in its IPO registration statement by using a to-be-issued report. In this situation, consultation with the SEC is suggested since the following conditions may need to be met as indicated at the June 2014 CAQ SEC Regulations Committee joint meeting with the SEC staff: (1) the disposal of the discontinued operation has occurred; (2) the financial statements have been audited, including the retrospective revision; and (3) the registrant has consulted with the appropriate industry group.

For more information, see Section 4710 of the FRM. Also see Section 8.7 of Deloitte’s Roadmap Impairments and Disposals of Long-Lived Assets and Discontinued Operations.

Chapter 4 — Other Registration Statement Reporting

4.2 Selected Quarterly Financial Data

Under Regulation S-K, Item 302, registrants that have securities registered under Section 12(b) or 12(g) of the Exchange Act must disclose selected quarterly financial data for each full quarter within the two most recent fiscal years and any subsequent interim period for which financial statements are presented if a registrant reports a material retrospective change (or changes). In such circumstances, a registrant must disclose (1) an explanation for the material change(s) and (2) select financial information reflecting such change(s) for the affected quarterly periods, including the fourth quarter. Material retrospective changes may include, for example, a change in accounting principle in accordance with ASC 250 or a disposition of a business that is accounted for as a discontinued operation in accordance with ASC 205-20. The quarterly financial data table does not need to be provided in an IPO registration statement because the entity’s securities are not yet registered.

Although this requirement only applies to existing registrants and only when a material retrospective change has occurred, companies undertaking an IPO frequently include selected quarterly financial data voluntarily, often at the request of underwriters, to illustrate the sequential quarterly growth of the business. If presented, the quarterly financial data typically include, at a minimum:

Net sales.
Gross profit (net sales less costs and expenses associated directly with or allocated to products sold or services rendered, including depreciation and amortization).
Income (loss) from continuing operations.
Income (loss) from continuing operations per share.
Net income (loss).
Net income (loss) per share.
Net income (loss) attributable to the registrant.

The quarterly financial data may be included in an unaudited footnote to the annual financial statements or in a separate table elsewhere in the registration statement.

4.3 Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)

The purpose of MD&A is to give readers the information they need to understand a company’s financial condition, changes in financial condition, liquidity and capital resources, and results of operations (collectively, “financial condition and operating performance”), as well as its prospects for the future. Since the initial adoption of the MD&A disclosure requirements in 1980, the SEC has issued numerous rules and interpretive guidance intended to enhance the overall quality of MD&A disclosures. General disclosure requirements for domestic companies can be found in Regulation S-K, Item 303, as interpreted in Section 501 of the SEC’s Codification of Financial Reporting Policies and Topic 9 of the FRM.

Regulation S-K, Item 303(a), states that the “objective of the discussion and analysis is to provide material information relevant to an assessment of the financial condition and results of operations of the registrant including an evaluation of the amounts and certainty of cash flows from operations and from outside sources.” To that end, the discussion should:

Focus on material events and uncertainties.
Include discussion of the financial statements and other data that would be useful to understanding the registrant’s financial condition, cash flows, and results of operations.
Allow investors to understand management’s perspective on the business.

An MD&A section typically includes an overview section about the company and its business, an analysis of results of operations that addresses period-to-period changes in income statement line items, a discussion of liquidity and capital resources that focuses on the company’s financial position and cash flows, and a summary of the company’s critical accounting estimates (CAEs) intended to highlight financial statement items for which significant management estimates and judgment are required. In addition to the discussion and analysis of historical information, companies must disclose in MD&A any known trends, events, or uncertainties that are reasonably likely to have a material effect on their future liquidity, capital resources, or results of operations. As part of the discussion of liquidity and capital resources, registrants should include an analysis of “material cash requirements from known contractual and other obligations” and disclose material off-balance-sheet arrangements. Registrants should consider whether this disclosure requirement would be met by referring to the financial statement footnotes (e.g., debt maturity table) or whether additional tabular or narrative disclosure would be appropriate.

For each CAE, a registrant should discuss, to the extent material and reasonably available, (1) why the CAE is subject to uncertainty; (2) how much the CAE or assumption (or both) has changed during the relevant period; and (3) the sensitivity of reported amounts to the methods, assumptions, and estimates underlying the CAE’s calculation. Further, Instruction 3 to Item 303(b) states that disclosure of CAEs should “supplement, but not duplicate, the description of accounting policies or other disclosures in the notes to the financial statements.”

4.6 Metrics and Key Performance Indicators

Financial or operational metrics, sometimes called key performance indicators (KPIs), may also be included in an IPO registration statement to illustrate the size, profitability, and growth of the business or other relevant trends such as customer acceptance or retention. The SEC has indicated that registrants should consider the need to disclose KPIs or metrics that management uses in managing its business within MD&A, because such information may be material to an investor’s understanding of the company’s performance. Examples of metrics include items such as number of Web page views, total customers/subscribers, customer retention rates, average revenue per user, occupancy percentage, or same-store sales.

Metrics may be based on GAAP amounts, non-GAAP amounts, nonfinancial amounts, or any combination thereof. When using metrics, registrants should first consider whether an existing regulatory framework applies. For example, metrics based on non-GAAP measures would be subject to the requirements in Regulation G and Regulation S-K, Item 10(e) (see Section 4.5). If metrics are not subject to an existing framework, registrants should consider what additional information they may need to present for investors to understand the metric presented. As clarified in interpretive guidance issued by the SEC in January 2020, the SEC would generally expect the following disclosures to accompany all KPIs and metrics in MD&A:

A clear definition of the metric and how it is calculated.
A statement indicating the reasons why the metric provides useful information to investors.
A statement indicating how management uses the metric in managing or monitoring the performance of the business.
Whether there are estimates or assumptions underlying the metric or its calculation that may be important for investors to understand.
Disclosures accompanying any changes in the calculation or presentation of KPIs and metrics from period to period.

The guidance also reminds registrants of the importance of maintaining effective DCPs related to KPIs and metrics, including maintaining consistency and accuracy of disclosures.

In addition, for additional background and guidance on the presentation and use of metrics and KPIs, see Section 2.4 of Deloitte’s Roadmap Non-GAAP Financial Measures and Metrics.

4.7 Climate-Related Disclosures

On March 6, 2024, the SEC issued a final rule that requires registrants to provide climate disclosures in their annual reports and registration statements, including IPOs. In the footnotes to the financial statements, registrants must provide information about (1) specified financial statement effects of severe weather events and other natural conditions, (2) certain carbon offsets and renewable energy certificates (RECs), and (3) material impacts on financial estimates and assumptions that are due to severe weather events and other natural conditions or disclosed climate-related targets or transition plans. These disclosures will be subject to existing audit requirements for financial statements.

Disclosures required outside of the financial statements include:

Governance and oversight of material climate-related risks.
The material impact of climate risks on the company’s strategy, business model, and outlook.
Risk management processes for material climate-related risks.
Material climate targets and goals.

The final rule also requires large accelerated filers or accelerated filers (other than SRCs and EGCs) to disclose Scope 1 or Scope 2 greenhouse gas (GHG) emission metrics, or both, if they are material, and provide an assurance report. Because companies undertaking an IPO are generally nonaccelerated filers, GHG emission metrics will not be required as part of the IPO but would be required once the registrant becomes a large accelerated filer or accelerated filer (other than SRCs and EGCs).

The final rule was scheduled to become effective on May 28, 2024; however, the SEC has voluntarily stayed the rule’s effective date pending judicial review. If the original compliance dates in the final rule are upheld, nonaccelerated filers (companies undertaking an IPO are generally nonaccelerated filers) would be required to include these disclosures in registration statements that include financial statements for the fiscal year beginning in calendar year 2027. Registrants must include the disclosures discussed above for the same periods presented within the audited financial statements reflected in the filing. However, they do not need to provide them for comparative periods if such information was not disclosed or required in a previous SEC filing. Accordingly, in an IPO, disclosures would only be required for the most recent fiscal year.

For more information about the final rule on climate disclosures, see Deloitte’s March 15, 2024 (updated April 8, 2024), Heads Up.

Chapter 5 — Accounting Matters

5.4 Business Combinations

SEC pro forma financial information must be disclosed for a business combination or probable business combination. In addition, when a business combination is completed, an entity must disclose pro forma financial information in the notes to the financial statements in accordance with ASC 805.

ASC 805-10-50-2(h) requires an acquirer that meets the definition of a public entity to disclose the following:

“The amounts of revenue and earnings of the acquiree since the acquisition date included in the consolidated income statement for the reporting period.”
“[T]he revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period.”
“The nature and amount of any material, nonrecurring pro forma adjustments directly attributable to the business combination(s) included in the reported pro forma revenue and earnings.”

Entities must provide pro forma information for business combinations that occur (1) during the reporting period or (2) after the reporting date but before the financial statements are issued, unless the initial accounting for the business combination is incomplete at the time the financial statements are issued or are available to be issued. In addition, if multiple immaterial business combinations occur that are collectively material, pro forma information should be disclosed in the aggregate for those business combinations.

The ASC 805 pro forma disclosures are required only for public entities. Therefore, an entity may not have provided these disclosures in its financial statements before becoming a public entity. However, if a material business combination or multiple immaterial business combinations that are material in the aggregate have occurred in any of the reporting periods presented in the registration statement, the entity would be required to provide these disclosures in its registration statement.

The supplemental pro forma information required by ASC 805-10-50-2(h) (i.e., the revenue and earnings of the acquiree for the periods before the acquisition) does not need to be audited. Auditors, however, should perform the procedures required by PCAOB AS Section 2705.

The SEC’s rules on disclosure of pro forma financial information differ from the guidance in U.S. GAAP on this topic. Specifically:

ASC 805-10-50-2(h) requires disclosure of pro forma financial information in the notes to the historical financial statements for revenue and earnings only.
SEC Regulation S-X, Article 11, requires presentation of pro forma financial information in certain SEC filings (e.g., Form 8-K, registration statements, and proxy statements) to reflect a pro forma balance sheet and income statement.

In complying with the more extensive presentation requirements of Article 11, it is insufficient for an entity to provide only the pro forma financial information disclosures required by ASC 805. Because the FASB does not provide detailed guidance on preparing pro forma financial information, registrants preparing disclosures required by ASC 805 may apply the same concepts described in Article 11.

For more information about presenting pro forma financial information under ASC 805, see Deloitte’s Roadmap Business Combinations.

5.5 Financial Instruments

5.5.1 Valuation of Financial Instruments

Fair value has become an integral part of financial reporting and is often cited by investors as the most relevant measurement attribute for financial instruments. Under U.S. GAAP, derivative financial instruments, whether freestanding or bifurcated from host instruments, must generally be reported at fair value in the balance sheet. Consequently, the SEC staff often comments on how freestanding derivatives and bifurcated embedded derivatives have been measured and reported in the balance sheet. For example, the staff has frequently requested issuers to expand fair value disclosures to include quantitative information about significant unobservable inputs used in fair value measurements. Some of the SEC staff’s additional topics of focus related to financial instrument valuation include the following:

Significant assumptions, factors, and methods used to determine fair value.
Changes in valuation of the instruments over time.
Categorization of instruments in the fair value hierarchy.
Whether an independent valuation was performed contemporaneously.
Explanations of any discounts (e.g., marketability, liquidity).

For additional observations related to frequently issued SEC staff comments, see Deloitte’s Roadmap SEC Comment Letter Considerations, Including Industry Insights.

Because of the complexity of financial instruments, simple valuation models often are not appropriate for measuring fair value. At the Forum on Auditing in the Small Business Environment hosted by the PCAOB in 2012, the staff of the Division noted that errors in valuation of financial instruments often result from entities’ failure to carefully consider and evaluate the accounting implications of contractual provisions.3 Prospective registrants are strongly encouraged to evaluate such provisions, paying attention to the identification of any embedded features that may affect an instrument’s valuation. Such features may affect the settlement amount (and thus the fair value) of the instrument or embedded feature, and the valuation method or methods selected should appropriately incorporate all relevant terms.

The fair value of freestanding financial instruments (e.g., warrants) and bifurcated derivatives (e.g., conversion options bifurcated from debt or preferred stock) can fluctuate significantly with changes in the value of the underlying stock or underlying assumptions used in determining the instruments’ fair value. As is generally the case for a prospective registrant, when no active market exists for the underlying stock associated with the financial instrument, the entity must establish appropriate valuation processes and controls related to determining the fair value of both the stock underlying the financial instrument and the financial instrument in its entirety.

Connecting the Dots

Issuers often need to determine the fair value of the stock into which a financial instrument is convertible, because either the financial instrument in its entirety must be accounted for at fair value or an embedded conversion feature must be bifurcated and accounted for separately at fair value.

As the complexity of financial instruments increases, an entity may be required to use significant judgment in measuring fair value. Prospective registrants should ensure that their disclosures include the information investors need to understand how management determined fair value. Furthermore, depending on the complexity and terms of the instrument, an independent valuation specialist may need to be engaged to assess the instrument’s fair value. Section 7(a) of the 1933 Act requires that a written consent be obtained from an independent valuation firm that is “named as having prepared or certified any part of the registration statement, or is named as having prepared or certified a report or valuation for use in connection with the registration statement.”

Footnotes

3

For more information, see the slide presentation from the forum.

5.10 Earnings per Share

Public entities must comply with ASC 260, which provides guidance on calculating and presenting EPS for common stock. For each period presented, entities are required to present basic EPS (i.e., income available to common stockholders divided by the weighted-average number of common shares outstanding) and diluted EPS, which includes the total weighted-average number of common shares of the entity’s potential common stock that would dilute basic EPS if actually issued.

An IPO commonly involves changes in capital structure (see Section 5.6.2), including both simple reclassifications and other, more complex changes that may even occur for the same equity security. Section 8.6.2 of Deloitte’s Roadmap Earnings per Share provides examples illustrating changes in capital structure and the related impact on reported amounts of EPS, as well as an overview of the FRM guidance on the EPS accounting for changes in capital structure at or before closing an IPO. (ASC 260 does not contain such guidance.) While this guidance specifically applies to changes in capital structure that occur in conjunction with an IPO, it would also be relevant to other changes in capital structure.

Presentation and disclosure of EPS can be affected by the structure and substance of the transactions to effect an IPO (see Section 5.2). Section 8.6.3 of Deloitte’s Roadmap Earnings per Share provides an overview of EPS accounting considerations related to IPOs of entities that were previously part of a larger entity, including spin-offs and other dispositions. This guidance applies to such IPOs even if those share offerings are not spin-offs from a legal perspective.

ASC 260 also provides additional guidance specific to share-based compensation. An entity should carefully analyze share-based compensation arrangements to determine the EPS impact on the basis of the substance of the arrangements. For example, shares may be legally outstanding; however, for EPS purposes, unvested shares are not treated as being issued but are instead viewed as potentially dilutive and incorporated into the calculation of diluted EPS. For more information about the impact of share-based payment awards on EPS, see Section 12.4 of Deloitte’s Roadmap Share-Based Payment Awards.

For more information about the presentation and disclosure of EPS, see Deloitte’s Roadmap Earnings per Share, especially Section 8.6.2.1, which provides an overview of common ways in which ASC 260 is misapplied in an IPO.

5.12 Disaggregation of Income Statement Expenses

ASC 210-10 currently contains limited guidance on the presentation of expenses in the income statement. Although Regulation S-X prescribes expense classification requirements, an entity’s income statement expense captions do not provide much insight into the nature of such costs. Investors have consistently asked for additional details about income statement expenses, which they believe are important to understanding a company’s performance and forecasting future cash flows.

Changing Lanes

In July 2023, the FASB issued a proposed ASU that would enhance the disclosure requirements related to income statement expenses. Specifically, the proposal would require public entities to disclose, in a tabular format in the footnotes to the financial statements, disaggregated information about specific categories underlying certain income statement expense line items that are considered “relevant.” The proposal would not change or add to the expense captions that public entities currently present in the income statement.

The FASB tentatively decided to require disaggregation of any relevant expense caption presented on the face of the income statement that contains any of the following expense categories: (1) purchases of inventory, (2) employee compensation, (3) depreciation, (4) intangible asset amortization, and (5) depletion. Other items (which may include expenses, gains, or losses) that may need to be disclosed under existing U.S. GAAP, and that are recorded in a relevant expense caption, would need to be presented in the same tabular disclosure. Public entities would be required to disclose the amount, and a qualitative description of the composition, of other items remaining in relevant expense captions that are not separately disaggregated. In addition, a separate total of an entity’s selling expenses must be disclosed, along with the entity-specific definition of selling expenses.

Under the proposed ASU, all disclosures would be provided on an annual and interim basis except for those related to an entity’s selling expenses, which would only be required annually. The Board has tentatively decided that the new guidance would be effective for all PBEs for fiscal years beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027. Early adoption would be permitted.

For more information about the FASB’s tentative decisions related to its proposal on disaggregation of income statement expenses, see Deloitte’s June 28, 2024, Heads Up.

ASC 210-10 currently contains limited guidance on the presentation of expenses in the income statement. Although SEC Regulation S-X prescribes expense classification requirements, an entity’s income statement expense captions do not provide much insight into the nature of such costs. Investors have consistently asked for additional details about income statement expenses, which they believe are important to understanding a company’s performance and forecasting future cash flows.

Connecting the Dots

Given the additional disaggregation and disclosure requirements in the proposed ASU, companies considering an IPO should ensure that their financial reporting systems are designed to facilitate such disclosures.

5.13 Subsequent Events

When evaluating potential disclosures in the financial statements for inclusion in a company’s initial registration statement, management should consider subsequent events through the date on which the financial statements are issued or are available to be issued. Such an evaluation should include consideration of whether events are recognized (i.e., “Type 1”) or nonrecognized (i.e., “Type 2”) subsequent events, as described in ASC 855.

An initial registration statement may be amended several times before ultimately becoming effective. Each time the registration statement is amended, financial statements included in the registration statement are reissued. Questions often arise regarding the date through which subsequent events should be evaluated when financial statements are revised or reissued as a result of a registration statement amendment.

If new events are identified after the original registration statement has been filed, but before the subsequent amendment of a registration statement, financial statements included in the amendment may need to include disclosure of additional subsequent events but would not contain recognition of the impact of such events (unless a material error was identified). This approach is based on a reissuance framework — the premise that financial statements included in the amendment represent a reissuance of financial statements for subsequent-event purposes. The reissuance guidance in ASC 855-10-25-4 states:

An entity may need to reissue financial statements, for example, in reports filed with the SEC or other regulatory agencies. After the original issuance of the financial statements, events or transactions may have occurred that require disclosure in the reissued financial statements to keep them from being misleading. An entity shall not recognize events occurring between the time the financial statements were issued or were available to be issued and the time the financial statements were reissued unless the adjustment is required by GAAP or regulatory requirements. Similarly, an entity shall not recognize events or transactions occurring after the financial statements were issued or were available to be issued in financial statements that are later reissued in comparative form along with financial statements of subsequent periods unless the adjustment meets the criteria stated in this paragraph.

To the extent that new information is discovered after the financial statements were originally available to be issued, management should determine whether such currently available information represents (1) information that management was aware of and misapplied or (2) information that management should have been aware of. Errors identified during the preparation of a registration statement amendment that meet the criteria for the correction of an error or for a prior-period adjustment should be evaluated and accounted for in accordance with ASC 250. Management should use judgment in performing such an evaluation.

