IFRS IC Agenda Decision on SPACs: accounting for warrants on acquisition of a SPAC by an operating entity

Keywords: Mazars, Thailand, IFRS, IFRS IC, SPAC, Warrants, IASB

22 December 2022

As a reminder, a SPAC is a special purpose vehicle created at the initiative of its founders, listed from the outset by raising capital from market investors, and whose use is earmarked for the planned acquisition of a target operating company within a maximum period determined at the outset (for example 18 months).

In the fact pattern the Committee discussed:

• the economic target, an operating entity, is the acquirer for legal and accounting purposes of the pre-existing SPAC, the latter holding as assets the cash received from investors as part of its initial listing. The aim of the operating entity, by substituting itself for the SPAC, is to benefit from its market listing and to recover its cash. The SPAC does not meet the definition of a business in IFRS 3;
• at the time of its initial listing, and in addition to ordinary shares, the SPAC had also issued warrants to both its founder shareholders and public investors. When the operating entity acquires the SPAC, it issues new ordinary shares and new warrants to the SPAC’s founder shareholders and public investors in exchange for the SPAC’s ordinary shares and the legal cancellation of the SPAC warrants;
• the SPAC’s founder shareholders and public investors are not SPAC employees, nor will they provide services to the operating entity after the acquisition of the SPAC;
• the fair value of the instruments the operating entity issues exceeds the fair value of the SPAC’s identifiable net assets.

The main question posed to the IFRS IC was whether new warrants issued by the operating entity should be considered as:

• replacing the SPAC warrants, after the acquisition of the SPAC’s assets and liabilities (the SPAC warrants being financial liabilities assumed by the operating entity as part of the acquisition); or
• as part of the instruments issued as consideration for the SPAC acquisition (the SPAC warrants not being assumed by the operating entity).

The IFRS IC ruled that the answer to this question depends on the specific facts and circumstances of the transaction, including the terms and conditions of all agreements associated with the acquisition. For example, the entity considers the legal structure of the transaction and the terms and conditions of the SPAC warrants and the new warrants the entity issues.

In the event that the new warrants are analysed as instruments issued by the operating entity as consideration for the acquisition of the SPAC, the IFRS IC considers that these warrants are within the scope of both IAS 32 and IFRS 2, insofar as they remunerate the acquisition of both the SPAC's cash and the stock exchange listing service (the acquisition of this service being evidenced, in accordance with paragraph 13A of IFRS 2, by the existence of a difference between the fair value of the instruments issued as consideration for the acquisition of the SPAC and the fair value of the SPAC's assets and liabilities).

This distinction matters because many warrants - such as those that are settled by issuing a variable number of shares - are classified as either financial liabilities or equity instruments, depending on whether they are within the scope of IAS 32 or IFRS 2 respectively.

The remuneration for the acquisition of the SPAC (the shares and warrants issued by the operating entity) should then be allocated between the acquisition of the SPAC’s cash on the one hand and the listing service on the other.

In the absence of guidance in the standards as to how this allocation should be made, the entity, in accordance with paragraphs 10 and 11 of IAS 8, develops an accounting policy that produces reliable and relevant information.

The IFRS IC suggests that the allocation could be based on the relative fair value of the instruments issued by the operating entity. For example, if the fair value of the instruments issued by the operating entity was split, in percentage terms, between shares for 80% and warrants for 20%, and if the cash and the listing service acquired represented 90 and 10 currency units respectively, the warrants would be recognised under IAS 32 for 18 currency units (90 x 20%) and under IFRS 2 for 2 currency units (10 x 20%). However, prioritising allocation of the newly issued warrants to the acquisition of the stock exchange listing service solely to avoid their classification as financial liabilities would not meet the requirements in paragraphs 10–11 of IAS 8.

Hence the IFRS IC concluded that the principles and requirements of existing standards provide an adequate basis for answering this question, and decided not to add a standard-setting project to the IASB’s work plan.