Accounting and SEC Reporting Considerations for SPAC Transactions
Introduction
It has been a record-breaking year for special-purpose
acquisition company (SPAC) initial public offerings (IPOs); the proceeds raised
in the first nine months of 2020 have already more than tripled those raised in
2019.1 As a result, many private operating companies have been merging with SPACs
to raise capital rather than using traditional IPOs or other financing
activities. (See Deloitte’s Private-Company CFO Considerations for SPAC
Transactions for further discussion of the growth and
lifecycle of SPACs.) After a SPAC merges with a private operating company (the
“target”), the target’s financial statements become those of the combined public
company (the “combined company”). Therefore, a target will need to devote a
considerable amount of time and resources to technical accounting and reporting
matters.
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 via a proxy process).
Before completing an acquisition, SPACs hold no material assets
other than cash; therefore, they are nonoperating public “shell companies,” as
defined by the SEC (see paragraph 1160.2 of the SEC’s Financial Reporting Manual
(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 publication 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 required to vote on the
transaction, the SPAC may file either (1) a proxy statement on Schedule 14A or
(2) a combined proxy and registration statement on Form S-4 (note that (1) and
(2) are collectively referred to herein as a “proxy/registration statement”).
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 are
expected to be audited in accordance with PCAOB standards.
Once 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 (“Super 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 8-K, including financial statements that comply with the SEC’s age
requirements, is available and audited in accordance with the standards of the
PCAOB.
Connecting the Dots
The financial statement requirements and related SEC
review process for a SPAC transaction are largely consistent with the
requirements for a traditional IPO. SEC Chairman Jay Clayton recently
discussed the increase in SPAC transactions in a television interview.
He noted that the SEC staff believes that investors that are voting on a
transaction should receive the same rigorous disclosures that they would
receive in a traditional IPO. Chair Clayton further indicated that the
SEC staff is focused on disclosures of the compensation and incentives
that go to a SPAC’s sponsors.
When planning for SPAC transactions, entities should also be mindful of
the following unique considerations:
-
The SEC's draft registration review process is generally not available for SPAC transactions.
-
The SPAC and the target must work through the accounting for the transaction to determine (1) whether the SPAC or the target is the acquirer for accounting purposes (the “accounting acquirer”) and then (2) whether the nature of the transaction is an acquisition or recapitalization (as discussed in the Identifying the Accounting Acquirer section).
-
Pro forma financial information must be presented to reflect the accounting for the transaction.
-
While the SEC review process for a SPAC is as thorough and rigorous as that for a traditional IPO, after the SEC has completed its review of a SPAC’s proxy/registration statement, there is generally a period (e.g., 20 days) during which SPAC shareholders decide whether to approve the transaction. Separately, investors must also decide whether they wish to participate in the combined company or redeem their shares in the SPAC.
-
In addition to the SEC requirements discussed below, the target’s management may have other reporting considerations related to its support of the transaction, such as assisting in the marketing of PIPE financing and securing additional funding for the transaction.
Key Provisions for a SPAC Transaction
When conducting a SPAC transaction, the target should assess the following
technical accounting and SEC reporting considerations, which are discussed in
this publication:
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 that involve foreign entities or multiple
targets generate additional complexity, and we recommend further consultation
with accounting and legal advisers. Further, views on the reporting 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 and legal advisers.
SEC Filing Requirements
As discussed above, before consummating a transaction, a SPAC will be
required to file one of the following:
- Proxy statement on Schedule 14A — Generally required for the SPAC to solicit votes from its shareholders to consummate the transaction.
- Combined proxy and registration statement on Form S-4 — Generally required if the SPAC is registering additional securities as part of the transaction.
The reporting requirements for the proxy statement on
Schedule 14A and the combined proxy and registration statement on Form S-4
are substantially the same and are addressed in the Proxy/Registration
Statement Requirements section below.
A Super 8-K must be filed within four business days of the
consummation of a transaction, and the target will thereafter fulfill the
combined company’s ongoing reporting obligations. See the Super 8-K Requirements, Ongoing Reporting
Requirements, and Internal Control Over Financial Reporting and
Disclosure Controls and Procedures sections for further
information.
Proxy/Registration Statement Requirements
The SPAC’s shareholders are required to vote on the
transaction in which the SPAC merges with the target. Therefore, the
proxy/registration statement must include the following information related
to the target:
Financial Statement Requirements
The proxy/registration statement must include the target’s (1) annual
financial statements audited in accordance with PCAOB standards and (2)
unaudited interim financial statements, depending on the timing of the
transaction. Generally, the target must include annual audited financial
statements for three years. However, there are two scenarios in
which the financial statement requirements may be reduced from three
years to two years:
-
Smaller reporting companies (SRCs) — In a manner consistent with paragraph 1140.3 of the FRM, a target may provide two years of audited financial statements rather than three years if the target (1) is not an SEC reporting company and (2) would otherwise meet the definition of an SRC (i.e., it reported less than $100 million in annual revenues in its most recent fiscal year for which financial statements are available).