For Type 2 subsequent events, unless a material subsequent event was accounted for or disclosed in a subsequent interim period presented in the registration statement, the annual financial statements would generally need to be updated to disclose such an event. This disclosure may be provided in a separate note to the annual financial statements captioned as “Subsequent Event (Unaudited).” In certain circumstances, the annual financial statements may be retrospectively revised (e.g., discontinued operations, change in segments, stock split). In such cases, the evaluation of subsequent events must be updated to reflect the retrospective change.

In addition, the entity’s financial statements included in the IPO registration statement must include disclosure of the date through which subsequent events were evaluated. When financial statements are revised, ASC 855 requires an entity to disclose the dates through which subsequent events have been evaluated in both the originally issued financial statements and the retrospectively revised financial statements.

Chapter 6 — Audit Considerations

6.1 Introduction

After the financial statement requirements have been identified for a registration statement, the next step for the registrant’s audit committee1 is to engage auditors to complete the necessary audits and reviews of the financial statements, as applicable (see Section 2.4). The SEC indicates on its Web site that the 1933 Act, which governs registration statements, has two fundamental goals: (1) to “require that investors receive financial and other significant information concerning securities being offered for public sale” and (2) to “prohibit deceit, misrepresentations, and other fraud in the sale of securities.” In accordance with these objectives, the Securities Act requires that an independent registered public accounting firm audit annual financial statements and read certain other financial information included in the registration statement. In addition, interim financial statements included in the registration statement may be subject to a review under PCAOB standards. In some instances, stub-period financial statements may also need to be audited.

Audited financial statements to be included in the IPO registration statement often will be subject to additional audit procedures because the standards governing audits of public companies are different from those for private companies. Specifically, the financial statement audits performed for a private company and its independent auditor are subject to the auditing standards issued by the AICPA’s Auditing Standards Board; however, audits of financial statements included in a registration statement filed with the SEC need to be performed in accordance with PCAOB standards. Although the auditor may have previously expressed an opinion on the annual financial statements in accordance with AICPA auditing standards (i.e., auditing standards generally accepted in the United States, or “U.S. GAAS”), the auditor will need to issue an auditor’s report on the required annual financial statements in accordance with PCAOB standards for inclusion in the registration statement, or in accordance with both U.S. GAAS and PCAOB standards when the company is submitting its draft registration statement confidentially. Auditors would also issue a report under two sets of standards (i.e., perform an audit in accordance with both U.S. GAAS and PCAOB standards, commonly referred to as a dual-standard report) in other scenarios, such as when a Form 10 is being filed (e.g., when currently outstanding equity securities are registered) or when a private-company predecessor’s financial statements are included in a registration statement. To issue such an auditor’s report, the auditor must be registered with the PCAOB and comply with all relevant PCAOB requirements.

Footnotes

1

If the entity has not yet formed an audit committee, other governing bodies the entity has charged with governance, such as a board of directors or owners, may fulfill this role before the entity becomes a public company.

6.2 Independence Considerations

Because the SEC’s and PCAOB’s independence rules are generally more restrictive than the AICPA’s, both the auditor and management, with oversight from the audit committee, need to determine (1) whether there is possible noncompliance with the SEC’s and PCAOB’s independence rules, (2) whether there are conflicts of interest before the entity undertakes an IPO or a transaction involving a SPAC, or (3) both.

For first-time filers and when a target entity is included in a SPAC’s filing, PCAOB and SEC independence requirements apply to the most recent full fiscal year’s financial statements included in the initial filing and any other subsequent unaudited interim periods. Any earlier periods included in the filing are subject to the AICPA’s independence rules and the SEC’s general standard of independence (Regulation S-X, Rule 2-01). Accordingly, all periods of the filing need to be considered and evaluated under the SEC’s and PCAOB’s independence rules. Under the SEC’s general standard of independence, issuers must consider whether any service provided or relationship:

“Creates a mutual or conflicting interest between the [auditor] and the audit client.”
“[P]laces the [auditor] in the position of auditing [its] own work.”
“[R]esults in the [auditor] acting as management or an employee of the audit client.”
“[P]laces the [auditor] in a position of being an advocate for the audit client.”

Because certain nonattest services that the auditor is permitted to provide under the AICPA’s rules may be prohibited under the SEC’s independence rules, the auditor and management need to evaluate whether the nonattest services provided during the financial statement periods included in the registration statement (or services approved by the audit committee but not yet provided), are permitted under the SEC’s and PCAOB’s independence rules. In addition, the auditor may need to be independent of other entities, individuals, or both, that meet the definition of an affiliate of the entity under audit2 in accordance with the SEC’s independence rules but would not be considered an affiliate under the AICPA’s independence rules. For instance, while controlling entities are within the scope of both the SEC’s and AICPA’s definitions of an affiliate, the SEC’s definition does not allow for materiality considerations related to the determination of whether an upstream controlling entity is an affiliate while the AICPA’s definition does. Therefore, an entity not previously considered an affiliate under the AICPA’s independence rules may meet the definition of an affiliate under the SEC’s independence rules. Moreover, The SEC’s general standard of independence requires the auditor to consider relationships with, or services provided to, a nonaffiliate entity that is under common control with the entity under audit (i.e., one or both entities are not material to the controlling entity). See Table 6-1 for a list of potentially independence-impairing services.

Independence concerns may also arise as a result of business relationships (both indirect and direct) between the auditor, including covered persons at the auditor, and the entity commencing the IPO or SPAC transaction process, its affiliates, or persons (including entities) in a decision-making capacity at the entity under audit, such as officers, directors, or beneficial owners with significant influence. Therefore, these relationships should be reviewed for compliance with the SEC’s independence rules. Audit committee preapproval is not required for business relationships; however, such relationships may reasonably be thought to bear on the auditor’s independence and generally should be communicated by the auditor in the initial PCAOB Rule 3526 communication. See Table 6-2 for a list of potentially independence-impairing business relationships.

Services, fee arrangements, or relationships may need to be modified or terminated before the auditor is engaged or begins audit procedures in accordance with PCAOB standards. If prohibited relationships or nonattest services, including prohibited fee arrangements, were provided during the financial periods to be included in the registration statement, the auditor may not be independent and thus may not be able to issue (or reissue) auditor reports covering those periods. Therefore, the conflict and independence review should begin as early as possible (i.e., as soon as the IPO or SPAC transaction is initially considered) so that there is sufficient time to gather, understand, and appropriately address any services or relationships (e.g., financial, employment, business) for which there are potential conflicts of interest or independence implications before the IPO or SPAC transaction.

6.2.1 Conflict and Independence Review Procedures

The auditor typically will evaluate whether previous or present services and relationships (e.g., financial, employment, business) with any of the following could potentially impair its independence or otherwise pose professional, legal, or business conflicts:

The entity itself.
Any of the entity’s affiliates under SEC affiliate rules.
Individuals serving in an accounting role or financial reporting oversight role (e.g., officers or directors).
Persons (including entities) in a decision-making capacity at the entity under audit, such as officers, directors, or beneficial owners with significant influence.
Any entities that are under common control with the entity under audit but are not affiliates under SEC affiliate rules (i.e., one entity or both entities are not material to the controlling entity).

Further, the auditor, with the client’s assistance, should determine whether any individuals or entities with significant influence over the entity under audit (e.g., officers, directors, or beneficial owners, including individuals and entities that are not otherwise affiliates) have a lending relationship with the auditor, any covered person at the auditor, or an immediate family member of any covered person.

Connecting the Dots

A complete corporate entity tree is critical to performing a thorough review of independence and potential conflicts. This tree should include a detailed organizational structure consisting of all legal corporate entities considered to be (1) affiliates, including entities, individuals of the entity (as defined by the SEC), or both, and (2) entities that are under common control with the entity under audit but are not affiliates of the entity as defined by the SEC (i.e., one entity or both entities are not material to the controlling entity). At a minimum, the corporate entity tree should also include individuals or entities with significant influence over the entity under audit that are not otherwise affiliates (i.e., officers, directors, or beneficial owners with significant influence). However, for monitoring purposes, inclusion of additional beneficial owners that do not meet the significant influence criteria is preferred.

Both the auditor and management should compile a list of all the auditor’s relationships and services as well as the corresponding fee arrangements that (1) are currently being provided to the entity and its affiliates (as defined by the SEC’s rules), (2) were previously provided during the financial statement periods to be included in the registration statement, and (3) have been approved but not yet provided. In addition, any independence or conflict-related considerations should be evaluated. It is advisable for management to work closely with the entity’s auditor to ensure that the requisite information is available to complete this process in a timely fashion.

Below are examples of services (Table 6-1) and business relationships (Table 6-2) to consider in the evaluation of the auditor’s independence. As previously mentioned, there are certain differences between the SEC’s or PCAOB’s independence rules and the AICPA’s independence rules. Such differences may be particularly relevant to business relationships, as well as nonattest services currently being performed at the entity or its affiliates since an entity deemed an affiliate under the SEC’s rules may not have previously been deemed an affiliate under the AICPA’s rules. This may also be the case for certain individuals under the PCAOB’s rules (i.e., financial reporting oversight roles).

Table 6-1

Examples of Prohibited and Potentially Independence-Impairing Services for the Audit Client and Its Affiliates
Bookkeeping services or other services related to the accounting records or financial statements of the entity (including preparation of prospective financial information [e.g., forecasts and projections]). Financial information systems (both design and implementation). Valuation and appraisal services, or fairness opinions. Actuarial services. Managed services, including those that might not affect financial systems or financial reporting. Client project management (project management office consulting services). Loaned staff or secondment arrangements. Cash handling. Client agent or representative responsibilities. Internal audit or other outsourcing services (in whole or in part). Internal control services. Ongoing monitoring. Control assessment or support. Legal services, including dispute consulting. Immigration services. Forensic accounting services (including expert services and other litigation services unrelated to an audit). Broker-dealer, investment adviser, corporate finance, or investment banking services. Human resources, executive, or employee search. Psychological testing services. Background or reference checks. Corporate secretarial services. Other client advocacy, lobbying, and legislative advisory services. Language translation services — SEC filings. eXtensible Business Reporting Language (XBRL) services. Generic client training and instruction. Tax planning services that are not, at inception, at least more likely than not to be allowable under applicable laws. Tax compliance services for which the auditor may be (1) appointed the agent or (2) handling cash or making payments on behalf of the entity. Tax services for an individual serving in a financial reporting oversight role. Contingent or value-added fee arrangements.

Examples of Prohibited and Potentially Independence-Impairing Services for the Audit Client and Its Affiliates

Bookkeeping services or other services related to the accounting records or financial statements of the entity (including preparation of prospective financial information [e.g., forecasts and projections]).
Financial information systems (both design and implementation).
Valuation and appraisal services, or fairness opinions.
Actuarial services.
Managed services, including those that might not affect financial systems or financial reporting.
Client project management (project management office consulting services).
Loaned staff or secondment arrangements.
Cash handling.
Client agent or representative responsibilities.
Internal audit or other outsourcing services (in whole or in part).
Internal control services.
Ongoing monitoring.
Control assessment or support.
Legal services, including dispute consulting.
Immigration services.
Forensic accounting services (including expert services and other litigation services unrelated to an audit).
Broker-dealer, investment adviser, corporate finance, or investment banking services.
Human resources, executive, or employee search.
Psychological testing services.
Background or reference checks.
Corporate secretarial services.
Other client advocacy, lobbying, and legislative advisory services.
Language translation services — SEC filings.
eXtensible Business Reporting Language (XBRL) services.
Generic client training and instruction.
Tax planning services that are not, at inception, at least more likely than not to be allowable under applicable laws.
Tax compliance services for which the auditor may be (1) appointed the agent or (2) handling cash or making payments on behalf of the entity.
Tax services for an individual serving in a financial reporting oversight role.
Contingent or value-added fee arrangements.

Table 6-2

Examples of Prohibited and Potentially Independence-Impairing Business Relationships With the Audit Client and Its Affiliates and With Persons (Including Entities) in a Decision-Making Capacity at the Entity Under Audit, Such as Officers, Directors, or Beneficial Owners With Significant Influence (Including Entities Controlled by These Individuals or Entities)
Alliance relationships. Teaming relationships. Prime/subcontractor relationships. Reseller relationships. Commission or referral fee relationships. Certain vendor relationships. Other marketplace business relationships (including certain indirect marketplace business relationships).

6.2.2 Audit Committee Preapproval Requirements and Other Communications

Before auditors are engaged to perform audit services and before they commence work, audit committee preapproval is required for all services to be provided to the entity and its subsidiaries. For existing permissible nonaudit services that will continue to be provided after the auditor is engaged to perform a PCAOB audit, audit committee approval is required before the service can be continued. This approval is required under Regulation S-X, Rule 2-01, and must be obtained before the audit client (including an audit client that is the target entity in a SPAC transaction) files a registration statement with the SEC. In connection with seeking such audit committee approval, the requirements of PCAOB Rules 3524 and 3525 also apply to permissible tax services and permissible nonaudit services related to ICFR, as applicable, including required written communications and discussions with the audit committee. Audit committee approval is not required for services that are completed before the auditor is engaged to perform a PCAOB audit. Audit committee preapproval is not required for business relationships; however, such relationships may reasonably be thought to bear on the auditor’s independence and generally should be communicated by the auditor in the initial PCAOB Rule 3526 communication.

Section 600 of the code of the International Ethics Standards Board for Accountants (IESBA) requires the entity’s audit committee to concur that any nonaudit services provided to upstream controlling entities or downstream controlled, nonconsolidated entities do not affect the auditor’s independence from the entity under audit before the engagement begins or work commences. This requirement is an expansion of the aforementioned approval requirement under Regulation S-X, Rule 2-01. Section 410 of the IESBA code requires that additional information regarding fees paid or owed to the auditor be communicated to the entity’s audit committee as well. Both of these IESBA requirements should be addressed through the initial PCAOB Rule 3526 communication if not addressed in an earlier audit committee communication.

In accordance with PCAOB Rule 3526, before accepting an initial engagement to audit an entity under PCAOB standards, the auditor must (1) communicate, in writing, to the audit committee all relationships between the auditor and the audit client and its affiliates (or persons in financial reporting oversight roles at the audit client) that, as of the date of the communication, may reasonably be thought to bear on the auditor’s independence; (2) discuss, with those charged with governance (i.e., the audit committee), the potential effects of such relationships on the auditor’s independence; and (3) document the substance of the discussion with the audit committee regarding the potential effects of the relationships described in the initial written communication on the auditor’s independence. The matters covered during the initial written communication may include relationships beyond the audit period or professional engagement period. Acceptance of the audit engagement occurs after the auditor completes its engagement acceptance activities and before it obtains the executed engagement letter establishing the terms of the new engagement to perform PCAOB audits in connection with the IPO (referred to as the “IPO engagement letter”). Rule 3526 also includes the auditor’s responsibilities with respect to annual communications to the audit committee.

Footnotes

2

Entity whose financial statements or other information is being audited.

6.5 Legal Protective Clauses in Engagement Letters

Generally, legal protective clauses to mitigate the auditor’s potential liability are permitted in AICPA audit engagement letters. The most common legal protective clause that is included in such letters is a release and indemnification for management misrepresentations. In certain circumstances, such as some financial statement audits performed in connection with a transfer of ownership interests, other legal protective clauses (e.g., a limitation of liability) may also be included in AICPA audit engagement letters.

However, the SEC’s independence rules do not permit inclusion of legal protective clauses in audit engagement letters. When an entity is an issuer or the auditor is engaged to perform an audit in accordance with PCAOB standards, auditors are subject to, and must comply with, the SEC’s independence rules; accordingly, auditors do not include such legal protective clauses in PCAOB audit engagement letters. Any prior AICPA audit engagement letters for financial statement periods included in the initial registration statement will need to be amended to remove legal protective clauses before (1) independence matters are communicated to the audit committee and (2) the terms of a PCAOB audit engagement letter are executed.

6.6 Changes in Auditors

When planning for an IPO, an entity often considers whether its independent auditors have the requisite qualifications and experience to assist the entity with the IPO process. In addition to seeking an independent registered public accounting firm that has extensive experience with IPOs and public companies, an entity that has (or is interested in developing) international operations often wishes to engage an independent registered public accounting firm with a network of affiliated international firms around the globe.

In certain cases, the entity may be required to change its independent auditor to move forward with its IPO process because the prior auditor may be unable to be associated with the IPO. This could be the case because, for example, the audit firm is not registered with the PCAOB or is not in compliance with the SEC’s independence rules for its audits of the years for which financial statements will be included in the registration statement. A successor auditor will need to gain an understanding of the business, perform audits of one or more years, and coordinate with the predecessor auditor.

Connecting the Dots

If an entity changes to a new audit firm shortly before it commences an IPO process, the previous audit firm would be required to issue, for inclusion in the SEC filing, an auditor’s report on prior-year financial statements that refers to PCAOB standards. To comply with PCAOB standards, the previous audit firm may also need to perform additional audit procedures. If the prior auditor is not able to or willing to issue an auditor’s report that refers to PCAOB standards, the new auditor may need to reaudit previously issued financial statements.

An entity that changes auditors during the two most recent fiscal years or any subsequent interim period must provide certain disclosures under Regulation S-K, Item 304. For an existing public company, these disclosures are typically provided on a Form 8-K; however, the required disclosures for an IPO must be provided in the IPO registration statement.

6.6.1 Considerations Related to Dividing Responsibility for an Audit

Both AICPA and PCAOB standards allow an audit firm to divide responsibility for an audit with one or more referred-to auditors, although it is not common for audit firms to do so. Under SEC rules, if an independent public accounting firm divides responsibility with a referred-to auditor, the referred-to auditor’s report must be filed with the SEC and this report must refer to PCAOB standards. The referred-to auditor would also need to consent to the use of its auditor’s report in the registration statement. (See Section 6.8 for more information about consents.)

Even if an auditor previously divided responsibility with a referred-to auditor in its AICPA auditor’s report, it may not be appropriate to divide responsibility in the PCAOB auditor’s report if the referred-to auditor is not in a position to reissue its auditor’s report and refer to PCAOB standards. In addition, PCAOB AS 2101.06A states that “the participation of the engagement partner’s firm ordinarily is not sufficient for it to serve as lead auditor if the referred-to auditors, in aggregate, audit more than 50 percent of the company’s assets or revenues.” As a result, if an auditor previously divided responsibility with a referred-to auditor in a prior AICPA audit, the auditor would be required to reevaluate the appropriateness of that conclusion given the SEC’s position on this matter.

6.10 Comfort Letters

In conjunction with an IPO, underwriters will request a “comfort letter” from the company’s auditor. The purpose of such a letter is to assist underwriters in performing a reasonable investigation of financial and accounting information in the prospectus that is not covered by the auditor’s report.

The comfort letter lists procedures performed by the auditor on the basis of (1) PCAOB standards and (2) specific requests by underwriters. These procedures typically include:

Assertion of the auditor’s independence.
Affirmation of the annual periods audited under PCAOB standards and compliance of the financial statements with the accounting requirements of the 1933 Act.
Affirmation of the interim periods reviewed under PCAOB standards.
A description of procedures performed with respect to periods after the latest balance sheet included in the prospectus; the purpose of such procedures is to determine whether there have been any significant financial changes, such as a decline in sales or income since the last balance sheet date, that are not adequately disclosed in the document.
“Circle-up” or “tickmark” comfort, in which the auditor compares financial data in the prospectus with accounting records or financial statements or proves the arithmetical accuracy of such data.

