Category Archives: Reporting

Disruption for SPACs – Debt versus Equity and Possible Restatements

Debt versus equity classification for complex financial instruments has caused more public company restatements over the last 15 years than almost any other issue.  SPACs almost always issue warrants in their original formation and subsequent IPO.  These warrants, as it turns out, frequently have complex features that raise debt versus equity questions.

On April 12, 2021, the Acting Director of the Division of Corporation Finance and the Acting Chief Accountant issued a statement – “Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”).”

The Statement notes that the staff has recently evaluated fact patterns surrounding SPAC warrants.  It would appear that this review has found situations where SPACs may not have properly accounted for warrants and may need to restate financial statements.  It is important to remember that this complex issue depends on the specific features of each warrant.  Warrants with very similar features can have very different accounting treatments.

The Statement addresses two areas where, if SPACs did not properly apply GAAP, and the amounts involved are material, restatement would be required.  The issues focus on

  1. whether the instruments are “indexed” to the issuer’s equity, and
  2. whether certain redemption provisions could trigger a cash settlement where all equity holders do not participate equally.

The US GAAP “indexation guidance” requires a close link between the fair values of a SPAC’s warrants and equity securities.  If the warrants have features that break this relationship, they are not “indexed to the company’s stock” and must be classified as liabilities.  This technical and complex determination generally depends on the inputs to the warrant’s fair value computation.

The redemption issue focuses on whether a warrant could require a net cash settlement which is outside the control of the issuer.  This generally would require liability classification.  There is an exception to this requirement that if the holders of the warrants and all the underlying securities would receive a cash settlement, equity classification could still be appropriate.  This can be a very complex and technical determination based on the specific provisions of a warrant.

If a SPAC has issued warrants that involve these issues and did not appropriately classify the warrants as liabilities, restatement would be required if the amounts are material.

The Statement provides reminders about the restatement process, related Internal Control Over Financial reporting issues, potential requirements to file an Item 4.02 Form 8-K and communication issues related to Reg FD.

The number of SPAC restatements and the ultimate market impact will unfold in coming weeks.

As always, your thoughts and comments are welcome!

De-SPAC Transaction Liability – A Public Statement from the CorpFin Acting Director

On April 8, 2021, Acting CorpFin Director John Coates issued a Public Statement – “SPACs, IPOs and Liability Risk under the Securities Laws.”

Mr. Coates briefly reviews how SPACs, as shell companies, raise capital in an IPO and use this capital to acquire a private company in a “de-SPACing transaction.”  The de-SPACing transaction is structured so that the SPAC’s public company status and exchange listing survive to the combined entity.  Given the volume and complexity of these transactions, Mr. Coates affirms that the CorpFin staff is “continuing to look carefully at filings and disclosures by SPACs and their private targets.”

He then provides a thoughtful discussion about legal liabilities in disclosures surrounding de-SPACing transactions.  He addresses various “claims” that de-SPACing transactions present reduced liability compared to a traditional IPO transaction.  As an example, part of the discussion addresses how the 1995 Private Securities Litigation Reform Act applies to disclosures, particularly projections, in de-SPACing transactions.  Mr. Coates explores the definition of initial public offering and whether a de-SPACing transaction, where a private company is seen by the public for the first time, could be an initial public offering as contemplated in the 1995 Act.  If this were the case, the 1995 Act safe harbors might not apply to de-SPACing transactions.

There is much relevant discussion along with suggestions for next steps in Mr. Coates statement.

As always, your thoughts and comments are welcome.

ESG and Lending Tied Together in Real Life

On April 6, 2021, BlackRock filed an Item 2.03 Form 8-K disclosing a new credit agreement.  Generally, this is not a particularly newsworthy event.  This agreement though, while increasing the company’s revolving credit line by $400,000,000 to $4,400,000,000, also includes provisions linking the interest rate and commitment fee to various ESG factors.