-
Emerging growth companies (EGCs) — In a manner consistent with paragraph 10220.7 of the FRM, a target may provide two years of audited financial statements rather than three years if all of the following apply: (1) the SPAC is an EGC, (2) the SPAC has not yet filed or been required to file its first Form 10-K, and (3) the target would qualify as an EGC if it were conducting its own IPO of common equity securities. A private company target would generally qualify as an EGC in its own IPO if it has total annual gross revenues of less than $1.07 billion during its most recently completed fiscal year and has not issued more than $1 billion of nonconvertible debt over the past three years.
The decision tree below summarizes how entities can
determine the number of annual audited years to include in the
proxy/registration statement. That determination, as well as the
determination of the age of the financial statements, must be reassessed
(1) each time an amendment to the proxy/registration statement is filed
and (2) when the Super 8-K is filed or amended.
The audited annual financial statements must include (1)
balance sheets as of the end of the two most recent fiscal years and (2)
statements of comprehensive income, cash flows, and changes in
shareholders’ equity for the two or three most recent fiscal years (see
decision tree above). Depending on the timing of the transaction,
unaudited interim financial statements may be required. When needed,
interim financial statements must include (1) an interim balance sheet
as of the end of the most recent interim period after the latest fiscal
year-end (see the Age of Financial
Statements section) and (2) statements of comprehensive
income, cash flows, and changes in shareholders’ equity for the
year-to-date period from the latest fiscal year-end to the interim
balance sheet date and the corresponding period in the prior fiscal
year.
Financial Statement Presentation and Disclosure Requirements
The target’s financial statements must comply with SEC rules and
regulations, including SEC Regulation S-X and SEC Staff Accounting
Bulletins, both of which govern presentation and disclosures in the
financial statements. For example, in accordance with Regulation
S-X, Rule 5-03(b), a target is generally required to state
separately, on the face of the income statement, revenues (and the
associated costs of revenues) related to (1) product sales, (2)
rentals, (3) services, and (4) other revenue activities. In
addition, Regulation S-X, Rule 4-08(h), requires footnote disclosure
of an income tax rate reconciliation. However, targets that would
qualify as an SRC may instead apply the scaled disclosure
requirements for SRCs set forth in Regulation S-X, Article 8. SRCs
are generally not required to apply the disclosure provisions of
Regulation S-X in their entirety unless Article 8 specifically
indicates otherwise.
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.
Connecting the Dots
Because targets may not have historically
prepared interim financial statements, they should ensure
that they have established proper controls and procedures
for accurately preparing such information on a timely
basis.
The target’s financial statements must also comply
with public-company GAAP, which may trigger additional presentation
and disclosure requirements. Such requirements include, for example,
mezzanine equity classification (ASC 4802), segment- and entity-wide disclosures (ASC 280), earnings per
share (ASC 260), disaggregation of revenues (ASC 606), and
incremental business combination disclosures (ASC 805). For further
discussion, see Chapter 5 of
Deloitte’s A
Roadmap to Initial Public Offerings.
In addition, the target’s financial statement cannot reflect Private
Company Council accounting alternatives. Therefore, if a target has
elected such alternatives, such as amortizing goodwill, the effects
of these elections must be unwound before the financial statements
are included in the proxy/registration statement.
The target’s financial statements generally must
reflect the adoption of new accounting standards on the basis of the
dates required for public companies. However, it is our
understanding that the SEC staff will not object if a target uses
private-company (non-public- business-entity) 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).
Financial Statements of Acquired or to Be Acquired Businesses
Under Regulation S-X, Rule 3-05, the target may be
required to provide separate audited preacquisition financial
statements for its significant acquired or to be acquired businesses
(acquirees) in the proxy/registration statement. Note that the
definition of a “business” for SEC reporting purposes, which differs
from the definition under ASC 805 for U.S. GAAP purposes, focuses
primarily on the continuity of revenue-producing activities. The
target must perform the significance tests in Regulation S-X, Rule
1-02(w) (i.e., the investment, asset, and income tests). If the
acquiree is determined to be significant (i.e., the significance
level exceeds 20 percent on any of the three tests), separate
audited preacquisition financial statements of the acquiree may be
required.
