Special Purpose Acquisition Corporations (“SPACs”) often issue warrants as part of their formation and registration as a public entity. These warrants can be structured in many ways that can impact their accounting treatment and whether they are treated as equity or debt. The Securities and Exchange Commission (“SEC”) has recently been focused on this warrant accounting treatment. Many SPACs have treated the warrant issuance as equity when in fact the warrants should have been classified as debt recorded at fair value, and any changes in fair value from period to period would flow through the income statement.
Issues to consider:
- Review the accounting treatment with your accounting firm (ASC 815).
- An equity linked financial instrument must be considered indexed to an entity’s own stock to qualify as equity.
- If the warrant does not qualify for equity treatment it should be classified as a liability and carried at fair value.
- A valuation of the warrants will need to be performed at the IPO date and for subsequent quarters.
- If after reviewing ASC 815 a registrant has determined an error in previously issued financial statements has occurred, the materiality of the error will need to be assessed to determine whether a restatement is required.
A recent statement from two officials at the U.S. Securities and Exchange Commission is further gumming up the administrative gears behind processing new SPAC issuances and deal completions.