Three areas that companies should consider for SPAC readiness

Considering accounting implications 

It is crucial for both SPACs and their targets to address accounting aspects, including how accounting standards affect them and their listings in the markets. A key issue is identifying the accounting acquirer. One cannot assume that the target company or legal acquiree will be the accounting acquirer in the transaction. Careful consideration is needed to determine the accounting acquirer as this will impact the subsequent accounting treatment of the transaction and the instrument of the SPAC and its target.

After identifying the accounting acquirer, the SPAC and target company need to determine how to account for the business combination in the combined entity, according to IFRS 3 or by using the principles of IFRS 2, depending on whether the target company has been identified as an accounting acquirer. 

Another key accounting area is the classification and recognition of financial instruments issued by both the SPAC and target entity before the merger or de-SPAC, and later in the combined entity. For SPAC financial instruments, challenges may arise when the instruments need to be reclassified after the acquisition of a target. SPACs need to exercise careful judgment on whether such instruments continue to be classified as equity or liability under IAS 32. From the target’s perspective, a target identified as the accounting acquirer will need to determine if any SPAC instruments fall under IAS 32 or even IFRS 2 share-based payments if the transaction is considered an equity-settled share-based payment.

Another accounting challenge is accounting for existing employee share awards that have been vested. The target company, as an accounting acquirer, will need to introduce a mechanism that ultimately grants employees with existing share-based awards shares in the newly combined entity instead of the target company’s shares. 

Assessing IPO readiness 

Throughout the SPAC journey, the SPAC and target company should assess various key areas that help provide a holistic view of the current state so that the entity is able to meet the requirements of a listed company. Some key functions for consideration include finance and accounting, internal controls and taxes, among others. 

Finance and accounting

The finance and accounting function of the SPAC and target company needs to be efficient and robust before going public. It may face challenges in the form of technical accounting issues and the need to meet appropriate public company filing requirements. By going through a readiness assessment, an entity will be able to execute an effective accounting process and make prompt decisions based on financial data. 

Internal controls

While implementing a Sarbanes-Oxley Act (SOX) compliant control environment or a robust internal control framework may seem daunting for entities, they can be achieved in a balanced and scalable manner. The entity may need to determine if it is investing in the right resources or developing a structured approach to identify control weaknesses or failures and remediate these issues. A readiness assessment can help entities identify key gaps and develop an actionable road map so that they have an internal control framework that is responsive and cost-efficient. 

Taxes

Entities that are going public need to understand historical and potentially recurring tax risks and the considerations in moving to the listing structure. An optimal tax structure and an effective tax corporate governance framework will help the listed company manage undue tax risks. Undertaking a readiness assessment helps identify areas where the existing tax function and control or governance framework need to be strengthened. It can also highlight tax risks that the company can mitigate prior to listing as well as take an outside-in approach in assessing which areas may optimize returns for shareholders. 

Besides these three functional areas, SPACs and target companies will also need to consider other areas, such as governance and legal, communication and investor relations, human resources and IT.

Clearly, both SPACs and target companies will greatly benefit from a readiness assessment for reliable and efficient internal processes. By going through a structured and detailed assessment, the entity can be confident of its capabilities to meet the demands of a public company. 

Managing resources

Companies planning to go public should assess their current competencies and identify areas that need to be reinforced. They need to consider what resources can be leveraged to be more efficient and reliable. This will help them better manage their resources and grow the necessary competencies to prepare to go public. For example, it may be necessary to expand the team to support more complex regulatory requirements and achieve higher reliability. Hiring and training the right people will therefore be vital. Some non-core functions may be outsourced so that in-house resources can be redeployed to contribute more effectively toward core business functions.

As Asian markets prepare for more SPAC activity, both SPACs and target companies will need to carefully address accounting challenges at each stage of the SPAC life cycle. They should also undergo a readiness assessment so that they can be prepared to meet the regulatory and listing requirements and mitigate risks up front prior to the listing process.

The management of both SPACs and target companies should ask themselves the following questions as they work toward IPO readiness: 

• How do we avoid potential blind spots in the SPAC journey?
• Are our business functions capable and structured for timely reporting?
• Are our financial statements reported under the appropriate framework?
• Do we meet SOX or internal control requirements determined by relevant regulatory authorities in Singapore?
• Do we have the requisite resources to support ourselves along the SPAC journey?