Under PCAOB standards, the auditor may only provide comfort with respect to information that (1) is expressed in dollars (or percentages derived from such dollar amounts) and that has been obtained from accounting records that are subject to the entity’s controls over financial reporting or (2) has been derived directly from such accounting records by analysis or computation. The auditor may also comment on quantitative information that has been obtained from an accounting record if the information is subject to the same controls over financial reporting as the dollar amounts. It is important for the company to be involved in the procedures requested by the underwriters early in the process, since management may need to provide support for amounts in the registration statement.

Two comfort letters are generally issued — one on the effective date of the registration statement and one on the closing date, the latter of which is often referred to as the “bring-down” letter. However, a draft of the comfort letter may be requested as of each filing date so that the underwriters may decide whether the procedures described in the letter are consistent with what they requested.

If more than one auditor is involved in the IPO, either as a predecessor auditor to the registrant or as the auditor of other financial statements included in the IPO document, the other auditors may also be requested to provide a comfort letter related to financial information with which they are associated.

Connecting the Dots

Providing supporting documentation for amounts included in MD&A, pro forma financial information, and elsewhere in the registration statement is critical to expediting the procedures auditors perform upon the request of underwriters. Including both management and the auditor in discussions with the underwriter regarding comfort letter timelines and the expected nature of the auditor’s “comfort” procedures may prevent surprises.

6.11 Internal Control Over Financial Reporting

6.11.1 Management and Auditor Attestations

While a newly public entity does not need to provide management’s report on ICFR in a registration statement or in the entity’s first Form 10-K after the registration statement is declared effective, the entity should nonetheless be prepared to evaluate its ICFR on a quarterly basis, and key executives should be comfortable with certifying that DCPs are effective, in accordance with Section 302 of Sarbanes-Oxley. Auditors are not required to issue an auditor’s report on the effectiveness of ICFR in connection with the entity’s registration statement or its first Form 10-K but may be required to do so in the entity’s second Form 10-K.

Connecting the Dots

Under the JOBS Act, an entity that qualifies as an EGC is exempt from the requirement to obtain an attestation report on the entity’s ICFR from its independent registered public accounting firm. However, as noted in Section 1.6.2, an EGC only qualifies as such during the period in which it meets certain quantitative requirements or up to five years after its initial registration statement. In contrast, EGCs are not exempt from the requirement to perform management’s assessment of ICFR (Section 404(a) of Sarbanes-Oxley and the disclosure requirement in Regulation S-K, Item 308(a)).

In addition to establishing and evaluating the effectiveness of its DCPs as an entity prepares to go public, management will need to assess whether any changes or improvements have been made to its ICFR. There is substantial overlap between DCPs and ICFR. DCPs apply to all material financial and nonfinancial information filed in a public report (i.e., within and outside the financial statements) and includes the components of ICFR that affect public disclosures and provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with the applicable financial reporting framework.

For additional considerations related to control-related public-company disclosure requirements, see Chapter 7.

6.11.2 Auditors’ Testing of Controls in a PCAOB Audit

In both AICPA and PCAOB audits, auditors are required to obtain a sufficient understanding of the entity’s internal controls to plan the financial statement audit. However, the auditor’s evaluation of the design effectiveness of relevant controls and the related documentation may be more extensive in a PCAOB audit than in an AICPA audit.

Connecting the Dots

Management should inform the auditor early of its plans to go public. Because of the increased focus on internal controls for public companies, auditors will often increase their audit procedures related to the entity’s internal controls as they perform AICPA audits of an entity that plans to go public in the near future. Auditors can often make helpful suggestions on how management can strengthen internal controls and related documentation in preparing to meet the SEC’s requirements.

To this end, management should consider developing plans for implementing any needed internal control enhancements when preparing for an IPO. A leading practice is to perform a formalized risk assessment and identify risks of material misstatement associated with each process. Once the risks of material misstatement have been identified, identifying the controls needed to address those risks is more straightforward. Furthermore, auditors will request such documentation from management or the entity’s internal auditors.

In addition to the communication matters described in Section 6.7.6, there are incremental requirements for PCAOB audits related to communicating control-related matters to those charged with governance and management, which include the following:

If auditors become aware that the oversight of the entity’s external financial reporting and ICFR by the entity’s audit committee is ineffective, auditors communicate that information in writing to the board of directors.
The auditor needs to communicate in writing information about significant deficiencies and material weaknesses before the auditor’s report release date, instead of just on a timely basis as required by AICPA standards. For more detail on evaluating control deficiencies, see Section 3.7.4.

If members of management or those charged with governance have changed since the previous AICPA audits, auditors may decide to include the matters communicated in previous audits in the current communication. All matters must be communicated before the release of the auditor’s report to be included in the registration statement.

Chapter 7 — What to Expect After the Registration Statement Is Declared Effective

7.2 Periodic Reporting Requirements and SRC Status

After a registration statement is declared effective, a company is required to file quarterly reports on Form 10-Q and annual reports on Form 10-K. The first Form 10-Q, for the quarter after the most recent period included in the registration statement, is due the later of 45 days after the effective date or the date the Form 10-Q would otherwise be due if the company had been a public filer. For example, if a registrant with a December 31 year-end has a Form S-1 that is declared effective on July 15 and for which March 31 interim information is included in the registration statement, the registrant’s first Form 10-Q would be for the second quarter ending on June 30 and would be due on August 29, 45 days after July 15. The third-quarter Form 10-Q would be due 45 days after September 30, the end of the third quarter.

A registrant’s first annual report on Form 10-K would generally be due 90 days after its fiscal year-end. If the effective date of the initial registration statement was within 45 days after the fiscal year-end but the registration statement did not include the audited statements for the recently completed year, the registrant would still need to file its annual report on Form 10-K within the normal deadline (i.e., the post-IPO accommodation for Form 10-Q discussed above is generally not available for Form 10-K). However, if the registrant is subject to the Exchange Act reporting requirements only by virtue of Section 15(d), a Special Report on Form 10-K containing audited statements for that year may be filed within 90 days of effectiveness and a complete annual report on Form 10-K would not be required until the following fiscal year. See paragraph 1330.5 of the FRM for further details.

The number of years of financial statements included in the first annual report on Form 10-K (and subsequent annual reports) will depend on whether the registrant qualifies as an SRC. SRCs are permitted to present a balance sheet, income statement, cash flow statement, and shareholders’ equity statement for two years, whereas all other registrants must present an income statement, cash flow statement, and shareholders’ equity statement for three years. While EGCs are permitted to present only two years in their IPO registration statement, this accommodation does not extend to the annual report on Form 10-K.

The filing deadlines that apply to quarterly and annual reports after the first Form 10-K are summarized in the table below. These due dates vary depending on whether the company’s filing status1 is large accelerated, accelerated, or nonaccelerated. A company’s filing status is determined, in part, on the basis of its public float, which is the AWMV of the company’s voting and nonvoting common equity held by nonaffiliates. To be considered a large accelerated or accelerated filer, the registrant must have filed at least one annual report and must have been subject to the requirements of Sections 13(a) and 15(d) of the 1934 Act for at least 12 months. Accordingly, the registrant generally cannot be considered a large accelerated or accelerated filer for its first Form 10-K filing as a public company. However, companies that become public through a reverse merger with a public company may be required to take on the filing status of the legal acquirer and should consider carefully evaluating their filing status with their SEC counsel.

Filer	Public Float2 and Revenue	SEC Form 10-K	SEC Form 10-Q
Large accelerated filer	Public float ≥ $700 million and any amount of revenue	60 days after end of fiscal year	40 days after end of fiscal quarter
Accelerated filer	Public float ≥ $75 million but < $ 700 million and revenue ≥ $100 million	75 days after end of fiscal year	40 days after end of fiscal quarter
Nonaccelerated filer	Public float < $75 million and any amount of revenue or revenue < $100 million and public float < $700 million	90 days after end of fiscal year	45 days after end of fiscal quarter

A nonaccelerated filer will qualify as an SRC and, in some instances, so will an accelerated filer. See Section 1.5 and Appendix B for more information about SRCs and related accommodations that apply to such entities. SRC status may affect the content required in the filing but not the reporting deadlines discussed above.

Footnotes

1

As defined in Section 240.12b-2 of Title 17, Code of Federal Regulations. See Section 1340 of the FRM for a summary of the accelerated filer rule.

2

Paragraph 1340.2 of the FRM defines public float as “[t]he aggregate worldwide market value of its voting and non-voting common equity held by non-affiliates.” Therefore, debt-only registrants are nonaccelerated filers.

7.5 Internal Controls and Procedures

There are two types of controls and procedures that a public company will need to address in its filings with the SEC. ICFR refers to procedures within a company that are designed to reasonably ensure compliance with the company’s policies related to the preparation of financial statements that are compliant with U.S. GAAP and Regulation S-X. DCPs are a broader set of controls that largely encompass ICFR and are designed to provide assurance that information that the registrant must disclose in the reports that it files or submits under the 1934 Act is recorded, processed, summarized, and reported within the periods specified.

When preparing their annual and quarterly reports, registrants need to consider the requirements related to ICFR. Management must annually file a report containing its assessment of the effectiveness of ICFR. Moreover, an auditor’s attestation report on the effectiveness of ICFR must be included in annual reports of non-EGC4 accelerated and large accelerated filers. However, all newly public companies can take advantage of a phase-in exception in Regulation S-K, Item 308, under which management’s report and the auditor’s attestation are generally not required before the second annual report (i.e., until a registrant had been required to file or had filed a Form 10-K for the prior fiscal year).

Also, on a quarterly basis, the company must:

Disclose any change in its ICFR that occurred during that quarter and that materially affected, or is reasonably likely to materially affect, its ICFR.
Evaluate and reach a conclusion about the effectiveness of the company’s DCPs as of the end of the quarter.

In addition to the requirements described above, as part of a company’s quarterly and annual reports, the registrant’s principal executive and principal financial officer (typically the CEO and CFO) must file certifications prescribed by Sections 302 and 906 of Sarbanes-Oxley.

The Section 302 certifications signify that the CEO and CFO (1) have reviewed the respective quarterly or annual report; (2) do not know of any material facts that were omitted from, or untrue or misleading statements that were included in, the report; (3) believe that the financial information in the report presents fairly, in all material respects, the company’s financial conditions, results of operations, and cash flows; (4) are responsible for establishing and maintaining DCPs and ICFR;5 and (5) have communicated all detected significant deficiencies and material weaknesses, as well as any fraud involving the company’s management, to the audit committee and the external auditors.

In the Section 906 certifications, the CEO and CFO must certify that (1) the company’s quarterly or annual report complies fully with the requirements of Rule 13a or 15d of the 1934 Act and (2) information contained in this report presents fairly, in all material respects, the company’s financial condition and results of operations.

The corporate governance at many registrants includes an internal subcertification process in which other members of management help the CEO and CFO assess DCPs. These subcertifications cover matters consistent with those discussed in the paragraph above and are provided to the CEO and CFO before each periodic report is issued. A company may wish to consider who will be part of the subcertification process during its IPO readiness procedures.

While an exemption is available for the first annual report for management’s assessment of ICFR, management’s evaluation of DCPs, material changes in ICFR, and certifications must be provided starting with the first periodic report filed by a newly public company. The following table summarizes the control-related reporting requirements for various types of filers:

Description	Applicable Regulation	Annual Reporting Requirement?		Interim Reporting Requirement?
Management’s assertion on the effectiveness of DCPs	Rule 13a-15 or 15d-15 of the 1934 Act	Yes		Yes
Management’s assertion on the effectiveness of ICFR	Section 404(a) of Sarbanes-Oxley Regulation S-K, Item 308(a)	Newly public company filing first Form 10-K	No	No
Management’s assertion on the effectiveness of ICFR		Second Form 10-K and thereafter	Yes	No
Auditor’s report on the effectiveness of ICFR	Section 404(b) of Sarbanes-Oxley Regulation S-K, Item 308(b)	Newly public company filing first Form 10-K	No	No
		EGCs6	No
		Nonaccelerated filers	No
		Non-EGC accelerated filer	Yes
		Large accelerated filer	Yes
Disclosure of material changes in ICFR	Regulation S-K, Item 308(c)	Yes		Yes
CEO and CFO certifications	Sections 302 and 906 of Sarbanes-Oxley	Yes		Yes

Footnotes

4

For special relief provisions available to EGCs, see Section 1.6.

5

Before the initial requirement to file management’s assertion on the effectiveness of ICFR, the certifications may omit the specific references to ICFR.

6

For additional information about EGCs, see Section 1.6.

7.7 Registration Statements After the IPO

After its initial registration, a domestic registrant may need to register additional securities. The SEC offers various forms to facilitate registration; the form used will depend on the type of offering undertaken by the registrant. The sections below briefly summarize the most commonly used forms. When registering securities, registrants should consider consulting their legal counsel to determine the appropriate form to file.

While the accommodation for EGCs to use two years of financial statements rather than three generally only applies to their IPO registration statement, the SEC will accept two years of financial statements in a registration statement filed after the IPO, but before the first Form 10-K, as long as the registrant remains an EGC. However, if a registrant loses EGC status either during or after its IPO, it must provide three years of financial statements for any future registration statement, even if the third year predates the information provided in the IPO registration statement.

7.7.1 Form S-1

The Form S-1 registration statement is used (1) when no other form is prescribed by SEC rules and (2) by all issuers that have not previously filed under either the Securities Act or the Exchange Act or that have been in the Exchange Act reporting system for less than 12 months. A newly public company may use Form S-1 for a follow-on offering in which the company offers additional registered shares to the public or registers privately held shares of the company’s founders, board of directors, or other large shareholders so that those shares may be sold in the public market.

Connecting the Dots

An issuer may voluntarily submit for nonpublic review a draft registration statement within one year of the effective date of either its initial Securities Act registration statement or its Exchange Act Section 12(b) registration statement. This accommodation is available only for the initial submission. A registrant that files a draft registration statement in these circumstances must subsequently respond to Division staff comments on the draft registration statement by means of a public filing rather than a revised draft registration statement. At the time of the public filing, the previously submitted draft registration statement should also be filed. The public filing must be available on EDGAR for at least 48 hours before the issuer’s requested effective date for the registration statement.

7.7.2 Form S-3

Form S-3 is a more simplified form of registration statement than a Form S-1. Eligible public companies can use Form S-3 to sell securities provided that they satisfy certain reporting status requirements. For example, a registrant:

Must be organized under the laws of, and have its principal business operations in, the United States.
Must be currently reporting under the 1934 Act and have filed, in a timely manner, all the information required by the 1934 Act for at least 12 calendar months immediately preceding the filing of the form.
Must not have defaulted on any preferred stock dividend or sinking fund payment, installment on indebtedness for borrowed money, or rental under any long-term lease since the date of the last annual financial statements (unless the effects of such defaults, in the aggregate, were not material to the registrant’s consolidated financial position).

There may also be restrictions on the types or amounts of securities and offerings that may be registered by using Form S-3. A registrant should consult with legal counsel to determine a desired offering of securities that may be S-3 eligible. If a company is not eligible to use Form S-3, the offering may be made by using another appropriate securities offering form, often Form S-1. A Form S-3 can be used as a “shelf offering” in which the company does not intend to immediately sell all the securities being registered but is able to sell the registered shares in future transactions, often referred to as “takedowns” from the shelf.

7.7.3 Form S-4

Form S-4 is used for registration of securities to be issued in specified types of mergers, acquisitions, and exchange offers. For example, if a registrant’s shares are being registered and exchanged as consideration in a proposed acquisition or merger, they may be registered on Form S-4. Form S-4 may also be used to register private debt securities, previously issued under Securities Act Rule 144A, which contained registration rights requiring a future exchange of such debt for debt that is registered.

7.7.4 Form S-8

Form S-8 is used to register securities to be offered to employees as part of certain employee benefit plans. Because many newly public companies have stock compensation plans, it is common for the related shares to be registered by using Form S-8, shortly after the completion of a company’s public offering.

7.7.5 Form S-11

Form S-11 is used to register securities to be issued by REITs or “other issuers whose business is primarily that of acquiring and holding for investment real estate or interests in real estate or interests in other issuers whose business is primarily that of acquiring and holding real estate or interest in real estate for investment.”

7.7.6 Other

Various other forms may also be used to register securities, including forms that may be used by FPIs. A more complete list of these forms is available on the SEC’s Forms Index Web page. The individual forms and related instructions should be consulted for specific eligibility and content requirements.

Appendix A — Common Disclosures in an IPO Registration Statement

Typical Sections in an IPO Registration Statement

The table below summarizes the information entities either are required to provide or often include in an IPO registration statement.

Section	Section Overview
Prospectus summary (often referred to as the “box”)	Highlights in one consolidated location the key information related to the IPO, such as a summary of the company and its business, the nature of the securities being offered, primary risk factors, and summarized financial information.
Risk factors	Highlights the company’s most significant risk factors. Risk factors should be specific to the company.
Use of proceeds	Describes the primary intended use of the net proceeds. Examples of typical uses may include acquisitions, capital expenditures, debt reduction, and general corporate purposes.
Dividend policy	Discusses current dividend policy and any anticipated changes to the policy.
Capitalization	A table presenting the capital structure of the company before and after the offering is often presented.
Dilution	Disclosure, often in a tabular format, of any material difference between the IPO price of the securities and the net tangible book value per share.
MD&A	Discusses the company’s financial condition and results of operations for the periods presented, including forward-looking information.
Business	Contains extensive disclosure and discussion about a company’s business, including, but not limited to, its industry, customers, products and services, properties, operating segments, and significant litigation and contingencies.
Executive officers, directors, and principal and selling stockholders	A company’s executive officers and directors must be identified. A brief summary of the relevant business experience for each must also be disclosed. In addition, a company must disclose the name and beneficial stock ownership of each director/selling stockholder, executive officer, all directors and executive officers as a group, and each known 5 percent stockholder.
Executive compensation	Highlights the key provisions of the compensation arrangements of executive officers and directors.
Description of capital stock	Summarizes the terms of capital stock outstanding after the IPO, including the number of stockholders and shares, rights to acquire capital stock, and any anti-takeover provisions.
Underwriting/plan of distribution	Discloses the price of the securities being offered, the names of the managing underwriters and other members of the underwriting syndicate, and underwriting discounts and any other compensation arrangements with the underwriters.
Experts	Identifies any parties or persons who have prepared or certified any part of the prospectus (e.g., an independent registered public accounting firm that audits the financial statements included therein).
Financial statements	Any required annual or interim financial statements of the registrant or other entities. (See Chapter 2 for further details.)
Other disclosures	Certain relationships and related-party transactions, material income tax consequences, and legal matters.

Appendix B — Summary of Scaled Disclosure Requirements Available to SRCs

The tables below summarize certain requirements under Regulations S-K and S-X for SEC registrants and the related SRC scaled disclosures.

