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!


A New Role at the SEC – ESG Senior Policy Advisor

On February 1, 2021, Satyam Khanna was named Senior Policy Advisor for Climate and ESG in the office of Acting Chair Allison Herren Lee.

As noted in this Press Release, in this new role, Mr. Khanna will “advise the agency on environmental, social, and governance matters and advance related new initiatives across its offices and divisions.”

You can read more about the role and Mr. Khanna’s background in the Press Release.

A New “Dear CFO” Letter – Securities Offerings and Price Volatility

It has been a while since CorpFin issued a “Dear CFO” letter.  These sample comment letters, which historically started with the salutation “Dear CFO,” advise companies about rapidly emerging disclosure and accounting concerns.  On February 8, 2021, with an update in the salutation to “Dear Issuer,” the staff issued this “Sample Letter to Companies Regarding Securities Offerings During Times of Extreme Price Volatility.”

Among the issues the sample letter addresses are:

  • Providing an appropriate description of the volatility of the company’s stock price,
  • Including risk factors addressing price volatility, and
  • Explaining the effects of a potential “short squeeze” on investors.

In these times of volatility and change it will be interesting to see how many “Dear Issuer” letters the SEC promulgates.

As always, your thoughts and comments are welcome!

Where to Place the Performance Graph? A Filed Versus Furnished Example

A frequent question in our SEC Reporting Skills Workshop is “What the heck is going on with the performance graph required by S-K Item 201(e)?”  This question stems from a bit of history about the performance graph, an obscure instruction, and the distinction between furnished and filed documents.

(Spoiler alert:  The graph is not required in Form 10-K and can be furnished in the annual report to shareholders.)

S-K 201(e) requires a five-year line graph comparing the annual percentage change in the registrant’s cumulative total shareholder return on a class of common stock with the cumulative total return of a broad equity market index and a published industry, line-of-business or peer index.  You can read all the details of the requirement here.

Here is an example of the graph from Coca Cola’s 2019 Form 10-K.



Where to place the graph turns out to be a murky question.  Originally, this graph was a required proxy disclosure.  Several years ago, when the SEC expanded the proxy executive compensation disclosures, they proposed to remove the graph.  Several commenters on the proposal asked the SEC to retain the requirement, stating that it provided valuable information.  The SEC did not want to include the graph in the proxy for a variety of reasons.  As a compromise, the Final Rule added the graph to S-K Item 201.  What the Final Rule did not do was require the graph in Form 10-K.

This is where the filed versus furnished question arises.  Historically, the graph was not filed information.  It was simply furnished in the proxy.  If the SEC had required the graph in Form 10-K it would have become filed information and subject to the 1934 Act’s liability provisions for filed information.  To keep this from happening, the SEC added the following instruction to S-K Item 201(e):

  1. The information required by paragraph (e) of this Item need not be provided in any filings other than an annual report to security holders required by Exchange Act Rule 14a-3 (17 CFR 240.14a-3) or Exchange Act Rule 14c-3 (17 CFR 240.14c-3) that precedes or accompanies a registrant’s proxy or information statement relating to an annual meeting of security holders at which directors are to be elected (or special meeting or written consents in lieu of such meeting). Such information will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.

Unfortunately, this instruction was kind of hidden after an instruction for smaller reporting companies.

The bottom line is that the graph does not have to be in Form 10-K and does not have to be filed information.  It can be included in the annual report to shareholders, which is furnished, not filed. Companies that put the graph in the part of the annual report to shareholders that is not included in Form 10-K do not subject the disclosure to the 1934 Act’s liability provisions.

This annual report from Cracker Barrel Old Country Store provides an example of how the graph can be placed in the “wrap” pages of a “10-K wrap” annual report to shareholders.  This means the graph is not included in the filed Form 10-K.  You will find the graph on the back cover of the Cracker Barrel Old Country Store annual report to shareholders.

Lastly, to further illustrate the confusion about this graph, here is an SEC comment letter and company response about the placement of the graph.

The SEC Comment Letter

Re: Monro Muffler Brake, Inc.

Form 10-K for the Fiscal Year Ended March 28, 2015

Dear Ms. D’Amico:

We have limited our review of your filing to the financial statements and related disclosures and have the following comments. In some of our comments, we may ask you to provide us with information so we may better understand your disclosure.

Please respond to these comments within ten business days by providing the requested information or advise us as soon as possible when you will respond. If you do not believe our comments apply to your facts and circumstances, please tell us why in your response.

After reviewing your response to these comments, we may have additional comments.

Form 10-K for the Fiscal Year Ended March 28, 2015

Item 5. Market for the Company’s Common Equity and Related Stockholder Matters, page 16

  1. Please tell us your consideration for including the performance graph as required by Item 201(e) of Regulation S-K.


The Company’s Response

Item 5. Market for the Company’s Common Equity and Related Stockholder Matters

  1. Please tell us your consideration for including the performance graph as required by Item 201(e) of Regulation S-K.

Response: It is our understanding that the performance graph is required to be included in the Company’s annual report to stockholders, but not in its Form 10-K. This understanding is based on Instruction 7 to Item 201(e) of Regulation S-K, which states that “the information required by paragraph (e) of Item 201 need not be provided in any filings other than an annual report to security holders required by Exchange Act Rule 14a-3 or Exchange Act Rule 14c-3 that precedes or accompanies a registrant’s proxy or information statement relating to an annual meeting of security holders at which directors are to be elected (or special meeting or written consents in lieu of such meeting).” Further the staff of the Division of Corporation Finance has indicated in Regulation S-K Compliance and Disclosure Interpretations Question 106.10 that the performance graph is not required to be included under Item 5 of Form 10-K and need only be provided in the issuer’s annual report to stockholders.

The performance graph as required by Item 201(e) of Regulation S-K is included in the Company’s 2015 Annual Report under the Financial Highlights section on page 5.


SEC Response

Dear Ms. D’Amico

We have completed our review of your filing. We remind you that our comments or changes to disclosure in response to our comments do not foreclose the Commission from taking any action with respect to the company or the filing and the company may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States. We urge all persons who are responsible for the accuracy and adequacy of the disclosure in the filing to be certain that the filing includes the information the Securities Exchange Act of 1934 and all applicable rules require.

As always, your thoughts and comments are welcome!