This publication was updated on September 14, 2021, to address additional accounting considerations. Note that it was also updated on February 10, 2021; March 19, 2021; March 25, 2021; and April 30, 2021, to reflect additional interpretive guidance on financial statement presentation for reverse recapitalizations, accounting for shares and warrants issued by a SPAC, classifying share-settleable earn-out arrangements, share-based payment considerations, and the availability of nonpublic review for registration statements on Form S-4. It also includes considerations related to CF Disclosure Guidance Topic 11 as well as recently adopted amendments to Regulation S-K. Text that has been added or amended since this publication’s initial issuance has been marked with a boldface italic date in brackets.
For titles of FASB Accounting Standards Codification (ASC) references, see Deloitte’s “Titles of Topics and Subtopics in the FASB Accounting Standards Codification.”
SEC Final Rule Release No. 33-10786, Amendments to Financial Disclosures About Acquired and Disposed Businesses.
SEC Final Rule Release No. 33-10876, Qualifications of Accountants.
SEC Final Rule Release No. 33-10890, Management’s Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information.
SEC Final Rule Release No. 33-10825, Modernization of Regulation S-K Items 101, 103, and 105.
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 the Accounting for Issuance Costs section for more information).
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.
Class B Shares generally convert 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.
Public Warrants generally meet 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 contain all the characteristics in ASC 815-10-15-83.
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 $18.00 for a defined number of trading days. This feature is only considered an exercise contingency because it does not change the settlement terms.
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.
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.
In the example, the difference arises because of the reference to Section 6 of the Warrant Agreement, which explains that Public Warrants are subject to redemption (i.e., forced exercise) whereas Private Placement Warrants are not.
As discussed above, this section assumes 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.
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.
See footnote 16.
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, the discussion in this section is focused on earn-out arrangements.
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 further information, see the Share-Based Payment Considerations section.
Contracts that contain 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 as opposed to equity-linked instruments.