Disclosure Requirements Under Regulation S-K

Regulation S-K Item	Summary of Disclosure	SRC Scaled Disclosure	Registrants Other Than SRCs1
Item 101, “Description of Business”	Description of business developments, including principal products and services rendered	SRCs may elect to provide the alternative business disclosure (which may be less detailed) under Item 101(h)	Required
Item 201, “Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters”	A graph depicting share performance over the past five years against market indexes	Not required	Required
Item 302, “Supplementary Financial Information”	Under Item 302(a), if a registrant reports a material retrospective change (or changes) for any of the quarters within the two most recent fiscal years, the registrant must disclose (1) an explanation for the material change(s) and (2) select financial information reflecting such change(s) for the affected quarterly periods, including the fourth quarter.	Not required	Required after an IPO
Item 303, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”	Discussion of results of operations	Discuss prior two years	Discuss prior three years, but may refer to discussion of earliest period in prior filing.
Item 305, “Quantitative and Qualitative Disclosures About Market Risk”	Disclosure of information about market-sensitive instruments and related exposure, including sensitivity analysis	Not required	Required
Item 402, “Executive Compensation”	Number of named executive officers	Three	Five
	Scope of summary compensation table	Two years	Three years
	Compensation discussion and analysis, grants of plan-based awards table, option exercises and stock vested table, pension benefits table, nonqualified deferred compensation table, disclosure of compensation policies and practices related to risk management, pay ratio disclosure	Not required	Required
Item 404, “Transactions With Related Persons, Promoters and Certain Control Persons”	Description of policies/procedures for the review, approval, or ratification of related-party transactions	Not required	Required
Item 407, “Corporate Governance”	Disclosure of audit committee financial expert	Not required in first annual report	Required
	Disclosure of compensation committee interlocks and insider participation	Not required	Required
	Compensation committee report	Not required	Required
Item 503, “Prospectus Summary”	Discussion of the most significant risk factors affecting the company	Not required in Exchange Act filings (e.g., annual or interim reports); required in a registration statement	Required

Financial Statement Requirements Under Regulation S-X

Financial Statement Requirements2	Summary of Disclosure	SRC Scaled Disclosure	Registrants Other Than SRCs
Annual financial statements	Annual audited financial statements	Two years balance sheet, income statement, cash flow, and shareholders’ equity	Three years income statement, cash flow, and shareholders’ equity, two years balance sheet
Footnote and other disclosures	Compliance with presentation and disclosure requirements of Regulation S-X, including, but not limited to, separate disclosure of revenue and costs from products and services and separate presentation of related-party transactions	Generally not required	Required
	Disclosure of accounting policy related to certain derivative instruments (Rule 4-08(n))	Required	Required
	Adoption date for new or revised accounting standards3	Use “Bucket 2”4 adoption dates (i.e., those applicable to nonpublic entities, generally two years after “Bucket 1”5 adoption dates)	Use “Bucket 1” adoption dates (unless the registrant is an EGC that has elected to defer adoption dates for new standards)
	Disclosure of certain information related to guaranteed or collateralized securities (Rule 3-10/13-01 and Rule 3-16/13-02)	Required	Required
	Compliance with auditor independence requirements (Article 2)	Required	Required
	Supplemental financial statement schedules	Not required	Required
Financial information of EMIs	Summarized financial data of the EMI disclosed in the registrant’s financial statements	Required if the EMI exceeds 20 percent significance in both interim and annual periods	Required if the EMI exceeds 20 percent significance at interim periods or 10 percent significance for the annual period6
Financial information of EMIs	Audited historical financial statements of the EMI	Only required if EMI financial statements would be “material to investors”7	Required if the EMI exceeds 20 percent significance8

Footnotes

1

The disclosures identified in the “Registrants Other Than SRCs” column do not take into account certain scaled disclosure accommodations that may be available to EGCs.

2

SRCs apply the requirements in Regulation S-X, Article 8, when preparing their financial statements. SRCs typically are not required to apply the disclosure provisions of Regulation S-X in their entirety unless Article 8 indicates otherwise. Registrants other than SRCs should apply Regulation S-X in its entirety, as applicable.

3

As a result of ASU 2019-10, SRCs can adopt ASU 2016-13 (as amended) and ASU 2017-04 in a manner consistent with private-company adoption dates. In addition, the FASB intends to use the two-bucket framework to stagger effective dates for future major accounting standards.

4

See Section 2.5.3 for additional information.

5

See footnote 4.

6

Regulation S-X, Rule 4-08(g) and Rule 10-01(b)(1), prescribe the annual requirements for summarized financial information and the interim requirements for summarized income statement information, respectively.

7

See paragraph 5330.2 of the FRM.

8

Regulation S-X, Rule 3-09, prescribes the annual requirements for financial statements of an EMI. See Deloitte’s Roadmap SEC Reporting Considerations for Equity Method Investees for further guidance on evaluating the significance of EMIs.

Appendix C — Key Benefits Available to EGCs and Non-EGCs

The table below compares certain benefits available to EGCs and non-EGCs.

Description of Benefit	EGCs1,2	Non-EGCs3
Submit draft registration statements for:
Securities Act IPOs and initial registration statements	X	X
Exchange Act Section 12(b) registration statement (e.g., Form 10)	X	X
Securities Act offerings within one year of an IPO or Exchange Act Section 12(b) registration statement	X	X
Omit financial information4 from a draft registration statement if the company reasonably believes that it will not be required:
At the time of the offering5	X6
At the time of the public filing	X	X
Include only two years of audited annual financial statements in:
An IPO of common equity securities	X
An IPO of debt securities or Exchange Act registration statements (e.g., Form 10)	(7)
May elect to defer the adoption of new or revised accounting standards until they become effective for private companies (i.e., nonissuers)8	X
Eligible for reduced executive compensation disclosures	X
May omit management’s assessment of ICFR under Section 404(a) of Sarbanes-Oxley in the first Form 10-K after an IPO	X	X
May omit the auditor’s assessment under Section 404(b) of Sarbanes-Oxley:
In the first Form 10-K after an IPO	X	X
In the next four annual periods if the registrant continues to qualify as an EGC	X

The table above is not intended to be all-inclusive. We recommend that an issuer refer to SEC regulations, read the guidance in the FRM, and consult with its external auditors and SEC counsel on the application of SEC reporting requirements before submitting any registration statement or current report on Form 10-K.

Footnotes

1

See Topic 10 of the FRM for additional information about the eligibility requirements for, and accommodations available to, EGCs.

2

See Topic 5 of the FRM for information about the eligibility requirements for, and additional relief available to, SRCs.

3

See footnote 2.

4

We believe this may also include financial information of entities other than the registrant (i.e., under Regulation S-X, Rule 3-05 or 3-09).

5

The general instructions to Form S-1 and Form F-1 indicate that before the registrant distributes a preliminary prospectus to investors, the registration statement must be amended to include all financial information required under Regulation S-X.

6

This applies only to IPOs of debt or equity securities on Form S-1 or Form F-1. For example, it would not apply to draft registration statements on Form S-11 or Form 10.

(7)

An EGC would generally be required to present three years of financial statements for an IPO of debt securities or a registration statement on Form 10. See paragraph 10220.1 of the FRM for more information.

8

EGCs should refer to Section 10230 of the FRM for more information.

Appendix D — SPAC Considerations

D.1 Background

A SPAC is a newly formed company that raises cash in an IPO and uses that cash or the equity of the SPAC, or both, to fund the acquisition of a target. After a SPAC IPO, the SPAC’s management looks to complete an acquisition of a target (the “transaction”) within the period specified in its governing documents (e.g., 24 months). In many cases, the SPAC and target may need to secure additional financing to facilitate the transaction. For example, they may consider funding through a private investment in public equity (PIPE), which will generally close contemporaneously with the consummation of the transaction. If an acquisition cannot be completed within the required time frame, the cash raised by the SPAC in the IPO must be returned to the investors and the SPAC is dissolved (unless the SPAC extends its timeline to complete an acquisition through a shareholder vote).

Before completing an acquisition, SPACs hold no material assets other than cash and cash equivalents; therefore, they are nonoperating public “shell companies,” as defined by the SEC (see paragraph 1160.2 of the FRM). Since a SPAC does not have substantive operations before an acquisition has been completed, the target becomes the predecessor of the SPAC upon the close of the transaction, and the operations of the target become those of a public company. As a result, the target must be able to meet all the public-company reporting requirements that apply to the combined company. Many of the requirements discussed in this appendix are related to the fact that the target is considered the predecessor to an SEC registrant (i.e., the SPAC).

Since a SPAC’s shareholders are generally required to vote on the transaction, the SPAC may file a proxy/registration statement before the transaction is consummated. The final proxy/registration statement must be filed at least 20 calendar days before the shareholder vote on the transaction. These documents must include the target’s financial statements, which are expected to comply with public-company GAAP disclosure requirements as well as SEC rules and requirements. For annual periods, the financial statements must be audited in accordance with PCAOB standards.

If the SPAC’s shareholders approve the transaction, the acquisition will close, and the combined company has four business days to file a special Form 8-K (a “Super Form 8-K”) that includes all the information that would have been required if the target were filing an initial registration statement on Form 10. Accordingly, the SPAC and the target should take care to ensure that the acquisition is not closed until all the financial information required for the Super Form 8-K, including financial statements that comply with the SEC’s age requirements, is available and annual financial statements are audited in accordance with PCAOB standards.

The discussion herein applies to SPAC transactions in which (1) a domestic SPAC merges with a domestic target and (2) the SPAC has identified only one target for the transaction. Additional complexity may arise in SPAC transactions when foreign entities or multiple targets are involved. Further, views on the accounting requirements for SPAC transactions continue to evolve. While the discussion below reflects our understanding as of the date of this publication, because of the complexity involved in SPAC transactions and evolving views, we recommend regular consultation with accounting advisers.

D.5 Financial Statement Presentation for Reverse Recapitalizations

Although there is no direct U.S. GAAP guidance on accounting for reverse recapitalizations,the guidance in ASC 805-40-45-1 and 45-2 on the presentation of financial statements for reverse business combination acquisitions has been applied by analogy.

Accordingly, in SPAC transactions accounted for as reverse recapitalizations, the financial statements of the combined company represent a continuation of the target’s financial statements. As a result, the target’s assets and liabilities are presented at their historical carrying values in the combined company’s financial statements, and the assets and liabilitiesof the SPAC are recognized on the acquisition date and measured on the basis of the net proceeds from the capital transaction.

The table below summarizes the measurement basis for the combined company’s financial statements at the time of a reverse recapitalization with a SPAC.

Balance	Measurement Basis
Assets and liabilities	Sum of (1) the SPAC’s net assets (net cash proceeds from capital raise) and (2) the target’s assets and liabilities, measured at their carrying values.
Retained earnings and other equity balances	The target’s pretransaction carrying amount, proportionately reduced by any preexisting noncontrolling interests in the target.
Issued equity	Sum of (1) the target’s issued equity immediately before the reverse recapitalization, proportionately reduced by any preexisting noncontrolling interests in the target, and (2) the net proceeds received from the SPAC (i.e., the hypothetical consideration transferred). The equity structure (i.e., the number and type of equity interests issued) reflects the target’s equity structure. However, the balance is adjusted to reflect the par value of the SPAC’s outstandingshares, including the number of shares issued in the reverse recapitalization. Any difference is recognized as an adjustment to the additional paid-in capital (APIC) account.
APIC	The historical APIC account of the target immediately before the reverse recapitalization is carried forward and increased to reflect the net proceeds received for the SPAC, adjusted for any necessary changes in the par value of the shares and the ratio of shares held by preexisting target shareholders.
Noncontrolling interest	The noncontrolling interest’s proportionate share of the target’s pretransaction retained earnings and other equity balances.
Prior-period presentation of common shares	For periods before the reverse recapitalization, the common shares of the combined company are presented on the basis of the historical common shares of the target before the reverse recapitalization, retroactively recast to reflect the number of common shares deemed to be received in the transaction.
EPS	For periods before the reverse recapitalization, the EPS of the combined company is presented on the basis of the target’s shares outstanding multiplied by the exchange ratio. Complexities may arise for targets with multiple-class share structures; consultation with accounting advisers is encouraged.
Transaction costs	SABTopic 5.A states that “[s]pecific incremental costs directly attributable to a proposed or actual offering of securities may properly be deferred and charged against the gross proceeds of the offering.” While a reverse recapitalizationis legally structured as a merger or acquisition, the transaction is, in substance, a capital raise of the target. Therefore, we believe that specific incremental costs incurred by the target that directly result from the transaction may be offset against the proceeds raised. Management salaries or other general and administrative expenses typically are not considered incremental or directly attributable to the SPAC transaction, even though they may increase as a result of the transaction. Costs incurred by the SPAC would generally be expensed as incurred in the SPAC’s pretransaction financial statements.

D.6 Accounting for Shares and Warrants Issued by a SPAC

The guidance in this section is based on the typical terms and conditions that have been observed in practice. Since the specific terms can affect the accounting, consultation with an entity’s accounting advisers is recommended.

In its IPO, a SPAC typically issues units to third-party investors at $10 per unit. Each unit generally contains both of the following:

One Class A ordinary share (a “Class A share”).
A fraction of a warrant to purchase one Class A share at an exercise price of $11.50 (a “public warrant”).

The sponsor and its affiliates generally receive Class B ordinary shares (“Class B shares”) in return for forming the SPAC. They may also purchase warrants (“private placement warrants”) to acquire Class A shares at an exercise price of $11.50 per share. Alternatively, in lieu of the sponsor, a so-called anchor investor may purchase private placement warrants. The private placement warrants are generally purchased at $1 or $1.50 per warrant, and the proceeds received by the SPAC are used to pay the underwriting fees incurred in conjunction with the SPAC’s IPO.

In addition, entities may enter into other arrangements upon the formation of a SPAC or at a later date before the SPAC completes a merger. Such arrangements may include the following:

Forward contracts that (1) obligate the SPAC to issue additional Class A shares to a counterparty at a fixed price and (2) are settled immediately before the SPAC completes a merger with a target.
Warrants on Class A shares or on Class B shares that are issued to the sponsor, its affiliates, or third parties in return for providing financing to the SPAC.
Classes of preferred stock issued to third-party investors, the sponsor, or the sponsor’s affiliates.
Class A shares or Class B shares (or warrants on such shares) that are issued to the SPAC’s employees or third-party service providers as compensation for services provided.

While the discussion in this publication does not specifically address these other arrangements, the accounting analysis for some of these arrangements (e.g., the forward contracts and warrants described in the first two bullet points) may be similar to that for public warrants or private placement warrants, which are discussed below. SPACs that issue preferred shares or enter into share-based payment arrangements should consider other applicable GAAP to determine the appropriate accounting, including the potential effect of those instruments on reported EPS. Any shares or warrants issued as part of a share-based payment arrangement must be accounted for in accordance with ASC 718.

D.6.1 Unit of Account

Although initially issued as a unit, the Class A shares and public warrants become separately tradable shortly after the IPO. In addition, upon exercise, the public warrants do not alter the terms of the Class A shares previously issued. Therefore, the public warrants (1) are legally detachable and separately exercisable from the Class A shares issued as part of the units and (2) meet the definition of a freestanding financial instrument in ASC 480-10-20.

Since the Class A shares and public warrants constitute separate units of account, the proceeds from the issuance of these units (net of any direct and incremental offering costs paid to the investors1) must be allocated between the two components. The appropriate allocation method depends on how the public warrants are classified:2

Public warrants classified as liabilities — The SPAC must use the with-and-without method to allocate the net proceeds among the Class A shares and public warrants. Under that method, a portion of the net proceeds from the issuance of the units that equals the issuance-date fair value of the public warrants must first be allocated to such warrants. The entity then allocates the remaining net proceeds to the Class A shares. The with-and-without allocation approach avoids the recognition of a “day 1” gain or loss in earnings on the public warrants that is not associated with a change in their fair value (i.e., an entity does not recognize a day 1 gain or loss for the public warrants, which are subsequently measured at fair value, with changes in fair value recognized in earnings).
Public warrants classified as equity instruments — The SPAC must use the relative fair value method to allocate the net proceeds among the Class A shares and public warrants. Under that method, the SPAC separately estimates the fair values of the Class A shares and public warrants and then allocates the net proceeds in proportion to those fair value amounts. Because SPACs that apply the relative fair value method are required to independently measure each instrument, entities must make more fair value estimates under this method than under the with-and-without method. The Class B shares and any private placement warrants issued by the SPAC also generally represent separate units of account. If the private placement warrants were purchased by the sponsor in contemplation of the formation of the SPAC, the entity should consider (1) the need to allocate the amount it paid for these warrants between the Class B shares and private placement warrants and (2) whether such warrants represent share-based payment awards to the sponsor. In the discussion of the classification of the private placement warrants below, it is assumed that the warrants are not share-based payment arrangements. In a manner consistent with the above discussion of Class A shares and public warrants, if the private placement warrants are classified as liabilities, the initial amount allocated to those warrants must equal their initial fair value.

To perform the allocations discussed above, entities must measure the fair value of the instruments in accordance with ASC 820. Although public warrants and private placement warrants are generally not “in-the-money” on the issuance date and are often contingently exercisable, their fair value is nevertheless greater than zero. When measuring fair value, the entity must take into account the relatively high probability that the SPAC will successfully merge with a target and the warrants will subsequently become exercisable and contain intrinsic value. The issuance-date fair value of a public warrant or private placement warrant is not zero because there is no intrinsic value on that date. All warrants on equity shares have time value, which equals the fair value of the warrant when it is not in-the-money.

For more information about allocating proceeds to multiple freestanding financial instruments, see Section 3.4 of Deloitte’s Roadmap Issuer’s Accounting for Debt. For more information about fair value measurements, see Deloitte’s Roadmap Fair Value Measurements and Disclosures (Including the Fair Value Option).

D.6.2 Classification of Class A Shares

Class A shares issued by a SPAC are equity in legal form. Therefore, these shares should only be classified as liabilities if they represent (1) mandatorily redeemable financial instruments under ASC 480-10-25-4 or (2) unconditional obligations to deliver a variable number of equity shares that are liabilities under ASC 480-10-25-14. In practice, liability classification of the Class A shares has not been required under this guidance.

Since a SPAC is an SEC registrant, it must apply the guidance in ASC 480-10-S99-3A on redeemable equity securities. Class A shares generally contain the following redemption provisions:

If the SPAC does not consummate a business combination by a specified date after the IPO (e.g., two years after the IPO), the SPAC will be liquidated and the Class A shares will automatically be redeemed at approximately $10 per share.
If the SPAC does consummate a business combination, all holders of the Class A shares have the right to redeem their shares at approximately $10 per share immediately before the consummation (generally subject to the requirement that the SPAC maintain a minimum amount of net tangible assets [e.g., $5 million]).

Because it is certain that the Class A shares will be redeemed or become redeemable and no exceptions in ASC 480-10-S99-3A apply, the shares (1) must be classified within temporary equity in the SPAC’s financial statements and (2) are subject to the subsequent-measurement guidance in ASC 480-10-S99-3A. An entity must subsequently measure the shares at their redemption amount because, as a result of the allocation of net proceeds to the public warrants, the initial carrying amount of the Class A shares will be less than $10 per share. In accordance with ASC 480-10-S99-3A(15), there are two alternative methods that an entity can apply when subsequently measuring Class A shares:

Remeasure the Class A shares at their redemption amount (i.e., $10 per share) immediately as if the end of the first reporting period after the IPO was the redemption date.
Accrete changes in the difference between the initial carrying amount and the redemption amount from the IPO date to the redemption date. To apply this method, the SPAC must consider the date on which it expects a business combination to occur, rather than merely accreting to the automatic redemption date.

