On April 12, 2021, the U.S. Securities and Exchange Commission (SEC) issued guidance directed at the accounting for warrants utilized by many special purpose acquisition companies (SPACs). Significant valuation work and associated reviews will be required for SPACs in both pre-IPO and post-IPO phases. The results of these assessments may impact previously filed financial statements, as well as future filings.
The SEC advised companies that warrants may need to be classified as liabilities recorded at fair value each period. This determination will largely depend on the associated payout structure, settlement in cash or stock, or whether their value is indexed solely to the performance of the underlying stock. The evaluation of the accounting for contracts in an entity’s own equity requires careful consideration of the specific facts and circumstances for each entity and each contract.