June 21, 2021

IPOs: EGCs Embracing Delayed Application of Accounting Standards

Next April will mark the 10-year anniversary of the JOBS Act. WilmerHale’s recent “IPO report” devotes a couple of pages to analyzing the evolution of regulations & practices since “emerging growth companies” hit the scene.

In many ways, EGCs paved the way to greater relief for all issuers. Page 10 of the memo recaps how the confidential submission process has been expanded to allow all companies the opportunity for nonpublic review of registration statements – and how financial disclosure requirements have also been eased for all companies.

There’s also been an uptick in EGCs taking advantage of the accommodations that are available under the rules. Here’s an excerpt about delayed application of new accounting standards:

EGCs may choose not to be subject to any accounting standards that are adopted or revised on or after April 5, 2012, until these standards are required to be applied to nonpublic companies. In the past few years, a major shift in EGC practices has occurred.

– Through 2016, the vast majority of EGCs, regardless of industry, opted out of the extension of time to comply with new or revised accounting standards. This decision appears to have been motivated by the uncertain value of the deferred application of future, unknown accounting standards, and concerns that a company’s election to take advantage of the extended transition period could make it more difficult for investors to compare its financial statements to those of its peers.

– The percentage of EGCs adopting the extended transition period jumped from 11% through 2016 to 63% between January 1, 2017, and December 31, 2020. This trend has been most pronounced among technology companies, with the percentage electing the extended transition period spiking from 12% to 71% between these periods (including 94% in 2020), and life sciences companies, with the percentage increasing from 10% to 62% (including 90% in 2020). This change in behavior appears to have been motivated by the desire of many EGCs to delay the application of the new accounting standards for revenue recognition (ASC 606) and lease accounting (ASC Topic 842) or, at a minimum, to take more time to evaluate the effects of the new standards before adopting them.

Liz Dunshee