Changing Lanes
On May 20, 2020, the SEC issued a final rule3 that amends the financial statement requirements for
acquisitions and dispositions of businesses, including real
estate operations, and related pro forma financial
information. The final rule applies to fiscal years
beginning after December 31, 2020; however, early
application is permitted. The final rule offers significant
relief for targets that are undertaking a transaction since,
among other changes, they will no longer be required to
evaluate acquisitions that occurred before the most recent
full fiscal year included in the proxy/registration
statement. In the example below, it is assumed that a target
and SPAC have early adopted the final rule.
Example 1
Company A, a calendar-year-end
company, is a target in a SPAC transaction. The
proxy/registration statement includes its
historical (1) audited annual financial statements
as of December 31, 20X9, and December 31, 20Y0,
and for the three years ended December 31, 20Y0,
and (2) unaudited interim financial statements as
of September 30, 20Y1, and for the interim periods
ended September 30, 20Y1, and September 30,
20Y0.
Company A acquired Company B,
which also has a calendar year-end, in June 20X9.
Because the acquisition of B occurred before the
most recent full fiscal year presented by A, B’s
preacquisition financial statements are not
required. However, if B had been acquired in June
20Y0, A must evaluate the significance of the
acquisition of B. After performing the three
significance tests, A determines that the highest
level of significance was 41 percent. Therefore,
the proxy/registration statement would need to
include B’s audited annual financial statements as
of and for the years ended December 31, 20X9, and
December 31, 20X8, and as of March 31, 20Y0, and
for the three months ended March 31, 20Y0, and
March 31, 20X9. This is because B would not have
been included in A’s audited results for a
complete fiscal year.
For additional information, see Section 2.4 of Deloitte’s A Roadmap to Initial Public Offerings.
Financial Statements and Summarized Financial Information for Equity Method Investments
Targets with investments that are accounted for
under the equity method (equity method investees or “EMIs”) should
consider the reporting and disclosure requirements in Regulation
S-X, Rules 3-09, 4-08(g), and 10-01(b).
In accordance with Rule 3-09, if the target holds an
interest in an EMI that is considered significant, the investee’s
separate financial statements must be included in the
proxy/registration statement. An interest in an EMI is considered
significant if the result of either the investment test or the
income test exceeds 20 percent for any annual period presented in
the target’s financial statements. If the EMI’s financial statements
are required in the proxy/registration statement, such financial
statements should be (1) as of the same dates and for the same
periods as those of the audited consolidated financial statements
that the target is required to file (if the EMI and the registrant
have the same year-end; otherwise, the separate financial statements
may be as of the EMI's year-end) and (2) audited for each year for
which the result of either significance test exceeds 20 percent. The
EMI’s comparative financial statements for any years for which
significance did not exceed 20 percent on the basis of either test
must still be presented, but they may be unaudited.
A target is not required to include separate interim
financial statements for significant EMIs. However, if the
individual significance of any EMI is greater than 20 percent, the
registrant must disclose summarized income statement information
under Rule 10-01(b) in its interim financial statements.
In accordance with Rule 4-08(g), a target 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 the asset, income,
or investment test.
For additional information on the application of significance tests
and their relationship to transactions, see Section 2.6 of Deloitte’s A Roadmap to Initial Public
Offerings.
Auditing and Review Standards
Audits for a private company are typically subject
to the auditing standards issued by the AICPA’s Auditing Standards
Board (i.e., U.S. generally accepted auditing standards (U.S.
GAAS)); however, for a SPAC transaction, the audit of the target
that becomes the predecessor of the SPAC must be performed in
accordance with the standards of the PCAOB. Therefore, even if the
target has previously been audited, the target’s auditor will
generally need to perform additional procedures and issue an
auditor’s report, which will be included in the proxy/registration
statement, that states that the audit was performed in accordance
with both (1) U.S. GAAS and (2) the standards of the PCAOB. For
audits of fiscal years ending on or after December 15, 2020,
critical audit matters must be included in auditors’ reports that
refer to PCAOB standards, except when the company qualifies as an
EGC. In addition, interim financial statements are generally
reviewed by the target’s auditors.
In addition, the registered accounting firm must also meet the
independence requirements in Regulation S-X, Article 2, for all
periods. Because the SEC’s and PCAOB’s independence rules are
generally more restrictive than those of the AICPA, both the auditor
and those charged with governance need to determine (1) whether
there is possible noncompliance with the SEC’s and PCAOB’s
independence rules, (2) whether there are any conflicts of interest
before the entity undertakes the transaction, or (3) both. For
example, because certain nonattest services that the auditor is
permitted to provide under AICPA rules may be prohibited under SEC
independence rules, the auditor and those charged with governance
need to evaluate whether the nonattest services provided during the
financial statement periods to be included in the proxy/registration
statement are permitted under the SEC’s and PCAOB’s independence
rules. In certain cases, the target may be required to change its
independent auditor to move forward with the transaction. 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 proxy/registration statement.