Because a SPAC has two classes of shares (i.e., Class A shares and Class B shares), it must apply the EPS guidance in ASC 480-10-S99-3A, which requires specific accounting for the measurement adjustments. That is, the SPAC must apply the two-class method of calculating EPS while taking into account the measurement adjustments under an assumption that they represent dividends to the holders of the Class A shares. Generally, public warrants and private placement warrants do not represent participating securities; therefore, the application of the two-class method of calculating EPS is limited to the allocation of the SPAC’s net income or loss between the Class A shares and Class B shares.

After the completion of a business combination with a target, the redemption features on the Class A Shares generally lapse. Therefore, in the absence of other redemption provisions, the classification of such shares in temporary equity is no longer required. That is, provided that the Class A shares are redeemable only on an ordinary liquidation of the SPAC after a business combination, which is generally the case, they do not have to be classified in temporary equity.

D.6.3 Classification of Class B Shares

The Class B shares issued by a SPAC are equity in legal form. SPACs should consider whether these shares are within the scope of ASC 718 on the basis of the specific terms of the shares as well as other relevant facts and circumstances. The classification guidance in ASC 718 refers to the classification guidance in ASC 480, but there are additional considerations under ASC 718 that SPACs should take into account. The Class B shares should be classified as liabilities if they represent (1) mandatorily redeemable financial instruments under ASC 480-10-25-4 or (2) unconditional obligations to deliver a variable number of equity shares that are liabilities under ASC 480-10-25-14. In practice, liability classification of the Class B shares has not been observed.

Class B shares are generally not redeemable by the holder, and a holder is not entitled to any proceeds if the SPAC is liquidated because of a failure to complete a business combination. That is, in the absence of a merger of the SPAC with a target, the Class B shares will be worthless.3 Because there are no redemption provisions, entities are not required to classify Class B shares in temporary equity under ASC 480-10-S99-3A.

D.6.4 Public Warrants

To determine the appropriate classification of the public warrants, SPACs must first consider the liability classification guidance in ASC 480. ASC 480-10-25-8 states:

An entity shall classify as a liability (or an asset in some circumstances) any financial instrument, other than an outstanding share, that, at inception, has both of the following characteristics:

It embodies an obligation to repurchase the issuer’s equity shares, or is indexed to such an obligation.
It requires or may require the issuer to settle the obligation by transferring assets.

The evaluation of whether public warrants are liabilities under ASC 480-10-25-8 will generally depend on when the warrants become exercisable.

The public warrants may be exercised before a merger with a target.	The public warrants are liabilities under ASC 480-10-25-8 because the Class A shares received upon exercise of the warrants may be redeemed at the holder’s option upon a merger of the SPAC. The SPAC is obligated to use its best efforts to complete a merger.
The public warrants may be exercised only after a merger with a target. For example, they may be exercised only upon the later of (1) 30 days after the SPAC completes a business combination or (2) 12 months from the date on which the SPAC’s IPO closes.	The public warrants are not liabilities under ASC 480-10-25-8 because, once the warrants are exercisable, the holder will receive Class A shares that are not redeemable. As discussed above, once a merger with a target is completed, the holders of Class A shares can no longer redeem their shares. Rather, such shares are redeemable only upon an ordinary liquidation of the combined company.

If the public warrants are not liabilities under ASC 480-10-25-8, the SPAC should consider whether they represent liabilities under ASC 480-10-25-14. In practice, it would be unusual for such warrants to represent an obligation to issue a variable number of equity shares whose monetary value is based solely or predominantly on (1) a fixed amount, (2) variations in something other than the fair value of the Class A shares, or (3) variations that are inversely related to the fair value of the Class A shares. Public warrants that are not liabilities under ASC 480 are classified as liabilities or equity in accordance with ASC 815-40.4

To be classified as an equity instrument under ASC 815-40, the public warrants must meet two conditions:

They are indexed to the SPAC’s stock.
They meet the criteria for equity classification (i.e., the SPAC controls the ability to settle the warrants in shares; note that these criteria are relevant even if the contract requires settlement in shares).

D.6.4.1 Indexation

ASC 815-40-15 contains a two-step model that an entity must apply to determine whether the public warrants are indexed to the SPAC’s stock. The evaluation must consider the following:

Step 1 — The exercise or settlement of the contract (“contingent exercise provisions”).
Step 2 — The monetary value of the settlement amount (i.e., factors that affect the settlement amount, or “settlement provisions”).

For each unit of account, the entity evaluates the indexation requirements in ASC 815-40-15. If the entity determines that the contract is not considered indexed to the company’s stock, the contract must be classified as a liability (i.e., equity classification is never permitted).

ASC 815-40-15-7A addresses step 1 of the two-step indexation evaluation and states, in part:

An exercise contingency shall not preclude an instrument (or embedded feature) from being considered indexed to an entity’s own stock provided that it is not based on either of the following:

An observable market, other than the market for the issuer’s stock (if applicable)
An observable index, other than an index calculated or measured solely by reference to the issuer’s own operations (for example, sales revenue of the issuer; earnings before interest, taxes, depreciation, and amortization of the issuer; net income of the issuer; or total equity of the issuer).

The following features, which are exercise contingencies that generally exist in public warrants, would not preclude the warrants from being indexed to the SPAC’s stock in step 1 under ASC 815-40-15:

The public warrants are exercisable only if the SPAC completes a business combination.
The public warrants are no longer exercisable if the SPAC is liquidated.
The SPAC can force early exercise of the public warrants by means of certain redemption features.

While the above features represent the typical contingent exercise provisions in public warrants, there may be other features that must be evaluated in step 1 under ASC 815-40-15.

ASC 815-40-15-7C through 15-7I discuss the evaluation of settlement provisions. Any provision that (1) can potentially alter either the exercise price or the number of Class A shares that are issuable upon exercise of the public warrants and (2) is not considered a down-round provision must be evaluated to determine whether it represents an input into the pricing of a fixed-for-fixed forward or an option on equity shares. Common provisions that must be evaluated include the following:

Antidilution-type adjustment provisions.
Replacement of the Class A shares with other consideration in a reorganization or recapitalization.
Adjustments to the exercise price or number of Class A shares as a result of the SPAC’s issuance of additional Class A shares or other equity instruments at a price or effective price that is less than the public warrants’ exercise price (note that for such a provision not to preclude the public warrants from being indexed to the SPAC’s stock, the provision must meet the ASC master glossary definition of a down-round feature).
Adjustments to the number of Class A shares issuable to compensate the holder for lost time value upon an early settlement of the public warrants.
Adjustments to the exercise price or number of Class A shares that are made at the discretion of the SPAC to benefit the holders of the public warrants.

Public warrants generally contain multiple provisions under which the settlement amount is adjusted to compensate the holders for lost time value upon an early exercise or settlement. For such provisions not to preclude the public warrants from being considered indexed to the SPAC’s stock in step 2 under ASC 815-40-15, the entity must conclude that the adjustment (e.g., the increase in the number of additional Class A shares issuable) represents a reasonable amount of compensation to the holder for lost time value. We generally believe that if the additional value paid to the holder does not exceed the amount of lost time value, the adjustment will not preclude the public warrants from being indexed to the SPAC’s stock in step 2 under ASC 815-40-15. That is, as long as the holder would receive a monetary amount upon settlement that is (1) not less than the intrinsic value of the public warrants on the early settlement date and (2) not more than the fair value of the public warrants on the early settlement date, the settlement provision would not preclude the public warrants from being indexed to the SPAC’s stock in step 2 under ASC 815-40-15. In this determination, “fair value” means an amount that is consistent with the fair value measurement guidance in ASC 820.

Many public warrants contain a provision that allows the SPAC to call them for either (1) $0.10 per warrant or (2) Class A shares, provided that the shares’ fair value equals or exceeds $10.5 If the SPAC exercises this call right, the holders are entitled to exercise and settle the public warrants on a net-share basis. While such a feature may specify the payment of $0.10 per warrant, the economic substance of the feature is the same even if the $0.10 payment is not specified. (Hereafter, such a call right is also referred to as a “redemption-for-stock” feature.) The determination of the number of Class A shares issuable upon a settlement of a redemption-for-stock feature is based on a table whose axes are share price and time to maturity. The purpose of the table is to prescribe the amount of compensation the holder should receive for lost time value for any settlement that occurs when the Class A share price is below $18. For the settlement amounts in this table not to preclude the public warrants from being indexed to the SPAC’s stock in step 2 under ASC 815-40-15, the entity must conclude, on the basis of reasonable assumptions as of the issuance date of the public warrants, that each settlement number in the table represents a reasonable amount of compensation for lost time value. The assumptions that affect the estimated fair value of the public warrants should affect the number of shares included in each cell in the settlement table and should be determined in a commercially reasonable manner. Those assumptions include stock volatility, interest rates, and dividends. Because these assumptions change over time, a SPAC cannot conclude that a potential settlement based on share amounts in the table does not preclude the public warrants from being indexed to the SPAC’s stock in step 2 under ASC 815-40-15 solely because the share amounts in the table are the same as those in other public warrant agreements issued by other SPACs. Rather, each SPAC will generally need to consult with valuation specialists to determine whether the settlement provisions that apply in accordance with these settlement tables preclude the public warrants from being indexed to the SPAC’s stock under step 2 of ASC 815-40-15. See Chapter 4 of Deloitte’s Roadmap Contracts on an Entity’s Own Equity for more information about the indexation requirements.

Some public warrants contain a provision indicating that the settlement amount could differ if the warrants are held by the SPAC’s officers or directors. This settlement difference would arise if the SPAC exercises its redemption-for-stock feature. In such cases, holders of public warrants that are not officers or directors of the SPAC would receive a number of Class A shares per warrant on the basis of the table described in the previous paragraph, but holders of public warrants that are officers or directors of the SPAC would receive a number of Class A shares on the basis of the fair value of their warrants. The following example illustrates such a provision:

Example Provision

Public Warrants held by the Company’s officers or directors. The Company agrees that if Public Warrants are held by any of the Company’s officers or directors, the Public Warrants held by such officers and directors will be subject to the redemption rights provided in Section [X], except that such officers and directors shall only receive “Fair Market Value” (“Fair Market Value” in this Section [X.X] shall mean the last sale price of the Public Warrants on the Alternative Redemption Date) for such Public Warrants so redeemed.

On April 12, 2021, the SEC staff issued Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”) (the “SEC Staff Statement”), which addresses certain balance sheet classification matters related to warrants issued by SPACs. The SEC Staff Statement discusses a scenario related to the terms of warrants that were issued by a SPAC and states, in part:

[T]he warrants included provisions that provided for potential changes to the settlement amounts dependent upon the characteristics of the holder of the warrant. Because the holder of the instrument is not an input into the pricing of a fixed-for-fixed option on equity shares, OCA staff concluded that, in this fact pattern, such a provision would preclude the warrants from being indexed to the entity’s stock, and thus the warrants should be classified as a liability measured at fair value, with changes in fair value each period reported in earnings.

ASC 815-40-15-7E discusses the inputs into the pricing of a fixed-for-fixed option on equity shares. As indicated in the SEC Staff Statement, the holder is not an input into the pricing of an option on equity shares. Therefore, if the settlement terms of the instrument (i.e., the exercise price or number of shares) could potentially vary on the basis of its holder, the instrument is not considered indexed to the SPAC’s stock. Public warrants with an officer or director provision such as the one described above have settlement terms that depend on the holder. Accordingly, such public warrants are not considered indexed to the SPAC’s stock and must be classified as liabilities. Note that such liability classification is required both before and after a SPAC merges with a target.

In addition, some public warrants contain a provision that caps the holder to 0.361 shares per warrant in some, but not all, circumstances. The holder of such a warrant may avoid being subject to the cap if (1) it exercises the warrant on a physical (cash) basis and (2) such exercise is allowed only if there is an effective registration statement for the underlying shares. In such circumstances, the warrant would be considered indexed to the condition that there is an effective registration statement in a manner that is inconsistent with ASC 815-40’s requirements for equity classification (i.e., the holder would potentially receive less value when the underlying shares are not registered for resale). As a result, such public warrants would not be considered indexed to the issuer’s shares under ASC 815-40-15 and must be classified as liabilities.

D.6.4.2 Equity Classification Conditions

If an entity determines that the public warrants are considered indexed to the SPAC’s stock under ASC 815-40, it must evaluate the conditions in ASC 815-40-25 to determine whether it controls the ability to settle the contract in its shares. Only contracts for which the entity controls settlement in shares (i.e., that meet the conditions in ASC 815-40-25) may be classified in equity. For example, the public warrants would not meet the equity classification requirements in ASC 815-40-25 if (1) the holder of public warrants is able to net-cash-settle its warrants upon the occurrence of an event outside the SPAC’s control and (2) holders of the common shares underlying such warrants are not entitled to the same cash settlement right.

Public warrants often contain a provision that allows their holders to receive cash in the event of a tender or exchange offer involving the common shares underlying such warrants. (Note that private placement warrants may also be subject to this provision; therefore, the discussion in this section applies to both public warrants and private placement warrants.) An example of such a provision (a tender offer provision) is as follows:6

Example Provision

(ii) [I]f a tender, exchange or redemption offer shall have been made to and accepted by the holders of the Common Stock (other than a tender, exchange or redemption offer made by the Company in connection with redemption rights held by stockholders of the Company as provided for in the Company’s amended and restated certificate of incorporation or as a result of the repurchase of shares of Common Stock by the Company if a proposed initial Business Combination is presented to the stockholders of the Company for approval) under circumstances in which, upon completion of such tender or exchange offer, the maker thereof, together with members of any group (within the meaning of Rule 13d-5(b)(1) under the Exchange Act (or any successor rule)) of which such maker is a part, and together with any affiliate or associate of such maker (within the meaning of Rule 12b-2 under the Exchange Act (or any successor rule)) and any members of any such group of which any such affiliate or associate is a part, own beneficially (within the meaning of Rule 13d-3 under the Exchange Act (or any successor rule)) more than 50% of the outstanding shares of Common Stock, the holder of a Warrant shall be entitled to receive as the Alternative Issuance, the highest amount of cash, securities or other property to which such holder would actually have been entitled as a stockholder if such Warrant holder had exercised the Warrant prior to the expiration of such tender or exchange offer, accepted such offer and all of the Common Stock held by such holder had been purchased pursuant to such tender or exchange offer, subject to adjustments (from and after the consummation of such tender or exchange offer) as nearly equivalent as possible to the [antidilution] adjustments.

The SEC Staff Statement addresses the effect of this type of provision on the classification of public warrants and private placement warrants issued by a SPAC. It states, in part:

GAAP further includes a general principle that if an event that is not within the entity’s control could require net cash settlement, then the contract should be classified as an asset or a liability rather than as equity. However, GAAP provides an exception to this general principle whereby equity classification would not be precluded if net cash settlement can only be triggered in circumstances in which the holders of the shares underlying the contract also would receive cash. Scenarios where this exception would apply include events that fundamentally change the ownership or capitalization of an entity, such as a change in control of the entity, or a nationalization of the entity.

We recently evaluated a fact pattern involving warrants issued by a SPAC. The terms of those warrants included a provision that in the event of a tender or exchange offer made to and accepted by holders of more than 50% of the outstanding shares of a single class of common stock, all holders of the warrants would be entitled to receive cash for their warrants. In other words, in the event of a qualifying cash tender offer (which could be outside the control of the entity), all warrant holders would be entitled to cash, while only certain of the holders of the underlying shares of common stock would be entitled to cash. OCA staff concluded that, in this fact pattern, the tender offer provision would require the warrants to be classified as a liability measured at fair value, with changes in fair value reported each period in earnings.

The evaluation of the accounting for contracts in an entity’s own equity, such as warrants issued by a SPAC, requires careful consideration of the specific facts and circumstances for each entity and each contract. OCA is available for consultation on accounting and financial reporting issues, including relating to an entity’s specific fact pattern on issues similar to those described above or on other instruments and accounting issues. [Footnotes omitted]

The SEC Staff Statement addresses a scenario in which a SPAC and a target merge, and after the transaction, the combined company has two classes of common shares — Class A and Class B. The tender offer provision pertains to the public warrants and private placement warrants, which are both exercisable into Class A shares. The Class B shares control the entity and would continue to have such control regardless of the number of Class A shares involved in a tender or exchange offer (i.e., there would not be a change in control of the entity). The SEC staff concluded that as a result of the tender offer provision, the public warrants and private placement warrants would not meet the ASC 815-40-25 conditions for equity classification because (1) all such warrants could be cash settled upon an event outside the entity’s control and it is possible that less than all or substantially all of the Class A shares would be eligible to receive cash (e.g., the tender offer provision applies if 50.1 percent of the Class A shares are involved in a tender or exchange offer) and (2) the provision that would result in such a cash settlement would not lead to a change in control of the entity.

In reaching this conclusion, the SEC staff acknowledged that ASC 815-40-55-2 through 55-4 can be interpreted as providing a limited exception to the general principle that an equity-linked holder cannot be entitled to receive cash unless the holders of all shares underlying the contract are also entitled to receive cash. The paragraphs that describe this limited exception state:

55-2 An event that causes a change in control of an entity is not within the entity’s control and, therefore, if a contract requires net cash settlement upon a change in control, the contract generally must be classified as an asset or a liability.

55-3 However, if a change-in-control provision requires that the counterparty receive, or permits the counterparty to deliver upon settlement, the same form of consideration (for example, cash, debt, or other assets) as holders of the shares underlying the contract, permanent equity classification would not be precluded as a result of the change-in-control provision. In that circumstance, if the holders of the shares underlying the contract were to receive cash in the transaction causing the change in control, the counterparty to the contract could also receive cash based on the value of its position under the contract.

55-4 If, instead of cash, holders of the shares underlying the contract receive other forms of consideration (for example, debt), the counterparty also must receive debt (cash in an amount equal to the fair value of the debt would not be considered the same form of consideration as debt).

However, the SEC staff concluded that this exception could only be applied if the event giving rise to the cash settlement of the equity-linked financial instrument would always cause a change in control of the entity. Because a change in control could never occur in the situation in the example, the SEC staff concluded that the limited exception would not apply and, therefore, that the registrant’s public warrants and private placement warrants would not meet the equity classification conditions in ASC 815-40-25 (i.e., the cash settlement associated with the tender offer provision violated the general principle in ASC 815-40-25 for equity classification). As a result, the registrant would be required to classify those warrants as liabilities.

On the basis of informal discussions, we understand that the SEC staff’s conclusion specifically addresses the particular facts and circumstances of the registrant, which has a dual common-share structure. Therefore, the warrant would not meet the equity classification conditions in ASC 815-40-25 and must be classified as a liability if (1) a public warrant or private placement warrant contains a provision similar to the tender offer provision described above and (2) the registrant has a dual common-share structure in which holders of both classes are entitled to vote on matters submitted to the vote of the entity’s stockholders (which is usually the case before any acquisition of a target by the SPAC). The same conclusion would apply if there was a single common-share structure but holders of other classes of securities were entitled to currently vote on matters submitted to the vote of the entity’s stockholders.

