Kroll Institute Newsletter – April Edition

The Kroll Institute newsletter opens the lens of Kroll Institute Fellows on topics related risk mitigation, good governance and transparency. Here’s what our Fellows think you should be paying attention to this month.

Police and Community Relations: Eight Years After the Boston Marathon Bombing

Daniel Linskey, Kroll Institute Fellow, Managing Director, Security Risk Management 

April 15, 2021 marked the eight-year anniversary of the Boston Marathon bombing. On that day, I was the Superintendent-in-Chief for the Boston Police Department. Here are a few things that police departments and communities should consider based on my reflections from that day.

• Policing reform and public safety are inextricably linked, and that if the police cannot earn the trust of the community, it will make all of us less safe. Following the marathon bombing, community members helped find the bombers, who were later convicted. This would not have been possible without the community’s trust in the police force.
• Trust is cultivated and cannot be forced. During my time as Boston Police Chief, we rolled out community engagement programs, but were still met with challenges from those most impacted by policing.
• Law enforcement leaders must engage their harshest critics. Listen to them and their perspective, have respectful conversations and learn.
• Reshift the focus towards peace and community-involved policing. Include the community in training and preparedness activities. Hold community sessions to understand how they want to be policed, and educate them on police operations.

Biden Infrastructure Plan

Chris Campbell, Chief Strategist

• Earlier this month, President Biden unveiled his American Jobs Plan, a $2.25 trillion proposal for a wide range of investments in transportation, renewable energy, manufacturing, and combating climate change. The plan also includes several tax proposals designed to raise revenue to offset the spending. Speaker Pelosi has said she intends to have a House vote on the package before July 4.
• Most congressional Republicans have come out in opposition to the Biden plan, citing both the tax hikes and the expanded view as to what constitutes “infrastructure.” However, there is broad bipartisan support for major investments in more traditional infrastructure projects that don’t require major tax increases. A group of moderate Senate Republicans have reportedly been working on a counteroffer of around $600 to $800 billion. Ultimately, the fate of the American Jobs Plan may hinge on what compromises the president will have to make in order to maintain enough support among Democrats or, in the alternative, to gain the support of a handful of Republicans.

SPAC Warrant Valuations

David Larsen, Kroll Institute Fellow, Managing Director, Alternative Asset Advisory

• On April 12, 2021, the SEC issued a statement, “Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (SPACs).” While SPACs typically classify warrants on their balance sheets as equity, under certain circumstances they should be classified as a liability and measured at fair value on a quarterly basis with changes in fair value reported in earnings. SPACs that have misclassified their warrants as equity may be required to restate their financial results if the differences are deemed material. To determine if the impact is material, the fair value of the SPAC warrant liability needs to be estimated as of the initial IPO and at each quarterly reporting date. Fair value for both public warrants and private warrants is required, taking to account depending on the facts and cirucmtances, redemption provisions, restrictions and probability of a successful acquisition. To the extent that warrants remain outstanding after the acquisition (de-SPACing) the fair value would continue to be estimated at each quarter end with the related impact on the financial statements.
• Given the proliferation of SPACs as an alternative to the IPO process, scrutiny of this investment vehicle will likely increase. SPACs should take the following actions immediately in connection with the new SEC guidance.
  • Talk to your auditor to determine if the current accounting treatment of warrants issued in connection with your SPACs formation and initial registered offering is appropriate.
  • If you determine with your auditor that the warrants were misclassified as equity, obtain an independent valuation and discuss with your auditor to assess materiality. 
  • Obtain an independent valuation to assist with retrospective and ongoing valuations for warrant liabilities that are required to be reported at fair value.
• The recent SEC scrutiny with respect to SPAC accounting and valuation conclusions is related to highly technical and complex accounting rules. The SEC had not previously issued a statement with respect to the specific SPAC accounting treatment that is now under the microscope, but this questioning has halted all in progress offerings, business combinations and new IPO filings until SPACs resolve the accounting and related valuation questions. 
• While possibly not the primary intent, the SEC statement and resultant reconsideration by SPACs of their historical accounting treatment has resulted in an almost instantaneous cessation of public filings resulting in a stoppage or slow down of new security issuances in the super-heated SPAC market place.
• It is not known how the public stock market will react when SPAC financial statements are restated and reissued, if deemed necessary. The importance of complying with accounting, auditing and valuation standards should not be understated. However, in this case, investors should be aware that reclassifying the warrant obligation from equity to liabilities and reflecting changes in current earnings, while in many cases material, ultimately has no impact on expected cash flows before/after the accounting change. The expected profit and loss impact from an increase in the liability quarter on quarter, which naturally follows an increase in stock price, is a non-cash charge. And correspondingly, if the stock price were to fall significantly from a prior quarter, the warrant liability would decrease resulting in potentially significant quarterly income, again non-cash.

Read more about our guidance here.