Analysis

SEC addresses accounting treatment of warrants

, JD Supra

On April 12, 2021, the U.S. Securities and Exchange Commission (SEC) published a joint statement by John Coates, Acting Director of the Division of Corporation Finance, and Paul Munter, Acting Chief Accountant, which provides their view on the accounting treatment of warrants issued by special purpose acquisition companies (SPACs). This statement, titled Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (SPACs),1 suggests that the SEC staff has concerns that the warrants issued by many SPACs should be properly accounted for under the liability method on the balance sheet. As such, the staff advises that companies with these outstanding warrants consider the need to amend previously-filed audited and unaudited financial statements.

SPACs, targets in pending de-SPAC transactions, or the combined companies following de-SPAC transactions, should review carefully the terms of any outstanding warrants, including those issued in connection with the formation of the SPAC and at the initial public offering of the SPAC. Management, in consultation with counsel and the independent auditors, should review the warrant agreements in their entirety in order to determine whether the warrants trigger liability accounting. This review and determination should be documented, as the company's independent auditors may well require supporting documentation for any determination of the classification of such warrants.

If the warrants were previously classified as equity but should have been accounted for as debt, then companies should work in close coordination with counsel and their independent auditors in order to determine what periods may require fair value determinations, and whether those determinations will need to be performed by valuation specialists. In addition, companies should also undertake a SAB 99 materiality analysis to determine whether the accounting errors were material and, if so, whether a restatement of previously-filed financial statements will be necessary, which would require a Form 8-K filing under Item 4.02 as well as amendments to previously-filed Form 10-K and Form 10-Q filings, or whether only a revision will be necessary, which would require error corrections to be included in the next filed Form 10-K or Form 10-Q

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