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Perspectives

IPO process: Accounting and considerations guide

On the radar: Preparing for the initial public offering process

IPO activity is at an all-time high, accentuated by the rising popularity of special-purpose acquisition companies (SPACs). In this context, the latest edition of Deloitte’s On the Radar: Initial Public Offerings provides guidance on accounting for IPO, SEC requirements, and other finance-related steps in preparing for an IPO.

The past 12 months have been marked by the highest level of initial public offerings (IPOs) in recent history. In a “traditional” IPO, a private company becomes public by selling its equity in a formal underwritten offering. Although such an offering has historically been the most common way to raise public capital, 2020 was a record-breaking year for special-purpose acquisition companies (SPACs), and this trend has continued in 2021. Many private operating companies have continued to merge with SPACs to raise capital rather than undertaking traditional IPOs or using other financing alternatives. Direct listings have also become more frequent. Companies can also go public by registering debt securities, distributing shares in a spin-off transaction, or registering securities issued by real estate investment trusts (REITs).

Before a company commences a public offering of securities, it must file a registration statement with the SEC under the applicable securities laws. Both the form used to file the registration statement and the filing and review process will depend on the nature of the offering. Companies undertaking a traditional IPO can voluntarily submit a draft registration statement to the SEC staff for confidential, nonpublic review. The ability to file confidentially is a significant benefit because it allows companies to keep potentially sensitive information from customers or competitors until later in the IPO process. Confidential initial submissions are subsequently filed publicly no later than 15 days before (1) a roadshow or (2) the requested effective date of the registration statement if no roadshow is planned.

Once submitted to or filed with the SEC, a registration statement is reviewed by the staff of the SEC’s Division of Corporation Finance, which will generally complete its initial review and furnish its first set of comments within 30 calendar days.

For more information about typical SEC staff comments, see Deloitte’s Roadmap SEC Comment Letter Considerations, Including Industry Insights.

On the Radar: Initial Public Offerings

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Identifying the required financial statements

A company must determine what financial statements are required in the registration statement. While this determination may appear straightforward, additional complexities may arise because a company may first need to determine the legal entity that will become the SEC registrant. For example:

A company may succeed to substantially all of the business of another entity (or the “predecessor”) for which financial statements are required.
A company may be a carved-out entity that previously existed only as a subset of a larger parent entity or may be a combination of individual entities joined to form a larger public company.
A company, a subsidiary, or a subset of subsidiaries may issue securities, guarantee securities, or otherwise have dividend restrictions that trigger requirements for the inclusion of separate financial statements or financial statement schedules in the IPO registration statement.

Further, a registrant may need to consider whether separate financial statements or pro forma financial information is required for “significant” business acquisitions, dispositions, or equity method investments. The SEC recently issued a final rule amending the financial statement requirements related to acquisitions and dispositions, as well as the requirements related to pro forma financial information. The final rule offers significant relief for IPOs since, among other changes, companies undertaking an IPO are no longer required to evaluate acquisitions that occurred before the most recent full fiscal year. See Deloitte’s June 2, 2020, Heads Up for more information about the final rule.

Moreover, the SEC recently amended portions of Regulation S-K that govern public-company disclosure requirements for information outside the financial statements. See Deloitte’s September 3, 2020, and November 24, 2020, Heads Up newsletters for more information.

A public entity’s application of US GAAP and SEC regulations

Certain provisions of US GAAP for public entities differ from those for nonpublic entities. Notably, public business entities (PBEs) are generally required to adopt new accounting standards before private companies. Although companies that meet the EGC criteria can elect to use private-company adoption dates for new accounting standards, other entities (i.e., non-EGCs) undertaking an IPO typically must use public-company adoption dates for all accounting standards.

In addition, a company undertaking an IPO must present financial statements that are consistent with public-entity accounting principles and must comply with the disclosure requirements for public entities for all periods presented. The following are examples (not all-inclusive) of topics for which the accounting principles or disclosures may apply to public entities, but do not apply to nonpublic entities:

  • Earnings per share
  • Segment reporting
  • Temporary equity classification of redeemable securities
  • Certain income tax–related disclosures
  • Certain disclosures related to pensions and other postretirement benefits
  • Disclosure of the date through which subsequent events are evaluated

Further, public entities are subject to various SEC rules and regulations that may affect the financial statements and related disclosures (e.g., the additional disclosure requirements of Regulation S-X). Some of these requirements are broadly applicable, and some apply only to entities in certain industries. Therefore, a nonpublic entity’s previously issued financial statements will typically need to be revised for all periods presented to reflect the additional SEC disclosure requirements. However, an entity that meets the SRC criteria may be eligible to apply scaled disclosure requirements. SRCs generally do not have to apply the disclosure provisions of Regulation S-X in their entirety, except when specified.

Once a company is considered a PBE (even if it qualifies as an EGC and elects to use private-company adoption dates), it is no longer permitted to apply private-company accounting alternatives, such as the amortization of goodwill. Therefore, any previously elected private-company alternatives would need to be retrospectively eliminated from the company’s historical financial statements before such statements can be included in its registration statement.

Audit considerations for public companies

Audits of private companies are subject to AICPA auditing standards. However, auditors of issuers undertaking an IPO must apply PCAOB auditing standards and will need to perform additional procedures and issue a new auditor’s report that refers to these standards. Note that in a filing submitted for confidential review to the SEC, the auditor’s report will typically refer to both AICPA and PCAOB auditing standards.

Because the SEC’s and PCAOB’s independence rules are generally more restrictive than the AICPA’s, both the auditor and management, with oversight from the audit committee, need to determine whether (1) there is possible noncompliance with the SEC’s and PCAOB’s independence rules or (2) there are conflicts of interest before the entity undertakes an IPO.

Post-IPO periodic financial reporting and internal control requirements

After a registration statement is declared effective, a company is required to file quarterly reports on Form 10-Q and annual reports on Form 10-K. As a public company, a registrant must also file a current report on Form 8-K that discloses various material events that occur between its periodic reports. A public company will need to address two types of controls and procedures in its post-IPO filings with the SEC:

Companies also must continue to comply, on a quarterly basis, with reporting requirements related to material changes to ICFR and disclosure controls and procedures. In addition, in quarterly and annual reports, the registrant’s principal executive and principal financial officer (typically the CEO and CFO) must file certifications prescribed by Sections 302 and 906 of the Sarbanes-Oxley Act.

SPAC transactions

As discussed previously, the number of SPAC and IPO transactions has increased significantly during 2020 and 2021. Management should be aware of the differences between a traditional IPO and a SPAC transaction from a financial reporting and auditing perspective. The following table outlines the areas of potential differences between the two types of transactions.

Continue your IPO process learning

Deloitte’s Roadmap Initial Public Offerings addresses financial reporting, accounting, and auditing considerations to help companies navigate challenges related to preparing an IPO registration statement and ultimately going public. Entities should also consider Deloitte’s October 2, 2020 (last updated September 14, 2021), Financial Reporting Alert for guidance on entering into a SPAC transaction as an alternative to undertaking a traditional IPO.

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The services described herein are illustrative in nature and are intended to demonstrate our experience and capabilities in these areas; however, due to independence restrictions that may apply to audit clients (including affiliates) of Deloitte & Touche LLP, we may be unable to provide certain services based on individual facts and circumstances.

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