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.

“There have been recent news of potential large high-profile IPOs that may be on the horizon,” Ro Sokhi, partner at UHY, said on Aug. 16. “There is some cautious optimism; I don’t think that it’s in the clear that the market is definitely recovering, but there are encouraging signs.”

As of Aug. 17, 2023, there have been 103 IPOs filed in the U.S.—27.46 percent less than at the same period in 2022, which had 142 IPOs, according to Stock Analysis. Between 2000 and 2023, there have been 6,037 IPOs filed. The record year was 2021 with 1,035 IPOs, beating the previous record of 480 in 2020.

Currently, conversations have started around the topic, practitioners said. “The IPO market isn’t open yet but you can start to see some of those green shoots – so people thinking about that preparation, people asking about how the market would work, folks reaching out,” Jim Cox, CFO of Clearwater Analytics, said. “August is a historically very quiet time, but it will be interesting to see if the IPO market opens after Labor Day in September,” he said.

Deals can fall over timelines

Overall, the first thing to clearly grasp goes beyond accounting to the core of the business itself because everything stems from that, according to practitioners.

For example, “What’s special about us as a company? what is our special sauce? why are we unique? Is it the market? is it the problem we solve for our clients? is it the way we do something?” Cox said. “Figuring out that story - but then you also have a lot of the administrative things you need to do,” he said.

Trying to determine “does it make sense,” to file an IPO is a struggle for a lot of companies, Sokhi explained. “It’s not just the accounting standards, it’s having the folks in place because a lot of times private companies are very lean organizations who may have a CFO who is not really in the accounting world,” he said.

Moreover, the business needs a team of lawyers, auditors, bankers, tax professionals, IT systems and other third parties with IPO expertise because the process involves tons of documentation. A registration statement has to be filed with the SEC, for example, and the GAAP financial statements must be able to pass PCAOB audits, and so forth.

“But can they get that information? do they have the skills and knowledge to put those documents together?” said Sokhi. “Then ultimately bandwidth is a huge one – you’ll know because you’ll be getting requests with incredibly tight timelines,” he said. “Sometimes the deals are killed right there because they just can’t get the information timely.”

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