The new year is upon us, and it’s a time for reflection. The COVID-19 pandemic left its mark on the global economy in many ways, and as we head into 2022, we will still be picking up the pieces. However, a strong December close in the financial markets indicates a light at the end of the tunnel if the challenges and constraints on recovery can be managed.
When the pandemic struck a little more than 18 months ago, the United States faced the fastest decline in economic demand in its history. Millions found themselves unemployed each week. The price of oil was briefly at or near $0, and shipping companies cut capacity by 11%. Our recovery from that situation has been dramatic in some areas and gradual in others. Supply-side constraints continue to hold back economic activity, and there is a significant labor shortage in many sectors. On a positive note, the oil price has recovered, and shipping volumes are up 27% from pre-pandemic levels.
One of the reasons our nation is struggling with the recovery from this economic fallout is because it is so different from any other recession the United States has ever faced. Caused by external factors rather than internal economic problems, our current recession brought us a near-immediate decline in economic activity where unemployment has been a cause of the recession rather than a trailing indicator. The recovery challenges that we specifically face from this recession include managing the rapid advancement of technology, increased investment valuations, and supply chain and capacity issues.
Four of the biggest trends public companies can expect to see in 2022 include the following.
SPACs Continue to Gain Steam
Over the past couple of years, special purpose acquisition companies (SPACs) have grown in popularity and become widely accepted, providing a faster transaction for companies seeking to go public. In 2021 alone, half of the IPO’s on the NASDAQ were done through SPACS, and the number of SPACS in 2021 more than doubled 2020 numbers. Near the end of 2021 there were approximately 550 SPACs looking for target companies. High valuations have driven volumes of all transactions, including SPACs, traditional IPOS, and spin-off transactions.
There are some drawbacks to using this pathway to the public markets, however.
From the accounting side, companies using SPACs will have to consider technical accounting guidance related to debt, equity, and derivatives, share-based payments and business combinations. The target company may have also made private company accounting elections, which will have to be reversed to be compliant with public company accounting requirements.
From the IPO transaction process, SPACs do not have the benefit of a confidential filing process and would need to complete your public company readiness procedures within a much shorter timeframe.
Increase in Cybersecurity Risks
Public companies are increasing their use of new technology and tools to increase efficiency and effectiveness. But the advanced technology may raise new cybersecurity risks.
Internal controls should be re-evaluated and adjusted, particularly for any systems with access to cash, payments, or sensitive information. Systems that are part of the company’s internal controls over financial reporting may have cybersecurity issues that result in deficiencies and material weaknesses in the company’s internal controls over financial reporting.
Environmental, Social, and Governance (ESG) Reporting
Investor and other stakeholder demands will continue to drive public companies to report ESG measures. Currently, public companies do not have a full standard available that describes required reporting for ESG, so companies that report these measures are opting to follow available frameworks, such as the Carbon Disclosure Project (CDP) or standards from the Sustainability Accounting Standards Board (SASB).
ESG reporting has steadily been rising across S&P 500 companies, according to research from the Center for Audit Quality. A 2021 report from the Center of Audit Quality CAQ-led research found that 95% of S&P 500 companies report ESG information in some form or fashion. A little over half reported ESG data for periods ending in 2020, up from 37% of S&P 500 companies that reported ESG information for reporting periods ending in 2019. Companies were roughly split as to whether they sought additional assurance over their ESG reporting.
The Risks of Digital Assets
Accounting for digital assets continues to be an area of interest for the Financial Accounting Standards Board (FASB) and companies that invest in and/or accept cryptocurrencies. During a recent FASB invitation to comment, 440 of more than 500 responses the FASB received were focused on digital asset accounting issues.
Digital assets may come in many forms and be used for a multitude of business purposes. Most commonly companies transact in, or invest in, cryptocurrencies. With some industry specific exceptions, investments in cryptocurrencies are currently accounted for as indefinite-lived intangible assets under ASC Topic 350, an accounting standard that predates the existence of digital assets. In other cases digital assets may meet the definition of a debt or equity security and be accounted for under the relevant accounting topic. A common theme from those providing comments to the FASB was that the indefinite-lived intangible asset model may not accurately reflect the nature and economics of investments in cryptocurrencies and similar digital assets.
Upcoming developments in the accounting for digital assets will not be the only item to monitor for public companies. Digital assets carry operational, legal, and financial statement risks related to a variety of matters, including:
- Ownership (private key access)
- Validating transactions
- Evaluating if the asset is a security
- Applying the Uniform Commercial Code (UCC) to secured borrowings
- Obtaining expertise with appropriate knowledge and skills
- Fraud and misappropriation
- Determination of fair value
Public companies face an evolving set of challenges in the coming years, including increased cybersecurity risks and more stringent demands from shareholders. If you need to consult with one of our financial experts or have any questions, please contact us.