Anyone following the financial news over the past year or so will have seen the hype around Special Purpose Acquisition Companies, or SPACs. In fact, in 2021 alone, there were 612 SPAC IPOs, out of a total of 967 IPOs.
Well known companies have taken the SPAC route to an IPO, including the likes of DraftKings and Virgin Galactic Holdings, showing just how popular this method has become.
There are over 500 SPACs currently in existence – that is, entities that have completed IPOs and are now looking for companies to take public.
From an accounting perspective, one thorny issue is lease accounting, particularly compliance with Topic ASC 842, the new lease accounting standard that replaced the old ASC 840.
ASC 842: a quick primer
While ASC 842 has been mandatory for public companies, it’s only from January 2022 that the standard becomes a requirement for private companies. While early adoption was allowed by the standard, many companies elected not to do so.
Part of the reason for this is the significant changes from the previous lease accounting standard.
For one thing, the definition of a lease has changed. This impacts numerous areas including contracts that may contain a lease element according to the new standard.
Another area is the income statement and balance sheet: in the past, operating leases could just be expensed through the income statement, but today a right-of-use asset and lease liability must be created.
Furthermore, sometimes complex calculations are now involved; from ascertaining the present value of future lease payments using the appropriate discount rate, to lease modifications that have to follow the guidelines set out in ASC 842.
Lease practices for SPACs including common pitfalls
When a SPAC takes a private company public, that company now has to be fully compliant with the ASC 842 requirements, like any other public company. This can be a very sudden, and very dramatic, change.
In the past, it also mattered whether the transaction related to an “Emerging Growth Company,” or EGC, or a non-EGC. In a nutshell, the differences here are that an EGC has gross revenue under $1.07bn, non-convertible debt under $1bn, and a public float of less than $700m.
Non-EGCs had to file from the beginning of January 2019, while EGCs were allowed to hold off until 1 January 2022.
This distinction is less relevant today, as from 1 January 2022, all companies have to be ASC 842 compliant. However the problem is that most private companies have not set up the groundwork for such compliance, which can be a critical issue.
There is also the area of certain policy election options, particularly when it comes to the discount rate used – private companies can use their incremental borrowing rate (IBR) or risk-free rate, while public companies cannot make this choice.
All this shows that a private company listing through a SPAC has numerous critical lease accounting-related issues to deal with, that can jeopardize a deal or place them in the sights of regulators.
Best practice: the time for implementing a solution is now
One clear lesson that has emerged from SPACs taking private companies public, is that dealing with accounting issues early – particularly when it comes to lease accounting and ASC 842 compliance – is so important, and should not be neglected before it’s too late.
The easiest and most straightforward way for any company to ensure a smooth transition to ASC 842 and ensure compliance, is through the use of automated lease accounting software.
Trullion offers world-class AI-powered software, that ensures:
- Seamless compliance with ASC 842
- Accurate and consolidated reports in minutes
- Significantly reduced costs and immediate ROI
- The ability to effortlessly trace your audit trail back to the source data
- Simple reports and clear financial schedules
- Fully compliant disclosures
With Trullion, whether your private company is considering the SPAC route or not, you can ensure that you are ready for any eventuality. And with leases shaping up to be a key area of audit attention in 2022, this is more important now than ever before.
To find out more about how quickly you can implement Trullion’s solution and get ahead of ASC 842, get in touch with us today.