Warrant Balance Sheet

[Leonides Suttle]

HelloI am having trouble grasping some concepts from LOS 39.e The issuance of bonds with warrants can also reduce the interest costs relative to conventional bonds but, given the balance sheet treatment of the liability, interest expense will be greater than the interest expense for equivalent convertible bonds. ( I am not sure exactly why, if anyone would care to explain) Your time is greatly appreciated (I know there isnt much of it left at this point) Regards, K

Until we process a warrant for your agency, your FBWT will not be posted to the Fiscal Service Central Accounting System. The balance in USSGL account 109000 will not match the balance on the GWA Account Statement: Undisbursed Appropriation Account Ledger.

However, you must post your normal receipt and disbursement activity using USSGL account 101000, Fund Balance With Treasury, and the balance for USSGL account 101000 must match the balance on the GWA Account Statement.

When that part of the agency gets a warrant, record a debit to USSGL account 101000, Fund Balance With Treasury, and a credit to USSGL account 109000, Fund Balance With Treasury While Awaiting a Warrant.

To shift resources from one purpose to another or to reflect reorganization, transfer using SF 1151: Nonexpenditure Transfer. The transferring account reports a transfer out of budget authority or balances. The receiving account reports a transfer in.

To be sure the account you are dealing with is from the General Fund, check with the appropriate budget office. For the appropriate office, see the table in the earlier question: When I have budget-related questions that are not USSGL specific, whom do I contact?

If you need to find out if the reduction is temporary or permanent, check with the appropriate budget office. For the appropriate office, see the table in the earlier question: When I have budget-related questions that are not USSGL specific, whom do I contact?

If you need to find out if the reduction is temporary or permanent, check with the appropriate budget office. For the appropriate office, see the earlier question: When I have budget-related questions that are not USSGL specific, whom do I contact?

Following the release in April of the statement by the staff (the "Staff") of the U.S. Securities and Exchange Commission ("SEC") requiring most warrants issued by special purpose acquisition companies ("SPACs") to be accounted for as liabilities, SPACs scrambled to determine whether they needed to revise or restate their previously issued financial statements. At the same time, SPACs have been seeking accounting guidance to determine whether and how to revise the agreements governing their warrants so that their warrants qualify for equity classification. There now is clarity on the path forward. This Client Alert explains the current state of affairs and provides practical guidance to pre- and post-IPO SPACs seeking to implement changes to permit equity classification for their warrants.

On April 12, 2021, the Acting Director of the SEC's Division of Corporation Finance, John Coates, and Acting Chief Accountant of the SEC, Paul Munter, released a statement on accounting and reporting considerations for warrants issued by SPACs (the "Statement").1 The Statement was issued to "highlight the potential accounting implications of certain terms that may be common in warrants included in SPAC transactions and to discuss the financial reporting considerations that apply if a registrant and its auditors determine there is an error in any previously-filed financial statements.

Longtime SPAC market participants will recall that, on at least two prior occasions, SPACs and post-business combination companies faced the need to reclassify their SPAC warrants from equity instruments to contingent liabilities for different reasons.2 In those cases, even for post-business combination companies, the market shrugged it off, because the liabilities and non-cash charges do not affect the company's revenue, operating expenses, operating income, taxes, cash flows or cash and cash equivalents, or any adjusted EBITDA results the company might report. Further, following those cases, new SPACs simply revised the then-standard SPAC warrant agreement to eliminate the provisions that were resulting in liability classification. Not surprisingly, the market appears to be having the same reaction this time, and investors do not seem fazed by the countless restatements and Item 4.02 Form 8-Ks that have been filed by SPACs and post-business combination companies.

In the Statement, the Staff described two accounting issues, one of which relates to the private placement warrants, and the other of which relates to both the public warrants and private placement warrants.

Section 815-40-15 of Accounting Standards Codification ("ASC") Subtopic 815-40, Contracts in Entity's Own Equity, addresses equity versus liability treatment and classification of equity-linked financial instruments, including common stock purchase warrants, and states that a warrant may be classified as a component of equity only if, among other things, the warrant is indexed to the issuer's common stock. In the Statement, the Staff said that an example of such indexation is a warrant that is settled with a fixed number of shares or at a fixed strike price. However, the Staff noted, some warrants may include variables that could affect the settlement amount, which could potentially preclude a determination that the warrant is indexed to the company's own stock.3 For example, in the Statement, the Staff indicates that it recently reviewed a warrant agreement that "included provisions that provided for potential changes to the settlement amounts dependent upon the characteristics of the holder of the warrant." Because the holder of the warrant is not an input to the fair value of an option on equity shares, the Staff concluded that such provisions would "preclude the warrants from being indexed to the entity's stock, and thus the warrants should be classified as a liability measured at fair value, with changes in fair value each period reported in earnings."

The typical SPAC warrant agreement provides for different settlement amounts for the private placement warrants and the public warrants under certain circumstances. For example, one provision requires an adjustment to the exercise price of the SPAC warrants in connection with certain fundamental transactions occurring following a de-SPAC transaction (the "Fundamental Transaction Adjustment Provision"). Under the Staff's reading, the private placement warrants may be entitled to a greater adjustment pursuant to this provision than the public warrants. Further, the public warrants, but not the private placement warrants, are subject to redemption when the trading price of the company's stock following a business combination reaches a specified threshold, typically $18.00. The private placement warrants also may be exercised at any time, at the option of the holder, on a cashless basis. The warrant agreement provides that once the private placement warrants are transferred to persons other than certain permitted transferees, they become public warrants. Because the settlement amount of a private placement warrant may change if the warrant is transferred to a non-permitted transferee thereby becoming a public warrant, the Staff believes that the private placement warrants containing any of the above provisions must be classified as liabilities.

Another problematic SPAC warrant provision identified in the Statement relates to tender offers. For a warrant to qualify for equity classification under ASC Subtopic 815-40, it is not sufficient that it is considered indexed to the entity's common stock. The warrant must require or permit the issuer to share settle the contract (either physically or net in shares). Any provision that could require the issuer to net cash settle the contract precludes equity classification with limited exceptions. The Staff explained that one exception to this is that the warrant may be classified as equity if net cash settlement can be triggered only in circumstances in which the holders of the shares underlying the contract also would receive cash, including "events that fundamentally change the ownership or capitalization of an entity, such as a change in control of the entity or a nationalization of the entity." In the Statement, the Staff notes a fact pattern it recently evaluated in which the SPAC warrants provided that, "in the event of a tender or exchange offer made to and accepted by holders of more than 50% of the outstanding shares of a single class [emphasis added] of common stock, all holders of the warrants would be entitled to receive cash for their warrants. In other words, in the event of a qualifying cash tender offer (which could be outside the control of the entity), all warrant holders would be entitled to cash, while only certain of the holders of the underlying shares of common stock would be entitled to cash." The Staff determined that, since the language referred to a single class of stock and did not relate to an event that would necessarily cause a change in control, the warrants should be classified "as a liability measured at fair value, with changes in fair value reported each period in earnings."

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