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We continue to see companies leverage umbrella partnership C corporation (Up-C) organizational structures when accessing the capital markets. As discussed in a previous “Observations from the front lines” article, structuring an IPO, or special purpose acquisition company (SPAC) merger, as an Up-C requires considering unique and often complex financial reporting and tax implications.
Although the challenges of preparing to be public and going public should be addressed in parallel, once the bell is rung and a company is public, the challenges of being public take on added gravity. And ongoing accounting and financial reporting complexities related to an Up-C organizational structure and legal agreements will continue to impact a company long after the IPO or SPAC merger.
The majority of the financial reporting complexities are driven by a company’s post-IPO organizational and ownership structure. Post-IPO Up-C structures are typically characterized by a public corporation (PubCo) owning economic interest in the form of ownership units and being the sole managing member of a pass-through operating entity.
Owners of PubCo include:
In addition, the following terms are common in Up-C agreements and must be considered when determining the appropriate accounting once the Up-C structure is in place:
The Up-C structure and any associated legal agreements raise numerous accounting and reporting considerations. These can be nuanced, and a thorough understanding of a company’s specific facts and circumstances is necessary to reach the right accounting conclusions.
Potential considerations include:
The structure of this statement should clearly delineate between the pre- and post-IPO periods. This results in significant NCI balance on the balance sheet, as well as an attribution of earnings to the NCI holders on the income statement and statement of equity.
The calculation and disclosure of EPS can present unique challenges. For example, companies will need to determine the appropriate presentation of EPS in pre-IPO periods where the Up-C structure was not in place.
Additionally, the dilutive nature of the exchange feature held by pre-IPO investors can significantly change the presentation of the EPS footnote depending on the number of outstanding shares held by pre-IPO investors. The dilutive or antidilutive conclusion may be sensitive to certain activities, and management should be fully aware of when an exchange feature results in a dilutive versus an antidilutive conclusion.
Terms written in the legal agreements should be fully understood when calculating EPS. Companies may determine that dilutive securities impact the EPS numerator, as the assumed issuance of new securities could change the ownership percentage of the controlling interest.
The calculation of corporate taxes on net income attributable to PubCo requires an initial analysis of all income taxed and untaxed below PubCo within the Up-C organizational structure.
The TRA liability and deferred tax assets resulting from the Up-C IPO must be continually assessed and updated in line with the appropriate accounting framework for changes in ownership and the impact of the company’s operations.
Several additional footnotes will now be relevant and may include:
Additionally, other footnotes may need to be reexamined and tailored to the IPO.
As it relates to Non-GAAP measures, comparability across a company’s industry and with its peers is critical. An Up-C structure presents some unique challenges in achieving such comparability. Often investors and analysts will disregard the split in income between PubCo and the pre-IPO investors. They will also want to understand the future benefits that will be received as a result of the Up-C structure and associated TRA.
PubCo must record several journal entries to account for the reorganization, new ownership structure, cash proceeds and its use, the TRA, issuance of equity awards, and offering costs. Careful consideration should be given to the entity at which these journal entries are recorded. From an economic perspective, journal entries recorded at the PubCo entity reflect impacts to the public shareholders exclusively, whereas journal entries recorded at the pass-through operating entity or below reflect impacts to both the public shareholders and pre-IPO investors.
The significant advantages of an Up-C structure, including incremental cash flows for pre-IPO investors, have contributed to its increasing popularity. Companies should consider and prepare for the complexities. Early involvement and coordination between cross-functional teams from accounting, tax, and finance is critical in order to align expectations and evaluate the financial reporting implications.
PwC’s Deals and Tax specialists can advise management teams through the details of how an Up-C structure may impact your organization. For more insight on Up-C structures and how to prepare for the ongoing reporting requirements, please contact PwC to request a meeting.
“Observations from the front lines” provides PwC’s insight on current economic issues, our perspective regarding the financial reporting complexities and what companies should be thinking about to effectively address those issues. For more information, visit www.pwc.com/us/cmaas.