IAS 32 Financial Instruments: Presentation—Special Purpose Acquisition Companies (SPAC): Classification of Public Shares as Financial Liabilities or Equity (Agenda Paper 5)

Background

The Committee received a submission asking whether a SPAC classifies public shares it issues as financial liabilities or equity instruments applying IAS 32. In the fact pattern described, a SPAC, a listed entity established solely for the purpose of acquiring a target company to be identified in the future, issues two classes of shares: founder shares (Class A) and public shares (Class B). The Class B shareholders (a) individually have the right to demand a reimbursement of their shares on approval by the SPAC’s shareholders of the acquisition of a target entity and (b) are reimbursed in the event of the SPAC’s liquidation. The SPAC is liquidated if no target entity is acquired within a specified period of time and the SPAC’s shareholders do not vote to extend the SPAC’s life. A decision to extend the SPAC’s life is approved by either (i) two-thirds of the shareholders; or (ii) two-thirds of the Class A shareholders and two-thirds of the Class B shareholders independently.

The submitter seeks clarity on whether a SPAC classifies the Class B shares as financial liabilities or equity instruments applying IAS 32:16(a)(i). Specifically, the submitter asks about the effect of two features on the classification of the Class B shares: Feature 1: the effect of the Class B shareholders’ right to demand a reimbursement of their shares (in the event of the acquisition of a company) on the existence of an unconditional right to avoid delivering cash or another financial asset; and Feature 2: the effect of the terms and conditions of the SPAC’s liquidation after a specified period of time on the classification of the Class B shares.

Staff analysis

IAS 32:25 includes requirements on classifying a financial instrument as a financial liability when the occurrence or non-occurrence of uncertain future events that are beyond the control of both the issuer and the holder require the entity to deliver cash or another financial asset. However, it includes no requirement on classifying a financial instrument when a contractual obligation to deliver cash is at the discretion of the issuer’s shareholders. It is unclear whether the entity has the unconditional right to avoid delivering cash or another financial asset in many cases.

In addition, based on the staff’s research, discussions with stakeholders and feedback on the 2018 Discussion Paper on Financial Instruments with Characteristics of Equity (FICE), it is evidenced that questions arise about assessing whether an entity has an unconditional right to avoid delivering cash or another financial asset when its shareholders have discretion in other circumstances. The Committee therefore concluded that the matter described in the request is, in isolation, too narrow for the IASB or the Committee to address in a cost-effective manner. Instead, this matter should be considered by the IASB as part of its broader discussions on the FICE project.

Staff recommendation

The staff recommended publishing a tentative agenda decision explaining that the matter is too narrow for the Committee to consider in isolation and is better suited to be addressed as part of the IASB’s FICE project.

Committee discussion

Most of the Committee members were of the view that shares issued by the SPAC are financial liabilities given that the SPAC has a limited life (even though the life can be extended, it is never unlimited) and the shares are puttable to the SPAC, which demonstrates that the SPAC has no unconditional right not to deliver cash. One Committee member thought that the major question to consider would be whether there is a real target to acquire. If there is, the classification of the instrument would depend on the contractual terms and assessed applying IAS 32, without considering economic compulsion. Another Committee member commented that if the extension of the life of the SPAC is conditional on identifying a target, it may not be considered as within the control of the shareholders. Therefore, the Committee member struggled with how the substance and the contractual terms of a SPAC would meet the definition of equity.

However, the Committee member acknowledged that there was diversity in practice and that there are scenarios in which the contractual terms in the agreement may give the shareholders the right to defer settlement. In addition, there is no requirement in IAS 32 in assessing whether the decision of the shareholder is treated as a decision of entity, which is the core issue of this matter. Therefore, the Committee members agreed that this should be considered as part of the broader discussions of the FICE project.

Committee decision

The Committee, by a unanimous vote, decided to publish the tentative agenda decision.