Age of Financial Statements
Audited Annual Financial Statements
If the filing date, the effective date of a
registration statement, or the mailing date of the proxy statement
(hereafter “the filing or effective/mailing date”) is on or before
the 45th day after the target’s fiscal year-end, Regulation S-X,
Rules 3-01 and 3-12, permit the SPAC to include audited financial
statements of the target for the fiscal year preceding the target’s
most recently completed fiscal year. In such cases, the target must
also provide interim financial information through the third quarter
of the most recently completed fiscal year. However, if the audited
financial statements for the most recently completed fiscal year are
available or become available before the filing or effective/mailing
date, the filing should be updated to include them.
Example 2
SPAC A, a nonaccelerated
filer, enters into an agreement to acquire Target
B. Both A and B have calendar year-ends. On March
1, 20Y0 (i.e., more than 45 days after the
year-end), A files its proxy/registration
statement, which must include B’s audited annual
financial statements for the two or three fiscal
years ended December 31, 20X9 (see the Financial
Statement Requirements section). No
interim financial statements would be
required.
Unaudited Interim Financial Statements
If the audited year-end balance sheet is as of a date that is no more
than 134 days from the filing or effective/mailing date, the
target’s interim financial information is not required. If, however,
the year-end balance sheet is as of a date that is 135 days or more
from the filing or effective/mailing date, a registrant must provide
the target’s financial information as of an interim date that is no
more than 134 days from the filing or effective/mailing date in
addition to the audited year-end financial statements.
Example 3
SPAC A, a nonaccelerated
filer, enters into an agreement to acquire Target
B. Both A and B have calendar year-ends. SPAC A
files its proxy/registration statement on
September 1, 20Y0 (i.e., more than 134 days after
year-end). To meet the age of financial statement
requirements, the proxy/registration statement
must include B’s (1) annual audited financial
statements for the two or three fiscal years ended
December 31, 20X9 (see the Financial
Statement Requirements section), and
(2) interim financial statements as of June 30,
20Y0, and for the six months ended June 30, 20Y0,
and June 30, 20X9.
“Updating” Requirements for Proxy/Registration Statements
The financial statements in the proxy/registration
statement must meet the requirements for the age of financial
statements on both (1) the filing date and (2) either the effective
date of the registration statement or the mailing date of a proxy
statement. Because the effective or mailing date may be months after
the initial filing date, financial statements that met the
requirements for the age of financial statements as of the initial
filing date may no longer meet those requirements when a subsequent
amendment is filed or immediately before the effective/mailing date.
In such cases, the financial statements are sometimes described as
“stale,” and Regulation S-X, Rule 3-12, requires the SPAC to
“update” the financial statements that were included in the initial
filing (i.e., by providing financial statements of the target as of
a more recent date) before (1) an amendment is filed, (2) a
registration statement is declared effective, or (3) a proxy
statement is mailed. Typically, a SPAC will need to file an
amendment to the proxy/registration statement that provides more
current financial statements of the target that meet the
requirements for the age of financial statements.
Pro Forma Financial Information
The proxy/registration statement must include pro forma
financial information that reflects the close of the transaction. Pro
forma financial information, which is unaudited, typically includes an
introductory paragraph, a pro forma balance sheet, a pro forma income
statement (or statements), and accompanying explanatory notes. The
introductory paragraph briefly describes the transaction(s), the
companies involved, the periods for which the pro forma financial
information is presented, and any other information that may help
readers understand the content of the pro forma information. Ordinarily,
the pro forma balance sheet and income statement(s) are presented in a
columnar format that shows (1) historical financial information of the
SPAC, (2) historical financial information of the target, (3) pro forma
adjustments, and (4) pro forma totals. Further, each pro forma
adjustment should include a reference to an explanatory note that
clearly discusses the assumptions involved and how the adjustments were
derived or calculated.
A pro forma balance sheet is required as of the same date as the SPAC’s
most recent balance sheet included in the proxy/registration statement
(i.e., one pro forma balance sheet as of the end of the fiscal year or
the subsequent interim period, whichever is later). In the computation
of pro forma balance sheet adjustments, it is assumed that the
transaction was consummated on the balance sheet date. Pro forma income
statements are required for both (1) the SPAC’s most recent fiscal year
and (2) any subsequent year-to-date interim period included in the
proxy/registration statement. In the computation of pro forma income
statement adjustments, it is assumed that the transaction was
consummated at the beginning of the most recently completed fiscal year
(and carried forward to the interim period, if presented).
