A SPAC Pitfall To Avoid

Following a meeting held by the AICPA Investment Companies Expert Panel (Panel) in Q4 2020 to discuss the recognition criteria for private investments in public entities (PIPEs) offered through special purpose acquisition companies (SPACs) and whether this commitment should be recognized on the books and records when the entity makes the commitment, the Panel concluded that if the commitment is legally binding (which is a legal determination), it should be recognized when the commitment is made.

The Panel specified the commitment meets the definition of a financial instrument under ASC 825-10-20 Glossary - Financial Instrument and once recognized, it should be marked to fair value as other financial instruments are. Management might take into account any contingencies or the probability of the commitment not being fulfilled under the commitment when determining fair value as well as other factors. 

The financial markets have seen an increase in SPAC initial public offering (IPO) activity. With this type of transaction, the SPAC raises capital through the IPO and then the SPAC becomes a listed entity.  Once the IPO occurs, the SPAC generally has, on average, 18 to 24 months to find a merger target to effect a reverse merger IPO whereby the merger target is the surviving public company.

On occasion, SPACs offer interests in a specified merger target through PIPE commitments.   An entity enters into a commitment to buy shares of the merger target company (also referred to as a forward commitment).  The commitment is subject to various terms and contingencies such as shareholder approval and capital raising targets.