Accounting of SPAC warrants and the possible future need for issuers to change their financial statements
SPACs broke records last year and are going places this year, recording a high of raising nearly $90 billion in cash in just the first three months of 2021. Clearly, they look like lucrative investments, primarily because of the business advantages accrued thanks to the easy absorption of a firm that is primed and ready for a traditional IPO.
What’s more? It was a significant investment to make during the pandemic – it’s easier and faster to set up, and there’s less chance of issue pricing turbulence, more so now when market swings can crash and bring down a traditional IPO.
Recently, there was a reason to slam the brakes. A potential change in accounting demanded by the SEC.
The SEC issued a public statement about its worries regarding the present accounting of SPAC warrants and the possible future need for issuers to change their financial statements. Experts say that the U.S. Administration may mandate that the classification of SPAC warrants be changed from equity on the balance sheet to liability.
This accounting change could snowball into a big challenge.
- It is likely to cause market fluctuations
- The volatile SPAC market will affect profits and effect changes in earnings reports
- Companies will have heavy balance sheets as any change in a warrant’s fair market value would have to be written as profits
In the SPAC business, warrants are gold. They allow financiers the choice of obtaining shares of a firm at a particular price in the future, paving the way for good profits with minimal investment.
To make matters worse, the SEC remains vague with its stance on warrants. This lack of clarity has frozen the announcement and formation of SPACs as accounting firms shy away from certifying any financial statements or company audits until they receive specific instructions from the government.
The accounting change for SPAC warrants leaves another sector in turmoil. The issue of compliance.
When changes are imminent, the rules are going to be rewritten. Any government mandate comes with regulatory reporting requirements in tow. If existing systems are not foolproof to adapt to new reporting arrangements, then the whole process can go haywire and crash anytime.
The legal and finance force within the organization should prepare for a deluge of new compliance measures that could be introduced by the SEC. If a change from equity to liability has been announced, any firm will need to rework its accounts statements for all specified years to include changes acceptable to the SEC- a major task for many private firms who may have dreamt of going public in the recent past.
Are you thinking of giving up on your dreams? Hold on! All is not lost yet.
DataTracks can help companies understand the different reporting demands of the SEC and guide organisations through the entire journey. We have a flagship product – Rainbow – to help accounting, finance, and legal departments save time and resources.
Easy to use, on a secure cloud, and with keen collaborative nuances, Rainbow may the answer to your SPAC concerns. Role hierarchies, intuitive controls, and validations, as well as a granular audit trail, make Rainbow one of the most effective compliance SaaS in the market today.
The SPAC world is changing fast. With effective financial reporting through efficient technology from DataTracks, gain a definitive edge over competitors today!
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