The preparation of the pro forma financial information will depend on the
determination of the accounting acquirer. As discussed in the
Identifying the Accounting Acquirer section, if
the target is identified as the accounting acquirer, the transaction may
be a reverse recapitalization (i.e., the SPAC, which is a shell company,
is the legal acquirer but not the accounting acquirer). However, in
other instances, the SPAC may be identified as the accounting acquirer,
and the transaction may be an acquisition of either (1) a business or
(2) a group of assets (if the target does not meet the U.S. GAAP
definition of a business).
For a reverse recapitalization, the pro forma
adjustments would give effect to the issuance of the target’s equity
interests in exchange for the net assets of the SPAC and subsequent
recapitalization. For an acquisition in which the SPAC is determined to
be the accounting acquirer, the pro forma adjustments would reflect the
consideration transferred and the target’s assets and liabilities,
including goodwill, (if applicable) measured in accordance with ASC 805.
In either circumstance, additional adjustments may be necessary to
reflect (1) the target’s acquisition of a significant acquiree (or
significant acquirees) or (2) other financing transactions that will
occur on or before the close of the transaction. Note that the above
list of pro forma adjustments is not exhaustive, and SPACs and targets
should carefully analyze the structure of the transaction to
appropriately reflect the pro forma results.
Connecting the Dots
Because the pro forma financial information will reflect the
accounting for the transaction and any related financing, the
target must preliminarily determine the appropriate accounting
before the close of the transaction. See the
Identifying the Accounting Acquirer
section for further information.
In addition, the SPAC’s public shareholders typically have redemption
rights through which they may elect to redeem their shares in the SPAC
for their initial investment before the close of the transaction. As a
result, the amount of cash the SPAC will have at the closing is unknown
at the time the proxy/registration statement is filed. In accordance
with Regulation S-X, Rule 11-02(b)(8), the SPAC will need to present
multiple pro forma scenarios to reflect a range of possible results
(e.g., assuming no redemptions and assuming maximum redemptions) because
the outcome of the redemption scenario may vary. In some cases, the
level of redemptions may influence the identification of the accounting
acquirer and, thus, the accounting treatment of the transaction. In
these circumstances, the pro forma financial information may need to
reflect the SPAC as the accounting acquirer in one scenario and the
target as the accounting acquirer in another scenario.
Irrespective of the accounting for the transaction, the SPAC and the
target should carefully consider any income tax impacts and related pro
forma adjustments associated with the transaction. These adjustments
will largely depend on the structure of the transaction and the planned
corporate structure of the combined company. Special consideration
should be given to “UP-C” structures since these can result in
additional tax complexities. See Section 11.7.4.1 of Deloitte’s
A Roadmap to Accounting for Income Taxes for
additional information on UP-C structure–related income tax
considerations.
Changing Lanes
As discussed in the Financial Statements of Acquired or
to Be Acquired Businesses section, in May 2020,
the SEC issued a final rule that amends the requirements for pro
forma financial information. For additional information, see
Section 4.4 of Deloitte’s A Roadmap to Initial Public
Offerings.
Other Financial and Nonfinancial Information
In addition to the financial statements discussed above, the
proxy/registration statement must also include the following disclosures
related to the target:
-
Management’s discussion and analysis (MD&A) of financial condition and results of operations (see SEC Regulation S-K, Item 303). Typically includes an overview section about the company and its business, an analysis of the 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, a summary of the company’s critical accounting policies that highlights financial statement items for which significant management estimates and judgment are required, a tabular disclosure of contractual obligations (required unless the target would qualify as an SRC), and disclosures about off-balance-sheet arrangements. In addition to the discussion and analysis of historical information, MD&A requires companies to disclose 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.
-
Quantitative and qualitative disclosures about market risks (see Regulation S-K, Item 305). Generally describes the impact that certain market risks, such as interest rate risk, may have on the target (required unless the target would qualify as an SRC).
-
Selected financial data (see Regulation S-K, Item 301). Reflects net sales or operating revenues, income (loss) from continuing operations, income (loss) from continuing operations per common share, total assets, long-term obligations and redeemable preferred stock (including long-term debt, capital leases, and redeemable preferred stock), and cash dividends declared per common share of the target for the five most recent fiscal years (required unless the target would qualify as an SRC).
-
Comparative per share information (see Item 14(b)(10) of Schedule 14A, “Information Required in Proxy Statement,” and Form S-4, Item 3(f)).