BlackRock’s lending costs can increase or decrease depending on how well it meets or fails to meet targets related to:

  • Black, African American, Hispanic and Latino Employment Rate,
  • Female Leadership Rate, and
  • Sustainable Investing AUM (Assets Under Management) Amount.

You can find the details of the ESG adjustments in the amendment to the credit agreement filed as an exhibit to the Form 8-K.

You can read more about BlackRock’s ESG perspectives in this Letter to CEOs from BlackRock Chairman and CEO, Larry Fink.

This new lending arrangement puts ESG even more squarely in the spotlight for BlackRock.

As always, your thoughts and comments are welcome.

SPACs in the SEC Spotlight

On March 31, 2021, the SEC published two SPAC related statements:

The SEC’s Acting Chief Accountant, Paul Munter, issued a Public Statement titled “Financial Reporting and Auditing Considerations of Companies Merging with SPACs,”


The Division of Corporation Finance issued a “Staff Statement on Select Issues Pertaining to Special Purpose Acquisition Companies.”

Here are highlights of the issues addressed in the two pronouncements.

The Chief Accountant’s Statement addressed considerations in several complex areas related to “de-SPACing” transactions:

Market and Timing, including the challenges that can arise from the limited time a SPAC has to identify an acquisition candidate and the pressures this can create for the candidate to meet the reporting requirements for the de-SPACing transaction and subsequent SEC reporting,

Financial Reporting, including the need for qualified professionals to deal with complex issues frequently found in financial reporting for SPAC related companies,

Internal Control, including both Internal Control Over Financial Reporting and Disclosure Controls and Procedures requirements,

Corporate Governance and Audit Committee issues, with a focus on the need for appropriate board and audit committee oversight after a de-SPACing transaction, and

Auditor matters, in particular the SEC’s requirements for auditor independence as they relate to SPAC transactions.

CorpFin’s Statement focused on:

Shell Company Restrictions, including the requirements for a “Super 8-K” and a reminder that a former shell company will be an “ineligible issuer” for three years following the completion of a business combination,

Books and Records and Internal Control Requirements, with a reminder that after a SPAC related business combination the company will need “the necessary expertise, books and records and internal controls to provide reasonable assurance of timely and reliable financial reporting,” and

Initial Listing Standards of National Securities Exchanges, including reminders about continuing listing and governance requirements.

The issues mentioned above, as well as all the other detailed guidance in both Statements, will be addressed in our April 20 conference, “The SPAC Life Cycle: Business, Legal and Accounting Considerations Forum 2021.”

As always, your thoughts and comments are welcome!

SEC’s New “One-Stop” ESG Web Page

In recent months the SEC has announced a number of ESG iniatives ranging from an increasing focus on ESG matters in the review process to an ESG focused task force in the Enforcement Division.

To help “bring together agency actions and the latest information about environmental, social and governance investing” the SEC has added a new web page – “SEC Response to Climate and ESG Risks and Opportunities.”  You can find a link to the recent “Request for Comment on Climate Disclosure” on the new web page.

As always, your thoughts and comments are welcome!

Human Capital Resources Reminders From the SEC

Thanks to the ever-vigilant Alyson Claybaugh of Intelligize, below are two recent SEC comments focused on human capital resources disclosures.  Both comments relate to Form S-1 disclosures:

Employees, page 132

  1. Please amend your disclosure to describe any human capital measures or objectives that you focus on in managing your business, if material. See Item 101(c)(2)(ii).

Employees, page 100

  1. Please amend your disclosure to provide a more detailed discussion of your human capital resources, including any human capital measures or objectives upon which you focus in managing your business. For example, describe any measures or objectives that address the development, attraction, and retention of personnel. See Item 101(c)(2)(ii) of Regulation S-K. Alternatively, please tell us why you believe you are not required to include this disclosure.

The above comments provide reminders about this now effective requirement in Regulation S-K Item 101:

“A description of the registrant’s human capital resources, including the number of persons employed by the registrant, and any human capital measures or objectives that the registrant focuses on in managing the business (such as, depending on the nature of the registrant’s business and workforce, measures or objectives that address the development, attraction and retention of personnel).”