However, we do not believe that the SEC staff’s conclusion must be applied when there is a similar tender offer provision if (1) there is only a single class of voting common shares and (2) only holders of that class of shares are entitled to vote on matters submitted to the entity’s stockholders (i.e., the entity has no other class of voting securities). We believe that, in these circumstances, it is acceptable to apply the limited exception for changes in control in ASC 815-40-55-2 through 55-4.7

The table below provides examples of tender offer provisions similar to the one described above and explains when liability classification of public warrants and private placement warrants is and is not required.

Liability Classification Is Required	Liability Classification Is Not Required
Before a merger with a target, a SPAC has two classes of voting shares (Class A and Class B). The tender offer provision pertains only to the warrants on the Class A shares. Liability classification of such warrants is required as a result of the tender offer provision because (1) it is possible that the warrants will be cash settled in a tender or exchange offer made by a third party (even if those warrants are not otherwise currently exercisable) and (2) such a tender or exchange offer may not result in a change in control of the SPAC.	After a merger with a SPAC, the combined company has a single class of common shares that controls the entity. The tender offer provision pertains only to the warrants on this single class of shares. The entity has no other voting securities. Liability classification of such warrants is not required as a result of the tender offer provision because, in any cash settlement of the warrants, the group of common shareholders before the tender or exchange offer will no longer control the entity after the tender or exchange offer (i.e., a third party or group obtains control of the entity).
After a merger with a SPAC, the combined company has a single class of common shares. Although the common shareholders collectively control the entity, there are outstanding preferred shares that are entitled to currently vote on an as-converted basis. Liability classification of such warrants is required as a result of the tender offer provision because (1) it is possible that the warrants will be cash settled in a tender or exchange offer made by a third party and (2) such a tender or exchange offer may not result in a change in control of the entity.	After a merger with a SPAC, the combined company has two classes of shares (Class A and Class B). The Class A shares have voting rights and control the entity; the Class B shares have no voting rights. The entity has no other securities with voting rights. The tender offer provision pertains only to the warrants on the Class A shares. Although there is a dual-class common-share structure, liability classification of such warrants is not required as a result of the tender offer provision. This is because, in any cash settlement of the warrants, the group of common shareholders before the tender or exchange offer will no longer control the entity after the tender or exchange offer (i.e., a third party or group obtains control of the entity).

Liability Classification Is Required

Liability Classification Is Not Required

Before a merger with a target, a SPAC has two classes of voting shares (Class A and Class B). The tender offer provision pertains only to the warrants on the Class A shares.

Liability classification of such warrants is required as a result of the tender offer provision because (1) it is possible that the warrants will be cash settled in a tender or exchange offer made by a third party (even if those warrants are not otherwise currently exercisable) and (2) such a tender or exchange offer may not result in a change in control of the SPAC.

After a merger with a SPAC, the combined company has a single class of common shares that controls the entity. The tender offer provision pertains only to the warrants on this single class of shares. The entity has no other voting securities.

Liability classification of such warrants is not required as a result of the tender offer provision because, in any cash settlement of the warrants, the group of common shareholders before the tender or exchange offer will no longer control the entity after the tender or exchange offer (i.e., a third party or group obtains control of the entity).

After a merger with a SPAC, the combined company has a single class of common shares. Although the common shareholders collectively control the entity, there are outstanding preferred shares that are entitled to currently vote on an as-converted basis.

Liability classification of such warrants is required as a result of the tender offer provision because (1) it is possible that the warrants will be cash settled in a tender or exchange offer made by a third party and (2) such a tender or exchange offer may not result in a change in control of the entity.

After a merger with a SPAC, the combined company has two classes of shares (Class A and Class B). The Class A shares have voting rights and control the entity; the Class B shares have no voting rights. The entity has no other securities with voting rights. The tender offer provision pertains only to the warrants on the Class A shares.

Although there is a dual-class common-share structure, liability classification of such warrants is not required as a result of the tender offer provision. This is because, in any cash settlement of the warrants, the group of common shareholders before the tender or exchange offer will no longer control the entity after the tender or exchange offer (i.e., a third party or group obtains control of the entity).

The above table only addresses certain scenarios. Consultation with an entity’s independent advisers is recommended if (1) unique facts and circumstances are associated with the terms of the tender offer provision or the entity’s capital structure or (2) contracts other than equity shares convey control to their holder.

See Chapter 5 of Deloitte’s Roadmap Contracts on an Entity’s Own Equity for more information about the equity classification conditions in ASC 815-40-25.

Connecting the Dots

On the basis of the SEC Staff Statement, a registrant may conclude that its historical accounting for warrants was incorrect (e.g., equity classification when terms consistent with the SEC Staff Statement require liability classification). In such situations, the registrant must evaluate the materiality of the error to the previously filed financial statements in accordance with the guidance in SAB Topic 1.M. For more information about assessing materiality and SEC comments on this topic, see Section 2.15 of Deloitte’s Roadmap SEC Comment Letter Considerations, Including Industry Insights.

If a registrant concludes that the error was material to previously issued financial statements, it must disclose the error by filing Form 8-K, Item 4.02, within four business days of determining that the previously issued financial statements and related audits and reviews should not be relied upon. The registrant also must amend its most recently filed Form 10-K and any subsequently filed Forms 10-Q to restate (1) the financial statements, including applicable disclosures required for error corrections (i.e., ASC 250-50); (2) MD&A; (3) CAEs that are related to the warrants; (4) quarterly financial information for interim periods during the fiscal periods that were affected by the error (in accordance with Regulation S-K, Item 302); and (5) any other information in the filings that was affected by the change (e.g., risk factors, the business section). If the registrant’s auditor communicated CAMs in its auditor’s report (see Section D.3.1.4), it needs to reevaluate CAMs in light of restatements related to the warrant matter and determine whether it needs to make a change in an existing CAM or identify a new CAM.

The registrant should also consider whether the factors that led to the restatement represent a material weakness in ICFR or ineffective DCPs. The SEC staff often comments when companies conclude that either ICFR or DCPs remained effective after a material restatement. For more information, see Sections 3.5 and 3.6 of Deloitte’s Roadmap SEC Comment Letter Considerations, Including Industry Insights.

If the registrant concludes that the error was either (1) not material to the prior period being changed but would be material to the current period if corrected in the current period or (2) not material to any periods being presented in the required financial statements and disclosures, it may update the prior periods in future filings. In addition, as noted in the SEC Staff Statement, registrants that determine that the errors are not material to the required financial statements and disclosures included in a pending transaction may provide the staff, via EDGAR correspondence, with a written representation to that effect. A registrant must also evaluate the impact of an immaterial misstatement on ICFR and DCPs since the severity of a deficiency in ICFR depends on whether it is reasonably possible that the deficiency could have resulted in a material misstatement. For more information, see Section 3.6.2 of Deloitte’s Roadmap SEC Comment Letter Considerations, Including Industry Insights.

D.6.4.3 Earnings per Share

Because public warrants represent potential common shares, an entity must apply ASC 260 in accounting for and disclosing such warrants. In calculating diluted EPS, the SPAC should consider the guidance on contingently issuable shares.

In addition, regardless of whether they are classified as equity or liability instruments, public warrants that give the holders nonforfeitable rights to dividends represent participating securities regardless of whether the SPAC actually declares or pays dividends.

See Deloitte’s Roadmap Earnings per Share for more information about contingently issuable shares and participating securities.

D.6.5 Private Placement Warrants

Although the terms of private placement warrants are often similar to the terms of public warrants, there may be key differences, such as the following:

Public warrants often have a redemption-for-stock feature or a feature that allows the SPAC to call such warrants for $0.01 in the event that the holder does not exercise them. Private placement warrants do not contain redemption features that allow the SPAC to call the warrants to force early exercise.
Some exercise price adjustments are calculated differently for private placement warrants than they are for public warrants.
The cashless (net share) settlement formulas for private placement warrants differ from those for public warrants.

The terms of private placement warrants generally change if they are transferred to a nonpermitted transferee (e.g., a party other than the sponsor or its affiliates). In such situations, the private placement warrants become public warrants.

D.6.5.1 Indexation

As noted in the discussion of the indexation of public warrants (see Section D.6.4.1), ASC 815-40-15 contains a two-step model that an entity must apply to determine whether private placement warrants are indexed to the SPAC’s stock. Under this model, in addition to evaluating contingent exercise provisions, an entity must determine whether any potential adjustment to the exercise price or settlement amount represents an input into the pricing of a fixed-for-fixed option on equity shares. ASC 815-40-15-7E discusses such inputs.

As indicated in the SEC Staff Statement, the holder is not an input into the pricing of an option on equity shares. Therefore, a private placement warrant that contains any of the provisions below is considered not indexed to the SPAC’s stock and must be classified as a liability because the provision either (1) ceases to apply or (2) is applied differently if the private placement warrants are transferred to a nonpermitted transferee and thus become public warrants. That is, in these cases, the settlement amount (i.e., exercise price or number of shares) of the private placement warrants depends on the holder. Note that the provisions below only affect the classification of private placement warrants because public warrants cannot become private placement warrants.

Redemption-for-stock feature — Public warrants may contain a provision that allows the SPAC to call them for either (1) $0.10 per warrant or (2) Class A shares, provided that the shares’ fair value equals or exceeds $10. When the SPAC exercises this call right, the holders are entitled to exercise and settle the public warrants on a net-share basis. While such a feature may specify the payment of $0.10 per warrant, the economic substance of the feature is the same even if the $0.10 payment is not specified. An example of a redemption-for-stock feature is as follows:

Example Provision

Redemption of warrants for common stock. Subject to Sections [X] and [Y] hereof, not less than all of the outstanding Warrants may be redeemed, at the option of the Company, ninety (90) days after they are first exercisable and prior to their expiration, at the office of the Warrant Agent, upon notice to the Registered Holders of the Warrants, as described in Section [Z] below, at a price equal to a number of shares of Common Stock determined by reference to the table below, based on the redemption date (calculated for purposes of the table as the period to expiration of the Warrants) and the “Fair Market Value” (as such term is defined in subsection [W](b)) (the “Alternative Redemption Price”), provided that the last sales price of the Common Stock reported has been at least $10.00 per share (subject to adjustment in compliance with Section [V] hereof), on the trading day prior to the date on which notice of the redemption is given and provided that there is an effective registration statement covering the Common Stock issuable upon exercise of the Warrants, and a current prospectus relating thereto, available throughout the 30-day Redemption Period (as defined in Section [Z] below) or the Company has elected to require the exercise of the Warrants on a “cashless basis” pursuant to subsection [W].

The exact Fair Market Value and Redemption Date (as defined below) may not be set forth in the table above, in which case, if the Fair Market Value is between two values in the table or the Redemption Date is between two redemption dates in the table, the number of Common Stock to be issued for each Warrant redeemed will be determined by a straight-line interpolation between the number of shares set forth for the higher and lower Fair Market Values and the earlier and later redemption dates, as applicable, based on a 365- or 366-day year, as applicable.

The stock prices set forth in the column headings of the table above shall be adjusted as of any date on which the number of shares issuable upon exercise of a Warrant is adjusted pursuant to Section V. The adjusted stock prices in the column headings shall equal the stock prices immediately prior to such adjustment, multiplied by a fraction, the numerator of which is the number of shares deliverable upon exercise of a Warrant immediately prior to such adjustment and the denominator of which is the number of shares deliverable upon exercise of a Warrant as so adjusted. The number of shares in the table above shall be adjusted in the same manner and at the same time as the number of shares issuable upon exercise of a Warrant.
Exercise price adjustment upon certain changes of control — Many warrants issued by a SPAC contain a provision that requires adjustment of the exercise price if (1) there is a change of control of the entity and (2) less than 70 percent of the consideration received is stock listed on an exchange. The calculation of the exercise price adjustment for public warrants differs from that for private placement warrants. That is, for public warrants, the adjustment is calculated on the basis of a capped American call option; however, for private placement warrants, the adjustment is calculated on the basis of an uncapped American call option.8 If, however, the private placement warrants are transferred to a nonpermitted transferee, the exercise price adjustment changes from being calculated on the basis of an uncapped American call option to being calculated on the basis of a capped American call option. An example of such a provision is shown below.

Example Provision

[I]f less than 70% of the consideration receivable by the holders of the Common Stock in the applicable event is payable in the form of common stock in the successor entity that is listed for trading on a national securities exchange or is quoted in an established over-the-counter market, or is to be so listed for trading or quoted immediately following such event, and if the Registered Holder properly exercises the Warrant within thirty (30) days following the public disclosure of the consummation of such applicable event by the Company pursuant to a Current Report on Form 8-K filed with the Commission, the Warrant Price shall be reduced by an amount (in dollars) equal to the difference of (i) the Warrant Price in effect prior to such reduction minus (ii) (A) the Per Share Consideration (as defined below) (but in no event less than zero) minus (B) the Black-Scholes Warrant Value (as defined below). The “Black-Scholes Warrant Value” means the value of a Warrant immediately prior to the consummation of the applicable event based on the Black-Scholes Warrant Model for a Capped American Call on Bloomberg Financial Markets (“Bloomberg”). For purposes of calculating such amount, (1) Section [X] of this Agreement shall be taken into account, (2) the price of each share of Common Stock shall be the volume weighted average price of the Common Stock as reported during the ten (10) trading day period ending on the trading day prior to the effective date of the applicable event, (3) the assumed volatility shall be the 90 day volatility obtained from the HVT function on Bloomberg determined as of the trading day immediately prior to the day of the announcement of the applicable event, and (4) the assumed risk-free interest rate shall correspond to the U.S. Treasury rate for a period equal to the remaining term of the Warrant. “Per Share Consideration” means (i) if the consideration paid to holders of the Common Stock consists exclusively of cash, the amount of such cash per share of Common Stock, and (ii) in all other cases, the volume weighted average price of the Common Stock as reported during the ten (10) trading day period ending on the trading day prior to the effective date of the applicable event. If any reclassification or reorganization also results in a change in shares of Common Stock covered by subsection [X.1.1], then such adjustment shall be made pursuant to subsection [X.1.1] or Sections [X.2, X.3] and this Section [X.4]. The provisions of this Section [X.4] shall similarly apply to successive reclassifications, reorganizations, mergers or consolidations, sales or other transfers. In no event will the Warrant Price be reduced to less than the par value per share issuable upon exercise of the Warrant.
Different formulas used to determine the number of shares delivered in a cashless (net share) settlement — There are often multiple definitions of “fair market value” that may apply in the event of a cashless settlement. If the definition(s) applicable to public warrants differ from the definition(s) applicable to private placement warrants in any respect, the private placement warrants are not considered indexed to the SPAC’s stock because the applicable definitions change if the private placement warrants are transferred to a nonpermitted transferee and thus become public warrants. Two examples of a potential difference are as follows:
- For public warrants:
  
  Example Provision
  
  [T]he volume weighted average price of the Common Stock as reported during the ten (10) trading day period ending on the trading day prior to the date that notice of exercise is received by the Warrant Agent from the holder of such Warrants or its securities broker or intermediary.
- For private placement warrants:
  
  Example Provision
  
  [T]he average last sale price of the Common Stock for the ten (10) trading days ending on the third trading day prior to the date on which notice of exercise of the Warrant is sent to the Warrant Agent.
- For public warrants in the case of notice of redemption at $0.01:
  
  Example Provision
  
  The average reported last sale price of the shares of Common Stock for the ten trading days ending on the third trading day prior to the date on which the notice of redemption is sent to the holders of warrant.
- For private placement warrants:
  
  Example Provision
  
  [T]he average reported last sale price of the shares of Common Stock for the ten trading days ending on the third trading day prior to the date of exercise.

If a private placement warrant (1) does not contain any settlement provision (i.e., a provision other than a standard antidilution adjustment that affects the exercise price or number of shares) or (2) could never become a public warrant, the private placement warrant could be classified as equity provided that no other provisions or circumstances cause the warrant not to be considered indexed to the SPAC’s stock or not to meet the equity classification conditions in ASC 815-40-25. As discussed above, as a result of a tender offer provision, private placement warrants may not meet the equity classification conditions in ASC 815-40-25.

In current practice, because warrant agreements generally have one or more of the provisions above, most private placement warrants are not considered indexed to the SPAC’s stock and must be classified as a liability both before and after a merger of the SPAC with a target.9 On the basis of the SEC Staff Statement, some registrants may need to determine whether they have classified such warrants incorrectly in previously filed financial statements. For information about evaluating errors, see the Connecting the Dots above.

D.6.6 Accounting for Issuance Costs

Nonauthoritative AICPA Guidance

Technical Q&As Section 4110, “Issuance of Capital Stock”

.01 Expenses Incurred in Public Sale of Capital Stock

Inquiry — A closely held corporation is issuing stock for the first time to the public.

How would costs, such as legal and accounting fees, incurred as a result of this issue, be handled in the accounting records?

Reply — Direct costs of obtaining capital by issuing stock should be deducted from the related proceeds, and the net amount recorded as contributed stockholders’ equity. Assuming no legal prohibitions, issue costs should be deducted from capital stock or capital in excess of par or stated value.

Such costs should be limited to the direct cost of issuing the security. Thus, there should be no allocation of officers’ salaries, and care should be taken that legal and accounting fees do not include any fees that would have been incurred in the absence of such issuance.

SEC Staff Accounting Bulletins

SAB Topic 5.A, Expenses of Offering [Reproduced in ASC 340-10-S99-1]

Facts: Prior to the effective date of an offering of equity securities, Company Y incurs certain expenses related to the offering.

Question: Should such costs be deferred?

Interpretive Response: Specific incremental costs directly attributable to a proposed or actual offering of securities may properly be deferred and charged against the gross proceeds of the offering. However, management salaries or other general and administrative expenses may not be allocated as costs of the offering and deferred costs of an aborted offering may not be deferred and charged against proceeds of a subsequent offering. A short postponement (up to 90 days) does not represent an aborted offering.

D.6.6.1 Issuance Costs Incurred in Conjunction With a SPAC’s IPO

In addition to the above guidance, SAB Topic 2.A.6 states, in part, that “[f]ees paid to an investment banker in connection with a business combination or asset acquisition, when the investment banker is also providing interim financing or underwriting services, must be allocated between acquisition related services and debt issue costs.”

In accordance with this guidance, a SPAC should evaluate which fees and costs incurred in conjunction with its IPO, as well as with any issuance of private placement warrants or other securities, represent direct and incremental costs that would be eligible for deferral. For example, underwriting costs incurred to issue the units, as well as certain legal and accounting fees, may be direct and incremental costs. However, costs that are not direct or incremental must be expensed as incurred.

After identifying the group of eligible costs that would qualify for deferral, the SPAC should appropriately allocate such costs to the various instruments issued. For example, when a SPAC incurs underwriting costs with an investment bank (including deferred costs) and the amount of those costs is directly related to the proceeds received from issuing the units, those costs should only be allocated to the units. Other costs that are not directly related to a specific type of instrument may be allocated by using a rational basis.

