12 Apr SEC – Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (SPACs)
April 12, 2021 – SEC guide highlighting potential accounting implications of terms that may be common in warrants included in SPAC transactions, as well as considerations related to the handling of financial reporting if an error is discovered in prior financial statements.
GAAP guidance exists to determine how to classify warrants based on facts and details. Equity-linked financial instrument (or embedded feature) must be considered indexed to entity’s own stock, to qualify for equity classification whether fixed or floating price. GAAP requires inputs determining price must be internal, SEC decided where warrant price for SPAC varied based on who owned warrant, makes it not equity, but rather a liability.
GAAP states if an event not within the entity’s control could require a net cash settlement, then the contract should be classified as an asset or a liability, rather than as equity. Limited exceptions for change in control of the entity, or nationalization of the entity. For example: if 50% of outstanding shares class of common stock approved tender, all holders of warrants would be entitled to receive cash (but not all stockholders would). SEC concluded warrants must be classified as a liability and measured at fair value, with changes in fair value reported each period in earnings, not as equity per any exception.
Errors in Prior Filings
If a registrant or independent auditors find errors in previously filed financial statements, they would then need to evaluate the materiality of the error, decide if restatement needed or not. Also need to assess if prior disclosure on evaluation of internal controls for financial reporting should be revised in amended filings if there is a control deficiency, and how bad the deficiency may be. If the determination is made that there is no need to restate prior filings, then they may send a letter to SEC explaining why the error is not material.
For more information, visit www.federalregister.gov.