Companies that go public through a merger with a special purpose acquisition company (SPAC) face several tax considerations, Chad Robottom, Dallas market president of financial advisory firm Embark, said this week in Accounting Today.
First among them is identifying the accounting acquirer. It seems on its face that the SPAC, a publicly traded blank-check company created to merge with a private company, is the entity controlling the other entity, Robottom, a CPA, said.
But your determination can't rely exclusively on Accounting Standards Codification (ASC) 805, which governs business combinations. "There could still be a significant amount of judgment required," he said.
This is especially the case in a reverse merger, in which the SPAC acquires the equity interests in the private company in exchange for equity in the SPAC.
"While the SPAC is the legal acquirer," Robottom said, "for accounting purposes, these roles are reversed."
Robottom directs tax specialists to look to ASC 805 to help determine if the transaction should be treated as a business combination or an asset acquisition accompanied by a recapitalization.
Deciding on the predecessor entity isn't straightforward, either. It's "an entirely separate process from identifying the accounting acquirer," he said. "You should perform each analysis independently from the other."
In general, the predecessor is the entity whose historical financial statements are presented as the statements for the combined entity before the transaction, but it gets complicated when there are multiple target businesses, which isn't unusual with some SPACs.
In these cases, he said, the predecessor entity should be the one that makes up the most significant portion of the combined entity's operations.
Robottom points to three other matters to consider:
- Financial statements
Since the target company is typically private before the merger, the combined company's tax team might have to revise historical financials and add additional disclosures to make them compliant with Regulation S-X and GAAP requirements for public companies before they're filed with the Securities and Exchange Commission.
- Auditing standards
The standards under which the combined company's financial statements are audited are based on the predecessor entity. If the entity is the target business, Public Company Accounting Oversight Board (PCAOB) standards apply; if it's the SPAC or other entity, but the target business still includes its historical financials in SEC filings, then American Institute of CPAs (AICPA) standards apply.
- Pro formas
Given their complexity in a SPAC transaction, pro formas should be started right away and not put off until just before the SEC filing. "Time has a way of slipping," Robottom said.