As always, your thoughts and comment are welcome!

Check Out PLI’s SEC Reporting Practice Guides

Thanks to Gary M. Brown of Nelson Mullins Riley & Scarborough LLP and frequent SEC Institute workshop leader, we have three publications that provide practical SEC reporting tools:  Master the 8-K, Master the 10-K and 10-Q, and Master the Proxy Statement.  These practice guides help you answer SEC reporting questions by organizing the SEC’s guidance for a particular reporting issue in a logical and easy-to-use format.  Each book also includes practical reporting tips.  Links to each of the three publications are included below:


10K Book



CorpFin to Increase Focus on Climate-Related Disclosures

On February 24, 2021, Acting Chair Allison Herren Lee issued this “Statement on the Review of Climate-Related Disclosure.”  In the statement she directs CorpFin to “enhance its focus on climate-related disclosure in public company filings.”  She also refers to the SEC’s 2010 Release FR 82 – Commission Guidance Regarding Disclosure Related to Climate Change.  Acting Chair Herren Lee indicates that experience gathered in the staff’s review of climate-related disclosures will be used to update this guidance.

As always, your thoughts and comments are welcome!

Contingent Consideration and an SEC Comment

One of the more challenging estimates accounting for business combinations requires us to make is the fair value of contingent consideration.  This seems like a particularly challenging process because one of the reasons contingent consideration may be part of a deal is that the buyer and seller of the business could not agree on a price!  Nevertheless, in a transaction that involves contingent consideration ASC 805 states:

Contingent Consideration


The consideration the acquirer transfers in exchange for the acquiree includes any asset or liability resulting from a contingent consideration arrangement. The acquirer shall recognize the acquisition-date fair value of contingent consideration as part of the consideration transferred in exchange for the acquiree.

So, despite the fact that the buyer and seller of the business did not agree on a price, we accountants estimate the fair value of the contingent consideration.

As time passes and circumstances evolve or become clearer this estimate is bound to change.  Hence this subsequent measurement guidance:

Contingent Consideration


Some changes in the fair value of contingent consideration that the acquirer recognizes after the acquisition date may be the result of additional information about facts and circumstances that existed at the acquisition date that the acquirer obtained after that date. Such changes are measurement period adjustments in accordance with paragraphs 805-10-25-13 through 25-18 and Section 805-10-30. However, changes resulting from events after the acquisition date, such as meeting an earnings target, reaching a specified share price, or reaching a milestone on a research and development project, are not measurement period adjustments. The acquirer shall account for changes in the fair value of contingent consideration that are not measurement period adjustments as follows:

a.  Contingent consideration classified as equity shall not be remeasured and its subsequent settlement shall be accounted for within equity.

b.  Contingent consideration classified as an asset or a liability shall be remeasured to fair value at each reporting date until the contingency is resolved. The changes in fair value shall be recognized in earnings unless the arrangement is a hedging instrument for which Topic 815requires the changes to be initially recognized in other comprehensive income.

Changes to estimates of contingent consideration, except in extremely simple cases, are inevitable.  And, the opportunity to use such estimates for earnings management or other manipulative purposes is clear.  As you would expect, the SEC CorpFin staff asks questions when they see unusual fluctuations.  Here is one example comment:

  1. We note a significant gain of $31 million recorded during 2017 relating to a reduction in the contingent consideration of an acquisition in 2015. Please tell us, and revise to disclose, the nature of the events that lead to the reduction in the contingent consideration and how the reduced amount was calculated or determined.

The issue in the company’s financial statements underlying this comment was a decrease in SG&A from $151,353,000 in 2016 to $133,314,000 in 2017.  Net income for 2017 increased over net income for 2016 by $2,500,000.  The company’s disclosures surrounding this challenging contingent consideration estimate included the following: (note that the amounts in this footnote are in 000’s)

Note 1 –    GENERAL (Cont.)


