Co-working company WeWork Inc. tripped over the same accounting error that has caused scores of special purpose acquisition companies to restate, or redo, their past financial statements.
The problem, which triggered a restatement filing after the market close Wednesday, stemmed not from the company itself, but from the SPAC that took the business public. BowX Acquisition Corp., a blank-check company that merged with WeWork in October, erroneously classified a portion of its public shares as permanent equity, WeWork said in a securities filing.
The restatement notice, which also included a warning about a material weakness in internal control over financial reporting, doesn’t carry over to WeWork, the company said in a statement. “The underlying economics of the SPAC, de-SPAC transaction proceeds, sources and uses, and valuation at close were not impacted,” it said.
Under accounting rules outlined in ASC 480, if shares contain features that allow holders to redeem them, or cash them out, and those features are outside of the control of the company, the shares can’t be considered permanent equity.
This accounting problem is pervasive in the SPAC market and has caused a wave of restatements in recent weeks.
“It’s the exact same restatement that all the other SPACs are having,” said Derryck Coleman, director of research analytics at research firm Audit Analytics. “It’s really no different than anybody else.”
The company in its Nov. 15 quarterly financial statement disclosed the error and fixed it via what’s called a “small R” revision. That change was largely ignored by investors, unlike Wednesday’s news. WeWork fell 5.2% to $8.02 at 5:56 p.m. in New York.
Many other SPACs also used less-formal revisions to correct their accounting mistakes for the share classification problem, but Securities and Exchange Commission officials told two of the biggest auditors of SPACs that the errors were big enough to warrant formal, so-called Big R restatements.
Restatements require companies to file separate, attention-grabbing 8K statements announcing their mistakes. In WeWork’s case, the 8K also included a warning about a material weakness in internal control over financial reporting, as did many other similar SPAC restatement announcements.