Q2 2021 Quarterly Outlook

The latest on SPACs

Although special purpose acquisition companies (SPACs) have been around for decades, they have recently exploded in popularity. While SPACs can offer certain advantages over IPOs, such as quicker access to the capital markets, their use can also raise challenges. The SEC and others are monitoring the SPAC boom and responding as needed.

Warrants issued by SPACs (April 2021). The Office of the Chief Accountant and the Division of Corporation Finance issued a joint statement on two accounting considerations for warrants issued by SPACs.

• Indexation. An equity-linked financial instrument (or embedded feature) must be considered indexed to an entity’s own stock to qualify for equity classification. Provisions that change the settlement amount of the warrants based on the characteristics of the holder preclude equity classification. Warrants with these provisions are classified as liabilities and measured at fair value.
• Tender offer provisions. Certain cash tender offer provisions that require the SPAC to settle its warrants for cash preclude equity classification. Warrants with these provisions are classified as liabilities and measured at fair value.

The joint statement also discusses filing and other considerations if the registrant and auditor determine that there is an error in previously filed financial statements related to these warrants.

Liability risk under the securities laws (April 2021). The Division of Corporation Finance issued a statement that focuses on legal liability associated with disclosures made as part of ‘de-SPAC’ transactions, with a focus on presenting projections in registration and/or proxy statements.

Other accounting and reporting issues (March 2021). The Division of Corporation Finance issued a statement that addresses accounting, reporting and governance issues that a private company should consider before it merges with a SPAC. Additionally, the Office of the Chief Accountant issued a statement outlining considerations related to financial reporting, internal controls, auditors, and other unique risks and challenges that arise when a private company enters the public markets through a merger with a SPAC.

Disclosure considerations (December 2020). The Division of Corporation Finance issued guidance about disclosure considerations for SPACs in connection with their IPO and subsequent business combination transactions. The staff stressed the importance of expanded disclosure of potential conflicts of interest that may arise from economic interests of the SPAC sponsors, directors, officers and affiliates that are different from the economic interests of the public shareholders.

CAQ response. Following the recent statements from the SEC staff, the Center for Audit Quality (CAQ) issued an Alert with key considerations for auditors and audit committees related to the unique risks and challenges of a private company entering the public markets through a merger with a SPAC.

ESG-related developments

Investor demand for environmental, social and governance (ESG) disclosures is rapidly increasing and evolving. But, as the volume of disclosure increases, there is growing acknowledgment that the information lacks comparability and consistency across entities. While the SEC and others conduct outreach and consider potential solutions, financial reporting professionals are encouraged to monitor these developments and look to existing resources to better understand ESG reporting and the effects of ESG-related risks on their financial statements.

ESG risk in the financial statements

To help answer questions from investors and other interested parties, the FASB staff issued an educational paper that discusses the intersection of ESG matters with US GAAP, and highlights how environmental issues may affect the financial statements.

Separately, the Sustainability Accounting Standards Board (SASB) issued a technical bulletin to help investors and others better understand, measure and manage their exposure to climate-related risks and opportunities. The SASB’s research finds that climate change is likely to materially affect nearly every industry, although it manifests differently in each one. The bulletin includes a breakdown of financial impact by industry, an overview of current disclosure practices, and a full table of SASB’s climate-related metrics and associated risks across 77 industries.

SEC focus on climate-related disclosures

On February 24, then Acting SEC Chair, Allison Herren Lee, issued a statement indicating that the Division of Corporation Finance will enhance its focus on climate-related disclosure in public company filings. Specifically, the staff will review the extent to which a company’s disclosures address the 2010 Interpretive Guidance on climate change-related disclosure, assess companies’ compliance with disclosure obligations under the federal securities laws, and develop an understanding of how the market is managing climate-related risk.

On March 15, Lee expanded the focus on climate-related disclosures in a statement requesting public comment on a series of questions by June 13. The SEC will consider the responses in its evaluation of current climate-change disclosure rules and guidance to facilitate future rulemaking in this area.

Gary Gensler, new SEC Chairman, has reinforced this area as an SEC priority. In early May, Gensler told the House of Representatives Financial Services Committee that he expected the SEC to propose new rules on climate risk disclosures in the second half of 2021.

International developments

Following its public consultation in 2020 on sustainability reporting, the IFRS Foundation published proposed amendments to its Constitution to accommodate the formation of a new International Sustainability Standards Board to set IFRS sustainability standards. The comment period ends July 29.