In July 2015, the Company acquired a division from an Israeli-based company (the “Seller”), for a total consideration of approximately $154,000, of which approximately $40,000 is contingent consideration, which may become payable on the occurrence of certain future events.

In December 2016, following certain claims and allegations demanding indemnification pursuant to the asset purchase agreement, the Company signed a settlement agreement with the Seller, in which the parties agreed on certain cash payments and a reduction of up to $4,000 from any contingent consideration payment to Seller. During 2017, the Company recognized a reduction of approximately $31,200 in its contingent consideration related to the acquisition of the division from the Seller (the reductions in the contingent consideration offset general and administrative expenses).

With all that as prelude, here is the company’s response to the SEC’s comment:


The asset purchase agreement (“APA”) applicable to the 2015 acquisition provided for contingent consideration to be paid to the seller if the acquired division met certain post-acquisition performance targets.  Such performance targets were based on accumulated revenues during, and surplus backlog (based on actual orders received) at the end of, an earn-out period starting January 1, 2015 and ending December 31, 2017 (the “earn-out period”).

It should be noted that due to orders that could have been booked up to the last day of the earn-out period, the surplus backlog could be finally determined only at the end of 2017, based on order bookings and revenues up to that date.

The APA provided that any contingent consideration was to be determined following the end of 2017, with the Company delivering its calculation thereof to the seller by March 31, 2018, whereupon the seller would have a period of 45 days to review and notify the Company of any dispute with Company’s computation of the earn-out.

Following the end of the earn-out period, on December 31, 2017, the Company considered the facts and circumstances at that date and performed a detailed analysis involving the sales & marketing, finance and corporate management departments, to conclude whether the acquired division’s performance achieved the targets set forth in the APA. The Company’s analysis included a review of the acquired division’s actual revenues during the earn-out period as well as a review of the actual backlog as of December 31, 2017, the earn-out period expiration date.

Additionally, because of a possible commercial dispute with the seller due to the possible subjective judgment involved in determining the surplus backlog, and since the seller’s review and dispute period had not commenced, the Company assessed the likelihood of whether the seller might object to such a determination and retained contingent consideration of $4.5 million, which represented the Company’s best estimate for a potential settlement after the seller’s review of the calculations. Accordingly, the Company recognized a net gain of approximately $31 million resulting from the adjustment of the carrying amount of the earn-out contingent liability at December 31, 2017, which was recognized in general and administrative expenses on the consolidated statements of income.

During the first quarter of 2018, the Company delivered to the seller a schedule setting forth a computation of the earn-out amount, informing the seller that the performance targets under the APA were not met and no earn-out payment was required. During the second quarter of 2018, the seller’s review period expired without any claims made by the seller. Therefore, the Company decreased the earn-out contingent liability to $0.

In view of the circumstances described above regarding the contingent earn-out obligation and its resolution and finalization during 2018, we propose the following additional disclosure in our future filings, commencing with our 2018 Form 20-F, which will be filed in March 2019 (revisions are marked in underlined italics for the convenience of the Staff):

“During 2018 and 2017, the Company recognized reductions of approximately $4,500 and $31,200, respectively, in its earn-out contingent liability related to the acquisition of a division, since the Company concluded that the acquired division had not achieved the performance requirements necessary for making contingent earn-out paymentsFurther, in May 2018, the period in which the Seller could have filed a dispute over the earn-out computation expired without any claim or demand from the Seller. The income resulting from the reductions in the contingent consideration liability was recognized in general and administrative expenses.”

The next letter from the SEC?  The one we like to see:

We have completed our review of your filing. We remind you that the company and its management are responsible for the accuracy and adequacy of their disclosures, notwithstanding any review, comments, action or absence of action by the staff.

 Yes, it is an estimate.  And yes, it is challenging.  And yes, a reasonable, well documented approach to such estimates is crucial!  This will become even more important when the PCAOB’s new standard about auditing accounting estimates becomes effective.  More about this in a future post.

As always, your thoughts and comments are welcome!