-
A description of the target’s business (see Regulation S-K, Item 101), properties (see Regulation S-K, Item 102), legal proceedings (see Regulation S-K, Item 103), and directors and officers (including their compensation) (see Regulation S-K, Items 401, 402, and 404).
-
Risk factors related to the target (see Regulation S-K, Item 105).
Changing Lanes
On August 26, 2020, the SEC issued a
final rule4 to amend Regulation S-K, Items 101, 103, and 105, to
simplify compliance and improve the readability of the
disclosures. The amendments are effective 30 days after their
publication in the Federal Register. For additional information
about the new rule, see Deloitte’s September 3, 2020, Heads
Up.
For additional details regarding the requirements related to this
information, see Chapter 4 of Deloitte’s A Roadmap to Initial Public Offerings.
Identifying the Accounting Acquirer
In each acquisition, one of the combining entities must be identified as the
acquirer. The ASC master glossary defines an acquirer as follows:
The entity that obtains control of the acquiree. However, in a
business combination in which a variable interest entity (VIE) is
acquired, the primary beneficiary of that entity always is the
acquirer.
Accordingly, if the acquiree is a VIE, the primary beneficiary of the VIE is
considered the acquirer.
In an acquisition effected primarily by transferring cash or other assets or
by incurring liabilities, the acquirer usually is the entity that transfers
the cash or other assets or incurs the liabilities. In an acquisition
effected primarily by exchanging equity shares, the entity that issues its
equity interests to effect the transaction (the “legal acquirer”) is usually
the accounting acquirer. However, in some transactions, the legal acquirer
is determined to be the accounting acquiree, while the entity whose equity
interests are acquired (the “legal acquiree”) is for accounting purposes the
accounting acquirer. Such transactions are commonly called reverse
acquisitions. ASC 805-40-05-2 provides the following example of a reverse acquisition:
As one example of a reverse acquisition, a private operating entity
may want to become a public entity but not want to register its
equity shares. To become a public entity, the private entity will
arrange for a public entity to acquire its equity interests in
exchange for the equity interests of the public entity. In this
situation, the public entity is the legal acquirer because it issued
its equity interests, and the private entity is the legal acquiree
because its equity interests were acquired. However, application of
the guidance in paragraphs 805-10-55-11 through 55-15 results in
identifying:
-
The public entity as the acquiree for accounting purposes (the accounting acquiree)
-
The private entity as the acquirer for accounting purposes (the accounting acquirer).
Entities should consider the following factors in ASC 805-10-55-12 and 55-13
when identifying the accounting acquirer in business combinations effected
primarily by exchanging equity shares:
-
“The relative voting rights in the combined entity after the business combination.”
-
“The existence of a large minority voting interest in the combined entity.”
-
“The composition of the governing body of the combined entity.”
-
“The composition of the senior management of the combined entity.”
-
“The terms of the exchange of equity interests.”
-
The “relative size (measured in, for example, assets, revenues, or earnings)” of the combining entities.
While an evaluation of the pertinent facts and circumstances often results in
the clear identification of one of the combining entities as the acquirer,
in some transactions the determination of the acquirer may be less
straight-forward (i.e., some indicators point to one entity and others point
to the other). Since ASC 805 does not specify a hierarchy or the weight to
place on each fact and circumstance associated with the assessment, an
entity may sometimes need to use judgment. In such cases, the SEC staff
typically expects the entity’s disclosures to give financial statement users
insight into how the accounting acquirer was determined (e.g., a description
of the facts and circumstances deemed by the entity to be the most
instructive in its identification of the accounting acquirer).
A transaction in which a SPAC acquires a target must be analyzed to determine
whether the SPAC or the target is the accounting acquirer. Entities should
consider all pertinent facts and circumstances in its evaluation.
Considerations related to each potential outcome are as follows:
-
The SPAC is determined to be the accounting acquirer — The entities must assess whether or not the target meets the definition of a business in accordance with U.S. GAAP. If it does, the transaction is accounted for as a business combination and the SPAC recognizes the target’s assets and liabilities in accordance with the guidance in ASC 805-10, ASC 805-20, and ASC 805-30, generally at fair value. If the target is determined to be a group of assets that does not meet the definition of a business in accordance with U.S. GAAP, the transaction is accounted for as an asset acquisition and the SPAC recognizes the target’s assets and liabilities in accordance with the guidance in ASC 805-50, generally at relative fair value.
-
The target is determined to be the accounting acquirer — Typically, the SPAC’s only precombination assets are cash and investments and the SPAC does not meet the definition of a business in accordance with U.S. GAAP. Therefore, the substance of the transaction is a recapitalization of the target (i.e., a reverse recapitalization) rather than a business combination or an asset acquisition. In such a situation, the transaction would be accounted for as though the target issued its equity for the net assets of the SPAC and, since a business combination has not occurred, no goodwill or intangible assets would be recorded.