The underwriting fees are generally allocated only to the units because the amount of such costs is directly related to the number of units issued. Since the units contain two separate units of account (i.e., Class A shares and public warrants), such costs will be further allocated to those separate units of account. Any amounts allocated to Class A shares would be classified in temporary equity because those shares are redeemable securities. Any costs allocated to public warrants would be allocated to permanent equity if the public warrants are classified as equity instruments and would be immediately expensed if the public warrants are classified as liabilities that are initially and subsequently measured at fair value, with changes in fair value reported in earnings. For further discussion of the allocation of costs, see Section 3.3.4.4 of Deloitte’s Roadmap Distinguishing Liabilities From Equity.

D.6.6.2 Issuance Costs Incurred in Conjunction With the Merger of a SPAC and Target

Certain costs that the target company incurs in conjunction with a merger with a SPAC may represent direct and incremental costs (i.e., costs that qualify for deferral as part of the reverse capitalization). To properly account for them, the target company may need to allocate the eligible costs to the respective instruments issued or assumed in the SPAC merger.

If the target company in the SPAC merger does not recognize any liabilities that must be subsequently accounted for at fair value, with changes in fair value reported in earnings, it can recognize all direct and incremental costs in equity (i.e., APIC). However, the target company must take additional considerations into account if it recognizes any liability-classified instrument that is subsequently measured at fair value through earnings because the costs related (or allocated) to such instruments must be expensed as incurred.

When the target company issues, or assumes in the SPAC merger, any liability-classified instruments that are subsequently accounted for at fair value, the company should first evaluate whether any eligible costs are directly related to a specific instrument. Such costs should be allocated to that instrument and capitalized or expensed as appropriate (i.e., costs allocated to an equity instrument are recognized in equity, and costs allocated to a liability instrument that is subsequently reported at fair value through earnings are expensed as incurred). Other direct and incremental costs that are not directly related to a specific instrument should be allocated by using a rational basis. The accounting for costs incurred in a reverse capitalization involving a SPAC is not specifically addressed in U.S. GAAP. However, we believe that there are two acceptable views on how to allocate direct and incremental costs that are not directly related to a specific instrument:

View A: Allocate costs to all instruments assumed or issued in the SPAC merger on a relative fair value basis — Under this approach, eligible costs would be allocated to all the SPAC shares, SPAC warrants, and earn-out arrangements involved in the merger. Costs allocated to liability-classified instruments that are subsequently measured at fair value through earnings (e.g., SPAC warrants and earn-out arrangements entered into with the SPAC sponsor10) must be expensed as incurred.
View B: Allocate costs only to the SPAC shares and any newly issued instruments in the SPAC merger on a relative fair value basis — Under this approach, eligible costs would not be allocated to assumed liabilities such as liability-classified SPAC warrants. Rather, eligible costs would only be allocated to the SPAC shares and any newly issued instruments, such as earn-out arrangements. Costs allocated to liability-classified instruments that are subsequently measured at fair value through earnings (e.g., earn-out arrangements with the SPAC sponsor11) must be expensed as incurred.

D.6.7 SPAC Backstop Arrangements

During the panel discussion on current OCA projects at the 2023 AICPA & CIMA Conference on Current SEC and PCAOB Developments, SEC Associate Chief Accountant Carlton Tartar noted that there are still many complexities related to debt-versus-equity classification of financial instruments, particularly in SPAC transactions even though the volume of such transactions has declined. He further stated that SPACs have historically used various types of financings to ensure that they have the necessary funds to close their proposed business combinations once a target has been identified. He observed that, more recently, there has been an uptick in the use of a financing vehicle commonly referred to as a backstop arrangement. In such an arrangement, an issuer would prepay an amount to a counterparty to purchase a stated (or maximum) number of shares that the counterparty holds and vote in favor of the business combination, or merger. The counterparty has the right to (1) deliver the shares to the issuer at a later date for a stated amount per share or (2) retain the shares and return the prepayment.

Mr. Tartar highlighted an example in which a registrant proposed initially recognizing the prepayment as an asset under ASC 480 to reflect the up-front cash payment made to the counterparty. The SEC staff ultimately objected to this approach because it believes that the substance of the prepayment is more akin to a subscription receivable for transactions related to an entity’s own shares. Accordingly, the staff determined that it is appropriate to record the prepayment amount in contra equity in the manner described in Regulation S-X, Rule 5-02. The staff did not provide a view on the subsequent accounting for the instrument.

Footnotes

1

Direct and incremental costs associated with the offering that are paid to third parties should be allocated to the associated freestanding financial instruments after the allocation of proceeds discussed here (see Section D.6.6 for more information).

2

The classification of the public warrants and Class A shares is discussed below. In the discussion of the allocation of proceeds, it is assumed that the Class A shares are classified as equity instruments.

3

Class B shares are generally converted into Class A shares upon a merger of the SPAC with a target. In some cases, the holders can elect to convert the Class B shares into Class A shares before completion of a business combination. However, such conversion generally does not change the fact that the shares held by the sponsor and its affiliates do not have any redemption rights or rights to participate in the distribution of proceeds upon a liquidation of the SPAC.

4

Public warrants generally possess the characteristics of a derivative instrument in ASC 815-10-15-83. However, the guidance in ASC 815-40 must be applied regardless of whether such warrants have all of these characteristics.

5

Public warrants may also contain a provision that allows the SPAC to call them for $0.01 per warrant if the fair value of the Class A shares exceeds $18 for a defined number of trading days. This feature is only considered an exercise contingency because it does not change the settlement terms.

6

Note that in this example, “Common Stock” refers to the Class A shares of the SPAC. After a merger of the SPAC with a target, common stock refers to either (1) the single class of common shares of the combined entity or (2) the Class A common shares if the combined entity has multiple classes of common shares.

7

It is also acceptable to classify the public warrants as liabilities provided that the approach selected is applied consistently to all instruments with such features.

8

In the example, the difference arises because of the reference to Section [Z] of the warrant agreement, which explains that public warrants are subject to redemption (i.e., forced exercise) while private placement warrants are not.

9

As discussed above, in this section, it is assumed that the private placement warrants are not within the scope of ASC 718. If a private placement warrant is within the scope of ASC 718, the classification would be determined on the basis of the classification guidance in ASC 718. In these circumstances, if the holder has no continuing service requirement after the SPAC merges with a target and the transaction is accounted for as a reverse recapitalization, the combined company should reassess the accounting classification of the private placement warrant as of the date of the merger with the SPAC in accordance with the classification guidance in ASC 480-10 and ASC 815-40.

10

Earn-out arrangements entered into with all the target’s shareholders on a pro rata basis are treated as dividends. As a result, it is acceptable to recognize the amounts allocated to these arrangements in equity.

11

See footnote 10.

D.7 Classifying Share-Settleable Earn-Out Arrangements

As part of the merger negotiations, the SPAC and target may agree to enter into what is often referred to as an “earn-out” arrangement.12 Earn-out arrangements may be entered into with the target’s shareholders, the SPAC’s sponsors, or both. Generally, earn-out arrangements have the following characteristics:

The combined company is required to issue additional shares of common stock if, during a specified period after the merger date, its stock price equals or exceeds a stated amount or amounts.
Some or all of the shares not previously issued will become issuable upon the occurrence of a specific event (e.g., a change of control of the combined company).
The settlement must occur in shares (i.e., the combined company or holder cannot elect cash settlement).

Example D-1

As additional consideration for a SPAC transaction, 1 million common shares of the combined company will be issued to the target’s shareholders for each of the following share price levels achieved over the next five years:

Level 1 — (1) The volume-weighted average price of the combined company’s common stock over any 20 trading days in a 40-day trading period is equal to or greater than $10 per share or (2) the combined company is acquired in a change of control at a price equal to or greater than $10 per share.
Level 2 — (1) The volume-weighted average price of the combined company’s common stock over any 20 trading days in a 40-day trading period is equal to or greater than $15 per share or (2) the combined company is acquired in a change of control at a price equal to or greater than $15 per share.
Level 3 — (1) The volume-weighted average price of the combined company’s common stock over any 20 trading days in a 40-day trading period is equal to or greater than $20 per share or (2) the combined company is acquired in a change of control at a price equal to or greater than $20 per share.
Level 4 — (1) The volume-weighted average price of the combined company’s common stock over any 20 trading days in a 40-day trading period is equal to or greater than $25 per share or (2) the combined company is acquired in a change of control at a price equal to or greater than $25 per share.

If Level 4 is achieved, an aggregate of 4 million common shares of the combined company (i.e., 1 million shares for each level) will be issued on a pro rata basis to the target’s shareholders on the basis of their pretransaction ownership interests.

For an earn-out arrangement such as that in the example above, the accounting for the shares awarded depends on the terms of the arrangement. When such an earn-out arrangement is entered into with the SPAC’s sponsor, the shares are generally issued before the transaction; however, at the time of the SPAC merger, the shares become subject to either transfer restrictions or forfeiture on the basis of one or more share price levels or the occurrence of a specific event (e.g., a change of control). Such shares may or may not be held in escrow. In either case, if the holder of the shares is subject to losing those shares (e.g., they would be forfeited if one or more conditions are not met by a stated date), for accounting purposes, those arrangements are treated in the same manner as earn-out arrangements that involve the conditional issuance of shares (i.e., the shares are treated as equity-linked instruments rather than as outstanding shares). If, however, the owner legally owns the shares and is subject only to transfer restrictions that lapse upon the earlier of (1) meeting one or more specific conditions or (2) a stated date, such shares are considered to be outstanding shares of stock subject to transferability restrictions rather than equity-linked instruments. In other words, earn-out arrangements that contain vesting-type conditions are treated as equity-linked instruments (regardless of whether the related shares have been issued), whereas earn-out arrangements that subject the holder only to transfer restrictions are treated as outstanding shares.

Earn-out arrangements that represent equity-linked instruments are classified as either liabilities or equity instruments on the basis of ASC 815-40 unless such arrangements are within the scope of ASC 718.13 Contracts that are classified in equity under ASC 815-40 are not remeasured. However, contracts classified as liabilities must be subsequently remeasured at fair value, with changes in fair value recognized in earnings.

To be classified as an equity instrument under ASC 815-40, an earn-out arrangement must meet two conditions:

The instrument is indexed to the issuer’s stock.
The instrument meets several conditions for equity classification (i.e., the issuer controls the ability to settle the instrument in shares; note that these conditions are relevant even if the contract requires settlement in shares).

The application of ASC 815-40 to these arrangements can be very complex. Before beginning the analysis, entities must ensure that they fully understand all the relevant terms. For example, in some cases, the main provisions are included in a separate section of the merger agreement, but there could be other agreements or “side letters” that modify or expand upon such terms. In addition, the terms of such arrangements may be affected by definitions that are difficult to interpret. Entities may need to consult with their legal advisers regarding such definitions.

Several considerations are relevant to the application of ASC 815-40 to an equity-linked instrument such as an earn-out arrangement. Those considerations, which are discussed below, include determining the following:

The unit of account.
Whether the contract is indexed to the combined company’s stock.
Whether the contract satisfies certain additional conditions for equity classification.

D.7.1 Unit of Account

The evaluation of whether an earn-out arrangement can be classified in equity begins with a determination of the unit of account. The arrangement may be a single unit of account or it may contain multiple units of account, depending on whether (1) the arrangement as a whole represents a freestanding financial contract or (2) there are multiple freestanding financial contracts within the overall arrangement. For more information about the unit of account, see Section 3.2 of Deloitte’s Roadmap Contracts on an Entity’s Own Equity.

D.7.2 Indexation

For each unit of account, the entity then evaluates the indexation requirements in ASC 815-40-15 by using a two-step process for determining whether a contract is considered to be indexed to the combined company’s stock. If the entity determines that the contract is not considered indexed to the combined company’s stock, the contract must be classified as a liability (i.e., equity classification is never permitted). To determine that a contract is considered to be indexed to the combined company’s stock, the entity must evaluate conditions that affect either of the following steps:

Step 1 — The exercise or settlement of the contract (“contingent exercise provisions”).
Step 2 — The monetary value of the settlement amount (i.e., factors that affect the settlement amount, or “settlement provisions”).

All earn-out arrangements contain contingent exercise provisions, and most of them also contain settlement provisions. In some cases, a provision reflects both a contingent exercise provision and a settlement provision.14 The determination of whether the term of an earn-out arrangement is a contingent exercise provision or a settlement provision can significantly affect whether the contract is indexed to the combined company’s stock because the guidance on contingent exercise provisions significantly differs from the guidance on settlement conditions.

Example D-2

An earn-out arrangement specifies that the combined company will issue an aggregate of 5 million shares of its common stock to the target’s shareholders if either (1) the quoted price of the stock exceeds $20 during a stated period or (2) there is a change of control. In this example, the combined company’s stock price and the occurrence of a change of control affects only whether the holders will receive the 5 million shares. Both variables represent only contingent exercise provisions because the holders will receive either no shares or 5 million shares.

This scenario differs from that in Example D-1. In that example, the holders may receive no shares, 1 million shares, 2 million shares, 3 million shares, or 4 million shares, depending on the combined company’s stock price or the price paid in a change of control. In both examples, the conditions are contingent exercise provisions. However, unlike the conditions in this example, the conditions in Example D-1 are also settlement provisions.

For an exercise contingency not to prevent a contract from being indexed to the combined company’s stock, it must meet the guidance in ASC 815-40-15-7A, which states, in part:

An exercise contingency shall not preclude an instrument (or embedded feature) from being considered indexed to an entity’s own stock provided that it is not based on either of the following:

An observable market, other than the market for the issuer’s stock (if applicable)
An observable index, other than an index calculated or measured solely by reference to the issuer’s own operations (for example, sales revenue of the issuer; earnings before interest, taxes, depreciation, and amortization of the issuer; net income of the issuer; or total equity of the issuer).

The terms of earn-out arrangements that reflect contingent exercise provisions (e.g., the combined company’s stock price or a change of control) generally do not prevent the contract from meeting the first step in ASC 815-40-15 to be considered indexed to the combined company’s stock. However, terms that affect the settlement value of the contract (i.e., settlement provisions) may prevent it from being indexed to the combined company’s stock in the second step under ASC 815-40-15. For an instrument to meet the conditions in the second step, any input that could affect the settlement amount must meet the condition discussed in ASC 815-40-15-7D, which states, in part:

[T]he instrument (or embedded feature) shall still be considered indexed to an entity’s own stock if the only variables that could affect the settlement amount would be inputs to the fair value of a fixed-for-fixed forward or option on equity shares.

Common terms in these arrangements that affect the settlement amount, but that generally do not prevent the contract from meeting the requirement in step 2 under ASC 815-40-15, include:

The combined company’s stock price (i.e., the quoted price or a reasonable average of quoted prices).
Standard antidilutive adjustments.
Adjustments for dividends on the combined company’s stock.
Adjustments for lost time value upon an early settlement (provided that those adjustments reflect only reasonable compensation for lost time value).

Common terms in these arrangements that affect the settlement amount but that would generally prevent the contract from meeting the requirement in step 2 of ASC 815-40-15 include:

All remaining shares would be issuable (or the forfeiture provisions would lapse) upon any change of control involving the combined company.
All remaining shares would be issuable (or the forfeiture provisions would lapse) upon a bankruptcy or insolvency of the combined company.

We have observed that, in current practice, earn-out arrangements can generally be categorized into four different types, which are discussed in the table below.

Type	Evaluation of Indexation Guidance
A fixed number of shares will be issued if (1) the combined company’s stock price meets or exceeds a stated price or (2) there is a change of control of the combined company. See Example D-2.	If one of these two conditions is met, the issuance of the earn-out shares is only considered an exercise contingency because there is no variability in the number of shares issuable. This exercise contingency does not preclude the earn-out share arrangement from being considered indexed to the combined company’s stock.
A variable number of shares will be issued on the basis of the combined company’s stated stock prices. If there is a change of control, all the earn-out shares will be issued. Example As additional consideration for a SPAC transaction, 1 million common shares of the combined company will be issued to the target’s shareholders for each of the following share price levels achieved over the next five years: Level 1 — The volume-weighted average price of the combined company’s common stock over any 20 trading days in a 40-day trading period is equal to or greater than $10 per share. Level 2 — The volume-weighted average price of the combined company’s common stock over any 20 trading days in a 40-day trading period is equal to or greater than $15 per share. Level 3 — The volume-weighted average price of the combined company’s common stock over any 20 trading days in a 40-day trading period is equal to or greater than $20 per share. Level 4 — The volume-weighted average price of the combined company’s common stock over any 20 trading days in a 40-day trading period is equal to or greater than $25 per share. If Level 4 is achieved, an aggregate of 4 million common shares of the combined company (i.e., 1 million shares for each level) will be issued on a pro rata basis to the target’s shareholders on the basis of their pretransaction ownership interests. If, however, the combined company is acquired in a change of control, all previously unissued shares will be issued.	This arrangement contains a provision that affects the settlement amount. The number of earn-out shares issuable varies on the basis of whether there is a change of control of the combined company. That is, in the absence of a change of control, a variable number of shares will be issued on the basis of stock price. However, if a change of control occurs, all of the earn-out shares will be issued (i.e., 4 million shares will be issued regardless of the combined company’s stock price). This arrangement contains a settlement provision that precludes it from being indexed to the combined company’s stock in step 2 under ASC 815-40-15; therefore, liability classification is required.
A variable number of shares will be issued on the basis of the combined company’s stated stock prices. If there is a change of control at a price per share that equals or exceeds a stated amount that is less than the price needed for all the earn-out shares to be issued, all of the earn-out shares will nevertheless be issued. Example As additional consideration for a SPAC transaction, 1 million common shares of the combined company will be issued to the target’s shareholders for each of the following share price levels achieved over the next five years: Level 1 — The volume-weighted average price of the combined company’s common stock over any 20 trading days in a 40-day trading period is equal to or greater than $10 per share. Level 2 — The volume-weighted average price of the combined company’s common stock over any 20 trading days in a 40-day trading period is equal to or greater than $15 per share. Level 3 — The volume-weighted average price of the combined company’s common stock over any 20 trading days in a 40-day trading period is equal to or greater than $20 per share. Level 4 — The volume-weighted average price of the combined company’s common stock over any 20 trading days in a 40-day trading period is equal to or greater than $25 per share. If Level 4 is achieved, an aggregate of 4 million common shares of the combined company (i.e., 1 million shares for each level) will be issued on a pro rata basis to the target’s shareholders on the basis of their pretransaction ownership interests. If, however, the combined company is acquired in a change of control at a price of $15 or more, all previously unissued shares will be issued.	This arrangement contains a provision that affects the settlement amount. The number of earn-out shares issuable varies depending on whether there is a change of control of the combined company at a stated price. That is, in the absence of a change of control at a stated price, a variable number of shares will be issued on the basis of stock price. However, if a change of control occurs at a price per share of $15 or more, all the earn-out shares will be issued (i.e., 4 million shares will be issued regardless of the combined company’s stock price). This arrangement contains a settlement provision that precludes it from being indexed to the combined company’s stock in step 2 under ASC 815-40-15; therefore, liability classification is required.
A variable number of shares will be issued on the basis of either (1) the combined company’s stated stock prices or (2) the price per share in a change of control of the combined company. See Example D-1.	This arrangement contains a provision that affects the settlement amount. The determination of whether this arrangement is indexed to the combined company’s stock in step 2 under ASC 815-40-15 depends on how the price per share is calculated in a change of control of the combined company and an entity’s interpretation of the application of ASC 815-40-15 to the potential settlement that would occur upon a change of control. Some entities have determined that the settlement amount is affected by the occurrence or nonoccurrence of a change of control, which is not an input into the pricing of a fixed-for-fixed forward or option on equity shares. These entities have therefore concluded that the earn-out arrangement is not indexed to the combined company’s stock in step 2 under ASC 815-40-15. As a result, the earn-out arrangement is classified as a liability. Note that these entities reach this conclusion without evaluating the calculation of the price per share in a change of control of the combined company. Other entities focus on the calculation of price per share in the event of a change of control. On the basis of a preclearance with the staff of the SEC’s Office of the Chief Accountant, there are two possible outcomes: If the price per share is calculated by dividing the transaction consideration by a number of outstanding shares that exclude the shares issuable under the earn-out share arrangement, the arrangement is not considered indexed to the combined company’s stock in step 2 under ASC 815-40-15 and must be classified as a liability. If the price per share is calculated by dividing the transaction consideration by a number of outstanding shares that include the shares issuable under the earn-out share arrangement, the arrangement is considered indexed to the combined company’s stock in step 2 under ASC 815-40-15 and may be classified as an equity instrument as long as no other condition in ASC 815-40 precludes such classification. A price-per-share calculation that includes the number of shares issuable under the earn-out arrangement can be described as “circular,” “net,” or “as-diluted.” This calculation is not simple, and because the terms of the provision that apply in the event of a change of control are often subject to interpretation (i.e., ambiguous), entities must consult with attorneys to reach the proper legal interpretation. If an entity cannot conclude that the calculation in the arrangement would be circular, net, or as-diluted, the earn-out arrangement cannot be classified in equity. We understand that many entities are modifying the terms of such provisions or taking other actions to eliminate the ambiguity in the contractual terms of the change-of-control provision.