Separately, the EU issued a proposal for a Corporate Sustainability Reporting Directive (CSRD) that would amend the existing reporting requirements of the Non-Financial Reporting Directive and significantly expand the scope of ESG reporting by companies operating in the EU.

The CSRD would:

• extend the scope to all ‘large’ companies (including, for example, a large EU subsidiary of a US parent) and all companies (other than micro-companies) with securities listed on EU-regulated markets;
• require limited assurance over ESG reporting, including the processes followed in preparing it; and
• introduce more detailed reporting requirements and require the companies within its scope to comply with the mandatory EU sustainability reporting standards.

The proposed CSRD would take effect in 2023, with a three-year deferral for small and medium-sized listed companies. These changes would extend the scope of reporting from under 12,000 to nearly 50,000 companies.

Other SEC headlines

New SEC requirements; PCAOB proposed rule for companies with audit firms in certain jurisdictions

In March, the SEC released an interim final rule that addresses certain components of the Holding Foreign Companies Accountable Act (HFCAA), which became law on December 18, 2020. Specifically, the amendments will require companies audited by a registered public accounting firm in a foreign jurisdiction in which the PCAOB is unable to inspect to submit and disclose certain information in connection with their annual report. Companies will not be required to comply until the SEC establishes a process and provides appropriate notice. The interim final rule became effective on May 5.

In May, the PCAOB issued a proposed rule related to its responsibilities under the HFCAA and the related process being developed by the SEC. The proposed rule would provide a framework for the PCAOB to use when determining whether it is unable to inspect or investigate completely registered public accounting firms located in a foreign jurisdiction because of a position taken by one or more authorities in that jurisdiction. The comment period ends July 12.

SEC staff observations on insurance disclosures

The AICPA Insurance Entities Expert Panel recently issued the minutes of its December 2020 meeting with the SEC staff. Matters discussed include (1) disclosures about short-duration contracts, investments and non-GAAP measures, (2) effects of COVID-19 on the insurance industry and (3) implementation issues related to applying ASU 2016-13 (credit losses) and ASU 2018-12 (targeted improvements to long-duration contracts).

SEC reminder to disclose complete information on Form NT

The SEC’s Division of Enforcement recently announced a series of actions involving certain companies failing to disclose that their request for seeking a delayed quarterly or annual reporting filing (Form 12b-25) was caused by an anticipated restatement or correction of prior financial reporting. The violations were uncovered by an initiative focused on Form 12b-25 filings by companies that quickly thereafter announced financial restatements or corrections.

These actions serve as a reminder to registrants that they are required to file Form 12b-25 ‘Notification of late filing’—i.e. Form NT—when ‘not timely’ filing a Form 10-Q or Form 10-K and seeking additional days to file their reports. Companies must disclose on the Form NT why their quarterly or annual report could not be filed on time, and anticipated, significant changes in results of operations from the corresponding period for the last fiscal year.

PCAOB staff outlines certain plans for 2021

The PCAOB staff has issued a spotlight, which provides an overview of changes to inspections in 2021 and highlights important areas of planned inspection. The spotlight also addresses how the PCAOB is responding to the financial reporting and audit risks created by COVID-19 and how it intends to enhance the unpredictability of its inspections, including selecting non-traditional financial statement areas for review. The staff issued an accompanying audit committee resource, which suggests questions audit committees can use to further engage with their auditors.

The staff also issued a spotlight that addresses the 2021 plan for its data and technology research project, including the staff’s observations on service centers, automation, confirmations, auditing inventory and how auditors are using technology-based tools to respond to risks of material misstatement.

CAMs observations and trends

Critical audit matters (CAMs) are communicated in auditors’ reports on financial statements for all entities to which the CAM requirements apply.

Based on a KPMG analysis of CAM communications as of May 11, more than 4,600 public filings for entities with a year-end of June 30, 2020 or later contained an auditors’ report that included CAM communications. Of these filings, more than 2,000 were for large accelerated filers and the remainder were for other entities to which the CAM requirements apply.

The top categories of CAM communications remained the same year-over-year for large accelerated filers and include (in descending order) revenue; goodwill and intangibles; income taxes; business combinations; property, plant and equipment; and the allowance for loan and lease losses.

The top categories of CAM communications for other entities include (in descending order) goodwill and intangibles; revenue; property, plant and equipment; the allowance for loan and lease losses; investments; and business combinations.

Approximately 1% and 11% of large accelerated filers and other entities, respectively, to which the CAM requirements apply reported that no CAMs were identified during the audit.

The complete publication, including footnotes, is available here.