See Sections 3.1 and 6.8.8 of Deloitte’s A Roadmap to Accounting for
Business Combinations for additional information on
identifying the acquirer and considerations for evaluating transactions
involving SPACs.
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 30 calendar days. The entity would then respond to each
of the SEC’s comments and reflect requested edits, and include any other
necessary updates, in an amended proxy/registration statement, which the SEC
would also review. After the initial filing, the SEC’s review time can vary
significantly but typically is within two weeks. An entity can experience
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.
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 additional information on SEC comments, see
Deloitte’s A
Roadmap to SEC Comment Letter Considerations, Including
Industry Insights.
Super 8-K Requirements
The Super 8-K must be filed no later than four business days after the close
of a transaction. The 71-day extension typically available for an acquired
business does not apply to SPAC transactions. The Super 8-K must describe
the completion of the transaction (Item 2.01 of Form 8-K), the change in the
control of the SPAC, if applicable (Item 5.01 of Form 8-K), the change in
the SPAC’s shell company status (Item 5.06 of Form 8-K), and a change in the
fiscal year-end, if applicable (Item 5.03 of Form 8-K). Because the target’s
auditor generally becomes the auditor of the combined entity after the
transaction, the Super 8-K may describe a change in the certifying
accountant as well (Item 4.01 of Form 8-K). In addition, the Super 8-K must
include all the information that would be required if the target was filing
an initial registration statement on Form 10 (Item 9.01 of Form 8-K).
The form and content of the financial information required
in a Super 8-K are largely consistent with the information provided in a
proxy/registration statement. However, certain disclosures must be updated
to reflect information as of the Super 8-K filing date. For example, if
material, the pro forma financial information generally needs to be updated
to reflect the actual results of the transaction and any related financing,
rather than the minimum and maximum scenarios that may have been presented.
Further, entities should evaluate the number of annual periods and the age
of the financial statements included in the Super 8-K because more current
financial statements may be required.
In addition, 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 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 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 8-K to
provide the recently completed annual or interim period. The due date of the
amendment depends on the reporting requirements of the SPAC (i.e., its
filing status). For example, if the SPAC is a nonaccelerated filer, the Form
8-K amendment would be due within 45 days of the end of a quarter and within
90 days of the end of a fiscal year.
Example 4
SPAC A, a nonaccelerated filer, and a target both
have a calendar year-end. The transaction closes on
November 2, 20Y0.
SPAC A is required to file its Form 10-Q for the
quarter ended September 30, 20Y0, on or before
November 14, 20Y0. Since the transaction closed
after September 30, 20Y0, the Form 10-Q will include
A’s historical financial statements, with the
transaction disclosed as a subsequent event. The
Form 10-Q will not reflect the target’s financial
statements.
Within four business days of the
close of the transaction, A must file the Super 8-K
with the target’s (1) audited financial statements
for the two or three years ended December 20X9 (see
the Financial Statement
Requirements section) and (2) unaudited
financial statements for the interim periods ended
June 30, 20Y0, and June 30, 20X9. On or before
November 14, 20Y0, the Super 8-K must be amended to
include unaudited financial statements for the
interim periods ended September 30, 20Y0, and
September 30, 20X9.
Example 5
Assume the same facts as in Example 1, except that
the transaction closes on February 2, 20Y1.
SPAC A is required to file its Form 10-K for the year
ended December 31, 20Y0, on or before March 31,
20Y1. Since the transaction closed after December
31, 20Y0, the Form 10-K will include A’s historical
financial statements, with the transaction disclosed
as a subsequent event. The Form 10-K will not
reflect the target’s financial statements.
Within four business days of the
close of the transaction, A must file the Super 8-K
with the target’s (1) audited financial statements
for the two or three years ended December 20X9 (see
the Financial Statement
Requirements section) and (2) unaudited
financial statements for the interim periods ended
September 30, 20Y0, and September 30, 20X9. On or
before March 31, 20Y1, the Super 8-K must be amended
to include audited financial statements for the two
or three years ended December 31, 20Y0.
Connecting the Dots
Target companies must ensure that updated quarterly or annual
financial statements are available in a timely fashion (1) during
the proxy/registration statement process, (2) through the completion
of the transaction, and (3) on an ongoing basis thereafter. The
target, as a predecessor to the SPAC, may not “skip” a reporting
period between the Super 8-K and the first periodic report on Form
10-Q or Form 10-K that reflects the transaction.