In the table above, it is assumed that none of the earn-out shares are within the scope of ASC 718. We have seen instances in practice in which earn-out share arrangements with target shareholders may be issuable to employees that hold vested or unvested shares or options on the date on which the SPAC merges with a target. In addition to ASC 718 accounting considerations, entities should assess whether the potential shares issuable to common stockholders for which the accounting is in accordance with ASC 815-40 could be affected by the number of shares issuable to recipients for which the accounting is within the scope of ASC 718 (i.e., recipients that receive those shares as a form of stock-based compensation). For example, assume that earn-out shares will be issued to holders of unvested stock options on the merger date provided that those holders are still employees on the date on which the earn-out share target or targets are met. If an option holder is no longer an employee as of that date, the earn-out shares otherwise receivable by the holder will be reallocated to the pool of shares receivable by common stockholders that did not receive such shares in return for services (i.e., that were not within the scope of ASC 718). In this situation, as a result of the guidance on the unit of account in ASC 815-40, the portion of the earn-out arrangement that is within the scope of ASC 815-40 would not be considered indexed to the combined company’s stock because the number of shares varies on the basis of employee behavior. In a manner consistent with Example 20 in ASC 815-40-55, the earn-out arrangement within the scope of ASC 815-40 must be classified as a liability in its entirety.

For more information on the application of the indexation guidance, see Chapter 4 of Deloitte’s Roadmap Contracts on an Entity’s Own Equity.

D.7.3 Equity Classification Conditions

Once an earn-out arrangement is determined to be indexed to the combined company’s stock under ASC 815-40, the entity must evaluate whether it controls settlement of the contract in its shares. ASC 815-40-25 addresses the conditions that must be met. Only contracts for which the entity controls settlement in shares (i.e., that meet the conditions in ASC 815-40-25) may be classified in equity. See Chapter 5 of Deloitte’s Roadmap Contracts on an Entity’s Own Equity for more information about these classification conditions.

D.7.4 Other Considerations

Regardless of the classification of an earn-out arrangement, ASC 815-40 requires an entity to recognize the initial fair value of the instrument. The offsetting entry will depend on the facts and circumstances. We believe that for earn-out arrangements with target shareholders, the offsetting entry should be reflected in the same manner as it would if the entity declared a pro rata dividend to its common shareholders.

Entities should also consider the effect that earn-out arrangements may have on their EPS calculations and disclosures. Earn-out arrangements represent potential common shares; therefore, in calculating diluted EPS, the combined company should consider the guidance on contingently issuable shares. In addition, some earn-out arrangements require that shares be issued or released from escrow if the combined company’s common stock exceeds a certain price over a specified period. For example, an arrangement may stipulate that 1 million shares must be issued on the date the daily volume-weighted average share price is greater than or equal to $13.00 for any 20 days within a 30-day trading period. For these types of arrangements, we understand that there is diversity in practice regarding how ASC 260 is applied. ASC 260-10-45-52 states:

The number of shares contingently issuable may depend on the market price of the stock at a future date. In that case, computations of diluted EPS shall reflect the number of shares that would be issued based on the current market price at the end of the period being reported on if the effect is dilutive. If the condition is based on an average of market prices over some period of time, the average for that period shall be used. Because the market price may change in a future period, basic EPS shall not include such contingently issuable shares because all necessary conditions have not been satisfied.

Some believe that the denominator of diluted EPS should not include any shares that are issuable under the earn-out arrangement unless the triggering event either (1) has been met as of the end of the reporting period or (2) would have been met in the absence of a required waiting period (i.e., some arrangements do not allow stock price conditions to be met until a specified period after the SPAC merger has been consummated). This view is premised on a belief that the guidance on shares that are contingently issuable on the basis of an average of market prices applies and therefore no shares would be included in the denominator of diluted EPS unless a triggering event has been met, or would have been met, as of the reporting date. According to this view, if the triggering event is met as of the end of the reporting period, the shares are included in the denominator from the beginning of the reporting period (or issuance date of the earn-out arrangement, if later).

Others believe that the denominator of diluted EPS should include shares that would be issuable if the entity’s stock price as of the end of the reporting period would not change in the future. This view is premised on the belief that the guidance on shares that are contingently issuable on the basis of an average of market prices only applies to the volume-weighted average price as of the end of the reporting period. According to this view, the fact that shares are issuable only if a volume-weighted average daily price is met for a certain number of days within a defined period does not mean that the entity looks to the trailing prices over that defined period as of the end of the reporting period.

We believe that either of these two views is acceptable. Entities should disclose the approach they use to calculate diluted EPS for such arrangements.

In addition, earn-out arrangements that give the holders nonforfeitable rights to dividends represent participating securities regardless of whether (1) the arrangements are classified as equities or liability instruments or (2) the combined company actually declares or pays dividends. See Deloitte’s Roadmap Earnings per Share for more information about participating securities and the two-class method of calculating EPS.

Footnotes

12

There may be other options or warrants on stock that were previously issued by the SPAC or target that remain outstanding after the merger. While many of the accounting considerations discussed in this section are relevant to these instruments, this section focuses on earn-out arrangements.

13

Generally, an earn-out arrangement would be subject to ASC 718 if, in addition to meeting one or more share price levels or other conditions, the holder must provide service to the combined company after the merger date. Therefore, entities should consider whether the counterparty to the arrangement must provide services to the combined company to earn the award. For more information, see Section D.8.

14

Contracts containing only transfer restrictions that lapse upon the passage of time are considered outstanding shares and are not subject to this evaluation. As discussed above, those arrangements are accounted for as outstanding shares rather than as equity-linked instruments.

D.8 Share-Based Payment Considerations

As part of a target’s accounting analysis, the entity should assess the impact that the SPAC merger will have on preexisting share-based payment arrangements with employees and nonemployees (collectively, the “grantees”) that are within the scope of ASC 718. When the SPAC is the accounting acquirer and the target meets the definition of a business, the entity should consider the guidance on business combinations in Chapter 10 of Deloitte’s Roadmap Share-Based Payment Awards.

If the target is determined to be the accounting acquirer and the SPAC does not meet the definition of a business, an entity should consider whether the preexisting target awards were modified as part of the SPAC merger. When performing this assessment, the entity should pay careful attention to the original terms of the preexisting target awards and any changes that result from the SPAC merger. This assessment may include the evaluation of any earn-out arrangements with the grantees, including earn-out arrangements in which grantees are subject to ongoing service requirements after the SPAC merger. In addition, the entity should consider the effect, if any, of a SPAC merger on any antidilution provisions included in the original terms of the target awards. These determinations may require consultation with legal counsel. For further discussion of the accounting for modifications, see Chapter 6 of Deloitte’s Roadmap Share-Based Payment Awards.

As noted in Section D.7.2, companies may have earn-out share arrangements that provide earn-out shares to grantees that are subject to forfeiture. We believe that if any forfeited shares are subsequently reallocated to the remaining grantees that are subject to the earn-out share arrangement, the reallocation solely to grantees is analogous to a “last man standing” arrangement. Under that view, the forfeiture and subsequent redistribution of the awards to grantees are accounted for as (1) the forfeiture of the original award and (2) the grant of a new award. For more information, see Section 10.7.3 of Deloitte’s Roadmap Share-Based Payment Awards.

D.9 Proxy/Registration Statement Filing and Review Process

D.9.1 SEC Review Process

An entity can generally expect the SEC staff to complete its initial review of a proxy/registration statement and furnish the first set of comments within 27 calendar days. The entity would then respond to each of the SEC’s comments and reflect requested edits. It would include any other necessary updates in an amended proxy/registration statement that the SEC would also review. After the initial filing, the SEC’s review time can vary significantly but typically is within two weeks. There may be several rounds of comment letters with follow-up questions on responses to original comments as well as additional comments on new information included in the amended registration statement. For more information, see Section 1.4.1.

Connecting the Dots

The financial statement requirements and review of a proxy/registration statement are largely consistent with the requirements and review for a traditional IPO. Thus, in addition to performing a detailed analysis of the financial statement and pro forma requirements for the proxy/registration statement, targets may want to understand the types of comments that the SEC staff frequently issues. For more information about SEC comments, see Deloitte’s Roadmap SEC Comment Letter Considerations, Including Industry Insights.

D.9.2 Availability of Nonpublic Review

In a traditional IPO, companies may submit draft registration statements to the SEC for nonpublic review. The ability to file nonpublicly is a significant benefit because it allows companies to confidentially respond to SEC comments and update their draft registration statement while continuing to assess market conditions throughout the IPO process. As a result, companies are able to delay or withdraw the IPO, if desired, without public scrutiny. In limited circumstances, as described below, nonpublic review of an initial draft registration statement may be available for SPAC transactions.

The SEC staff may agree to review an initial draft Form S-4 for a SPAC transaction if it is submitted within 12 months of the SPAC’s IPO. As noted in the highlights of the September 2017 CAQ SEC Regulations Committee joint meeting with the SEC staff, the staff encourages SPACs to contact their respective industry review office of the Division to assess whether a nonpublic review would be acceptable. Note that a nonpublic review may only be used for the initial submission and any responses to the staff comments or other amendments to the Form S-4 must be included in a public filing; however, in alternative structures in which either the target or a newly formed company acquires a SPAC, the confidential review process may be available for a longer period. The draft registration statement in a nonpublic review must be “substantially complete”15 and (1) contain a signed audit report from the company’s independent registered public accounting firm and (2) meet all line item requirements applicable to the registration statement unless the company is using certain permitted accommodations for omitting otherwise required information (e.g., financial information [including financial statements] related to periods that are not reasonably expected to be required at the time the registration statement is filed publicly).

Footnotes

15

For more information, see the announcement on the SEC’s Web site.

D.12 Internal Control Over Financial Reporting and Disclosure Controls and Procedures

The combined company must consider the requirements related to ICFR and DCPs that apply to public companies. After the close of the transaction, the combined company must be prepared to (1) evaluate and disclose material changes to its ICFR on a quarterly basis, (2) provide quarterly disclosures and certifications from key executives that DCPs are effective, and (3) disclose to the auditor and audit committee all significant deficiencies and material weaknesses in ICFR and any fraud that involves management or other employees who have a significant role in ICFR. If the SPAC has previously filed its first Form 10-K, the combined company must be prepared to evaluate the effectiveness of ICFR on an annual basis (except in certain circumstances discussed in the following paragraph). In addition, depending on its filing status, the combined company may need to provide its auditor’s attestation report on the combined company’s ICFR on an annual basis. As long as the combined company remains an EGC or nonaccelerated filer, an auditor’s attestation report on ICFR is not required. See Section 7.5 for further details on ICFR and DCPs.

In addition, the SEC may not object to the exclusion of management’s report on ICFR in the first Form 10-K filed after the close of the transaction. As noted in Section 215.02 of the SEC’s C&DIs on Regulation S-K, it may not “always be possible to conduct an assessment of the [target’s] internal control over financial reporting in the period between the consummation date of [the transaction] and the date of management’s assessment of internal control over financial reporting required by Item 308(a) of Regulation S-K.” In these circumstances, which may arise if the transaction closes late in the fiscal year, the combined company must also be prepared to disclose (1) why management’s assessment has not been included, (2) the effect of the transaction on management’s ability to conduct an assessment, and (3) the scope of the assessment if one was conducted. However, if the transaction closes at the beginning of the fiscal year and the Form 8-K is amended to include the most recent annual period (see Example D-4), this guidance would not apply and the first Form 10-K that reflects the target’s financial statements must include management’s ICFR report. Because of the complexity involved in assessing these requirements, we recommend consultation with accounting and legal advisers.

Appendix E — Titles of Standards and Other Literature

Appendix F — Abbreviations

Abbreviation	Description
AETR	annual effective tax rate
AICPA	American Institute of Certified Public Accountants
APB	Accounting Principles Board
APIC	additional paid-in capital
ASC	FASB Accounting Standards Codification
ASR	SEC Accounting Series Release
ASU	FASB Accounting Standards Update
AWMV	aggregate worldwide market value
CAE	critical accounting estimate
CAM	critical audit matter
CAQ	Center for Audit Quality
CEO	chief executive officer
CFO	chief financial officer
CIMA	Chartered Institute of Management Accountants
CODM	chief operating decision maker
C&DI	SEC Compliance and Disclosure Interpretation
DCP	disclosure control and procedure
DLOM	discount for lack of marketability
Dodd-Frank Act or Dodd-Frank	Dodd-Frank Wall Street Reform and Consumer Protection Act
DTA	deferred tax asset
DTL	deferred tax liability
EBITDA	earnings before interest, taxes, depreciation, and amortization
EDGAR	SEC’s Electronic Data Gathering, Analysis, and Retrieval system
EGC	emerging growth company
EITF	Emerging Issues Task Force
EMI	equity method investee
EPS	earnings per share
ESPP	employee stock purchase plan
Exchange Act or 1934 Act	Securities Exchange Act of 1934
FAQ	frequently asked question
FASB	Financial Accounting Standards Board
FAST Act	Fixing America’s Surface Transportation Act
FPI	foreign private issuer
FRM	SEC Division of Corporation Finance’s Financial Reporting Manual
GAAP	generally accepted accounting principles
GAAS	generally accepted auditing standards
GHG	greenhouse gas
HTML	HyperText Markup Language
ICFR	internal control over financial reporting
IESBA	International Ethics Standards Board for Accountants
IFRS	International Financial Reporting Standard
IPO	initial public offering
IRC	Internal Revenue Code
IRR	internal rate of return
IRS	Internal Revenue Service
ISO	incentive stock option
JOBS Act	Jumpstart Our Business Startups Act
KPI	key performance indicator
LLC	limited liability company
MD&A	Management’s Discussion and Analysis
Nasdaq	National Association of Securities Dealers Automated Quotations
NQSO or NSO	nonqualified stock option
NYSE	New York Stock Exchange
OCA	SEC Office of the Chief Accountant
OECD	Organisation for Economic Co-operation and Development
PBE	public business entity
PCAOB	Public Company Accounting Oversight Board
PCC	Private Company Council
PIPE	private investment in public equity
REC	renewable energy certificate
REIT	real estate investment trust
SAB	SEC Staff Accounting Bulletin
Sarbanes-Oxley Act or Sarbanes-Oxley	Sarbanes-Oxley Act of 2002
SAS	AICPA Statement on Auditing Standard
S&P	Standard & Poor’s
SEC	U.S. Securities and Exchange Commission
Securities Act or 1933 Act	Securities Act of 1933
SPAC	special-purpose acquisition company
SRC	smaller reporting company
Tax Act	Tax Cuts and Jobs Act of 2017
TRA	tax receivable agreement
XBRL	eXtensible Business Reporting Language
XML	eXtensible Markup Language

Appendix G — Roadmap Updates for 2024

The tables below summarize the substantive changes made in the 2024 edition of this Roadmap.

New Content

Section	Title	Description
1.7.2	Reverse Mergers	Discusses reverse mergers between operating companies.
1.7.2.1	Sign-and-Close Transactions	Discusses the nature and structure of “sign-and-close” transactions.
2.5.1.4	Omitting a Balance Sheet for a Significant Business Acquisition	New section and example added to align content with Deloitteʼs Roadmap SEC Reporting Considerations for Business Acquisitions.
2.5.2	Financial Statements Used to Measure Significance	New section and examples added to align content with Deloitteʼs Roadmap SEC Reporting Considerations for Business Acquisitions. Subsequent examples renumbered.
4.7	Climate-Related Disclosures	Addresses the SEC’s final rule on climate-related disclosures.
5.11.1	ASU 2023-07 — Improvements to Reportable Segment Disclosures	Incorporates discussion of ASU 2023-07 on segment reporting.
5.12	Disaggregation of Income Statement Expenses	Covers the FASB’s proposed disclosure requirements related to income statement expenses.
7.6.4	Enhancements to Climate-Related Disclosure Requirements	Discusses the climate-related disclosures required by the SEC’s final rule.
Appendix D	SPAC Considerations	Incorporates content previously included in Deloitte’s October 2, 2020 (last updated April 11, 2022), Financial Reporting Alert as well as updates related to the SEC’s final rule on SPACs and de-SPAC transactions.

Amended Content

Section	Title	Description
1.7.1	Special-Purpose Acquisition Companies	Addresses the SEC’s final rule on SPACs and de-SPAC transactions.
3.7.5	Additional IPO Considerations	Includes discussion of the SEC’s final rule on executive compensation clawbacks.
5.7	Accounting for Offering Costs — SAB Topic 5.A	Reflects the SEC staff’s view that audit fees would not qualify as offering costs.
5.9.6.1	Disclosures in the Financial Statements	Adds discussion of ASU 2023-09 on income tax disclosures.
7.6.2	Clawback Policies	Includes discussion of SEC’s final rule on executive compensation clawbacks.

	John Wilde Audit & Assurance Partner Deloitte & Touche LLP +1 415 783 6613 johnwilde@deloitte.com		Pat Gilmore Audit & Assurance Partner Deloitte & Touche LLP +1 410 843 3242 pagilmore@deloitte.com
	Doug Rand Audit & Assurance Managing Director Deloitte & Touche LLP +1 202 220 2754 dorand@deloitte.com

	Will Braeutigam Audit & Assurance Partner Deloitte & Touche LLP +1 713 982 3436 wbraeutigam@deloitte.com		Barrett Daniels Audit & Assurance U.S. IPO Services Co-Leader Deloitte & Touche LLP +1 408 704 4176 badaniels@deloitte.com
	Previn Waas Audit & Assurance U.S. IPO Services Co-Leader Deloitte & Touche LLP +1 408 704 4083 pwaas@deloitte.com