Gearing up to ride the SPAC wave: 3 key aspects

SPECIAL purpose acquisition company (SPAC) initial public offerings (IPOs) have been under the spotlight in recent years. Notably, in 2021, SPAC IPOs claimed fame, with US exchanges having seen more SPACs than traditional IPOs that year.

Many markets are gearing up to support this alternative listing structure, including the Singapore Exchange, which announced its SPAC listing framework in September 2021. The introduction of this framework will likely further bolster IPO activity in Singapore and attract fast-growing companies and startups in South-east Asia, which are looking to merge with highly valuable companies and access capital via a SPAC listing.

Understanding the SPAC journey

Many IPO aspirants see SPAC as a more efficient route to get listed and gain access to capital, compared with the traditional IPO process. Depending on the listing framework enacted by a stock exchange, a SPAC typically has 18 to 24 months from the date of its IPO to identify and acquire a target.

Making the most of a SPAC deal often comes down to how quickly and effectively the business can address critical reporting requirements and take preparatory steps. All these have a bearing on the ultimate success of the SPAC deal. There are 3 key areas for the management to consider: accounting implications; assessing the company's IPO readiness; and managing resources in preparation for a listing.

Accounting implications

It is crucial for 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.

Other accounting considerations include how to account for the business combination in the combined entity; 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; as well as accounting for existing employee share awards that have been vested.

Assessing IPO readiness

Throughout the SPAC journey, the SPAC and target company should assess various key areas that help to 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.

• Finance and accounting

The finance and accounting function of the SPAC and target company should 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 can execute an effective accounting process and make prompt decisions based on financial data.

• Internal controls

While implementing 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 optimise returns for shareholders.

Besides these 3 functional areas, SPACs and target companies 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 reinforcements. 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 towards 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 upfront prior to the listing process. Such diligence will also position them well for the compliance and reporting rigour expected of a public company post-SPAC.

• The writers are from Ernst & Young LLP.
• Ronald Wong is financial accounting advisory services leader and partner. Adele Liew is financial accounting advisory services partner.