Ongoing Reporting Requirements
After a transaction, the historical financial statements of
the target become those of the registrant. Therefore, the target’s
historical financial statements will replace those of the SPAC beginning
with the filing of the financial statements that first include the
transaction. For example, if the transaction closes on March 15, 20Y0, the
financial statements for the interim period ended March 31, 20Y0, will first
include the transaction. Therefore, the financial statements included in the
March 31, 20Y0, Form 10-Q, and all future filings will represent those of
the target and no longer the SPAC. If the SPAC is determined to be the
accounting acquirer, there will be a lack of comparability between the
predecessor and successor periods because of the new basis established for
the target’s assets and liabilities as a result of the acquisition.
Therefore, the pre- and post-transaction periods must be separated,
typically by a “black line,” to emphasize the change in the basis of
accounting in the post-transaction periods (i.e., in the fact pattern above,
the Form 10-Q would reflect the operations and cash flows of the target for
the predecessor period from January 1, 20Y0, through March 14, 20Y0, and the
successor period from March 15, 20Y0, though March 31, 20Y0, as two distinct
columns separated by a black line). For a transaction in which the target is
identified as the accounting acquirer and reverse recapitalization
accounting applies, no separation of the periods before and after the
transaction is required since there is no change in basis of the target’s
assets and liabilities.
The combined company is required to file Forms 10-K and 10-Q
in accordance with specific deadlines that depend on the combined company’s
filing status:
|
Filer
|
SEC Form 10-K
|
SEC Form 10-Q
|
|---|---|---|
|
Large accelerated filer
|
60 days after end of fiscal year
|
40 days after end of fiscal quarter
|
|
Accelerated filer
|
75 days after end of fiscal year
|
40 days after end of fiscal quarter
|
|
Nonaccelerated filer
|
90 days after end of fiscal year
|
45 days after end of fiscal quarter
|
The combined company may file a new or amended registration
statement after the transaction closes. For a reverse recapitalization, if
the combined company files a new or amended registration statement after the
filing of the first periodic report that reflects the transaction but before
the filing of the first annual report reflecting the transaction, the
combined company must consider whether the historical annual financial
statements need to be retroactively revised to reflect the recapitalization.
Also, if the combined company is not an SRC and files a new or amended
registration statement after the close of the transaction, the combined
company may need to 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 (see Regulation S-K,
Item 302). Because of these and other matters that may arise, we recommend
consultation with accounting and legal advisers.
In addition, as a public company, the combined company is also required to
file current reports on Form 8-K that disclose various material events that
may occur. Unless otherwise specified in the Form 8-K instructions, such
events must generally be disclosed within four business days after they
occur. Management should consider the controls and procedures in place to
identify these events and report them in a timely manner. It is recommended
that an entity consult with legal advisers regarding the Form 8-K reporting
requirements. For additional information on such requirements, see Section 7.3 of Deloitte’s A Roadmap to Initial Public Offerings.
Internal Control Over Financial Reporting and Disclosure Controls and Procedures
The combined company must consider the requirements that apply to public
companies related to internal control over financial reporting (ICFR) and
disclosure controls and procedures (DCPs). 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.
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 Compliance and Disclosure
Interpretations 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 had been 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 5 in the Super 8-K
Requirements section), 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.
Contacts
If you have any questions about
this publication or the related content, please contact any of the following
Deloitte professionals:
|
|
Derek
Gillespie
Partner
Audit &
Assurance
Deloitte &
Touche LLP
+ 1 212 492
4356
|
|
Will
Braeutigam
Partner
Audit &
Assurance
Deloitte &
Touche LLP
+1 713 982
3436
|
|
|
Derek
Malmberg
Partner
Audit &
Assurance
Deloitte &
Touche LLP
+1 561 962
7645
|
|
Previn Waas
Partner
Audit &
Assurance
Deloitte &
Touche LLP
+1 408 704
4083
|
|
|
Andrea
Perdomo
Senior Manager
Audit &
Assurance
Deloitte &
Touche LLP
+1 303 312
4121
|
|
Elena
Cilenti
Senior Manager
Audit &
Assurance
Deloitte &
Touche LLP
+1 216 589 5051
|
Footnotes
1
Source: SPACInsider as
of September 30, 2020.
2
For titles of FASB Accounting Standards
Codification (ASC) references, see Deloitte’s
“Titles of Topics and Subtopics in the FASB
Accounting Standards
Codification.”
3
SEC Final Rule Release No. 33-10786, Amendments to
Financial Disclosures About Acquired and Disposed
Businesses.
4
SEC Final Rule Release No. 33-10825,
Modernization of Regulation S-K Items 101, 103,
and 105.