Considering an IPO? Time to factor in FASB public company accounting rules

Some practitioners say they are cautiously optimistic that the initial public offering (IPO) market could pick up later this year, hopeful that the current downturn will not last.

But a key part of the IPO process is shifting from private company accounting simplifications to public company rules, i.e., full GAAP, so potential filers need to get ahead of that now or risk holding up the deal, accounting practitioners said. The process toward accounting readiness can take between three to nine months, depending on the experience of management, including the CFO’s understanding of public company rules.

“Private companies can elect to account for intangible assets and goodwill in an acquisition under simplified standards – I think that’s probably the most pervasive and obvious thing that needs to be addressed if the company had elected that at the outset,” Chris Perkins, audit partner at Armanino LLP, said on Aug. 14, 2023. “And in an IPO situation they would have to go back and revisit that and account for those acquisitions under the big company standards,” he said. “And a lot of companies have elected over the years to amortize goodwill and simplify the way you have to analyze it for impairment. I think that’s a big issue.”

Perkins also flagged FASB ASC 842, Leases, which allows private companies to use a risk-free rate as an input in analyzing those assets and liabilities but which public companies cannot use; rules around common control variable interest entities (VIEs); hedge accounting; and, ASC 326, Credit Losses, which public companies already adopted but which takes effect this year for private companies—many of which have not started applying it as yet.

Added to those and other accounting rules, footnote disclosures also need to be considered, including earnings per share (EPS) which is a transition item for private companies to public because no private company is required to disclose that. “That’s a process that can be super complex when you have venture-backed entities with maybe complex preferred stock characteristics,” Perkins explained.

Encouraging signs of recovery

The IPO process is when a privately held company offers new or existing shares to the public for the first time for a price on a recognized stock exchange like the New York Stock Exchange and the Nasdaq.

Blockbuster IPOs have not recently been taking place but deals like Cava Group’s June IPO did very well, which has created a level of optimism. In its filing, Cava sold 14.4 million shares, raising $318 million and landing the overall value of the restaurant chain at about $2.45 billion. And there is market buzz about other firms such as Kim Kardashian’s SKIMS going public.