Revenues, PSPCs and LIBOR pose year-end accounting problems

As companies and their auditors prepare for this year-end, they face new and complex accounting and reporting challenges.

“The challenge is to deal with the complexity of adopting new standards, such as revenue recognition, and interpreting and applying existing standards to new transactions,” said Lisa Munro, CPA, partner of audit at KPMG which should participate in a panel on hot accounting. topics at the AICPA & CIMA Conference on Current SEC & PCAOB Developments, to be held December 6-8 in Washington, DC

“When dealing with difficult technical areas and areas requiring significant judgment, it’s important to understand when you need help,” said Brandon Coleman, CPA, an audit partner at Deloitte who leads the panel. “Chat with your advisers and listeners and find out where others have struggled or what the SEC’s main challenges are. “

Revenue from contracts with customers

Revenue recognition according to FASB ASC Topic 606, Revenue from contracts with customers, is still new to many companies. An emerging issue in this area is revenue accounting for platform companies that host infrastructure to provide services. A platform business model facilitates transactions between consumers and producers by creating and facilitating the way they connect. While these businesses started primarily with online advertising platforms that connected buyers and sellers, there are now many more in many different industries.

“This is a complicated area because there are usually at least three parties involved, and it is not always clear who the customer is, which is a starting point for applying Topic 606,” Munro said. . “Without knowing who your client is, and there may be more than one, it is really difficult to navigate your way through the revenue model to determine performance obligations, whether you are a principal or an agent in the transaction which determines the gross salary against the net. , and the revenue recognition model. “

She states that under topic 606, contract terms determine the outcome and even companies in the same industry that on the surface have similar fact patterns may have different accounting results depending on their specific facts and circumstances. .

“There is a tendency for platform companies to pre-approve their accounting model with the SEC, especially those that are pre-IPO,” she said.

Special purpose acquisition companies (SPAC)

A popular way for private companies to go public is by using a SPAC, which is formed to raise capital on an initial public offering (IPO) and then finds a private company to buy in order that the combined company becomes a public enterprise. While PSPCs are not new, there has been a significant trend in their use in recent years, and the high volume of these transactions received special attention from the SEC in 2021.

“SPACs have been in the news quite often this year, and SPACs and IPOs have been the most common area of ​​our national office accounting consultations this year,” said Coleman.

“While GAAP in this area has not changed, its application poses many challenges,” said Munro. Some of them include how to account for the PSPC itself, determining:

  • If the PSPC or the target is the “accounting acquirer”;
  • If there is a reverse acquisition or reverse recapitalization;
  • If there is an increase in the basis and how to determine the fair values; and
  • If the operating company is subject to variable interest accounting.

“The number one accounting challenge for SPACs this year is about complex financial instruments issued and whether they should be classified as equity or liabilities,” said Coleman. In a SPAC IPO, investors can obtain a unit of securities consisting of common shares and warrants to purchase additional shares.

“This area has recently gained a lot of attention when the SEC objected to the number of companies that account for these instruments in equity, and there have been a significant number of restatements to the PSPC financial statements,” said Munro. “The devil is in the details in this area because if the instruments are within the reach of [FASB] ASC 718 on stock-based compensation, you get an answer, but it can also fall under [FASB] ASC 480 or ASC 815 on derivatives. “

Coleman agrees. “It is essential to fully understand the provisions of the financial instruments issued to determine whether they can be classified as equity, which companies prefer, or whether they should be treated as derivative liabilities and marked to market through the account. of result. “

After the SPAC transaction, there are additional issues. “If private companies allocated share allocations to employees within the framework of [FASB] ASC 718 and they are exchanged for the now public company, change accounting applies, ”Munro said.

The shares issued to the founders of the SPAC can be either a stock compensation or a stock transaction. “One difficult area is the assessment of post-acquisition earn-outs,” said Coleman. “If the share price rises or other performance targets are met, the founders or sponsors of the acquired target get additional shares over time.”

Munro said, “In addition to accounting, SPACs face the challenges shared by all companies that go public of implementing internal controls and complying with SEC and SOX requirements. These companies have not been around for long and need to move quickly to become a public company and have processes and people in place. “

Reform of the reference rate

As of December 31, 2021, benchmarks such as the London Interbank Offered Rate (LIBOR) will be phased out and replaced by other benchmarks. LIBOR-based contracts will need to be amended for the rate change, and FASB ASC Topic 848, Reform of the reference rate, discusses the resulting contract changes.

“ASC 848 provides that if contracts are changed only to replace LIBOR rates with other rates, the GAAP framework for accounting for changes (for example, debt, hedging and leasing standards) should not be applied, ”Coleman said. For example, in the area of ​​hedge accounting, there are exemptions and various documentation elections that companies can apply, including a convenient expedient for companies not to de-designate and re-designate hedges, but rather assume that the effectiveness of perfect coverage continues.

“Banks have been preparing for this change for years and have changed their products accordingly,” he added. “For companies, while there are accounting considerations, this is a critical business initiative as they need to replace LIBOR and determine how those contracts are impacted by LIBOR termination.”

Maria L. Murphy, CPA, is a freelance writer based in North Carolina. To comment on this article or to submit an idea for another article, contact Ken Tysiac, the JofAmanaging editor of, at [email protected].

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