Special Purpose Acquisition Companies (SPAC): Accounting for Warrants at Acquisition (Agenda Paper 6)

Background

The Committee received a submission about how an entity accounts for warrants on acquiring a SPAC. In the fact pattern described, the entity acquires a SPAC that has raised cash in an initial public offering (IPO). The purpose of the acquisition is for the entity to obtain the cash and the SPAC’s listing in a stock exchange. The SPAC does not meet the definition of a business in IFRS 3 and, at the time of the acquisition, has no assets other than cash. Before the acquisition, the SPAC’s ordinary shares are held by its founder shareholders and public investors. The ordinary shares are equity instruments as defined in IAS 32. In addition to ordinary shares, the SPAC also issued warrants to both its founder shareholders and public investors: (a) Founder warrants were issued at the SPAC’s formation as consideration for services provided by the founders. The founders will provide no services to the entity after the acquisition; and (b) public warrants were issued to public investors together with ordinary shares at the time of the IPO. The entity acquires the SPAC by setting up a new parent Company (NewCo) which issues new ordinary shares and warrants to the SPAC’s founder shareholders and public investors in exchange for the SPAC’s ordinary shares and the cancellation of the SPAC’s warrants. The entity’s owners control the group after the transaction. The SPAC becomes a wholly-owned subsidiary of the NewCo and the NewCo replaces the SPAC as the entity listed on the stock exchange. The fair value of the new shares and warrants issued by the NewCo exceeds that of the identifiable net assets (comprising of cash only) of the SPAC. The submitter asks whether the warrants issued by the NewCo are in the scope of IFRS 2 or represent a liability assumed by the entity as part of the acquisition and, if the warrants are in the scope of IFRS 2, whether they remain so after the acquisition date.

Staff analysis

The staff outlined that the first step in determining how to account for a SPAC acquisition is to identify the acquirer, i.e. which entity obtains control of the acquiree. In the submitted fact pattern, the entity is identified as the acquirer in the transaction. Having determined that the transaction is not a business combination in the scope of IFRS 3, the second step is to determine which IFRS Accounting Standard applies to the acquisition. As the SPAC does not meet the definition of a business in IFRS 3, applying IFRS 3:2(b), an entity identifies and recognises the individual identifiable assets acquired and liabilities assumed as part of the SPAC acquisition.

The main purpose of a SPAC acquisition is for the entity to acquire cash and the SPAC’s stock exchange listing. However, a stock exchange listing does not meet the definition of an intangible asset to be "identifiable" under IAS 38 and thus it does not form part of the identifiable assets acquired applying IFRS 3:2(b). On the other hand, the entity receives a stock exchange listing service for which it has issued equity instruments as part of a share-based payment transaction because it agrees to issue equity instruments with fair value exceeding that of the identifiable net assets. The entity should measure the stock exchange service received as a difference between the fair value of the equity instruments issued and that of the net identifiable assets applying IFRS 2:13A.

Next, the entity would need to assess whether it has assumed any liabilities, i.e. the SPAC warrants, as part of the acquisition. In making this assessment, an entity has to consider the specific facts and circumstances of the acquisition and might conclude that the terms and conditions are such that it either assumes the SPAC warrants as part of the acquisition and then replaces them with new warrants or does not assume the SPAC warrants as part of the acquisition.

If the terms and conditions are such that the entity does not assume the SPAC warrants as part of the acquisition (i.e. the entity issues the new warrants as consideration for the acquisition), the staff were of the view that the acquisition is not in the scope of IFRS 2 in its entirety. Instead, IFRS 2 should be applied in accounting for shares and warrants issued to acquire the stock exchange listing service while IAS 32 should be applied in accounting for the shares and warrants issued to acquire cash. The staff considered that an entity could allocate the shares and warrants to the acquisition of cash and the stock exchange listing service on the basis of the relative fair values of the instruments issued despite that there are no requirements in IFRS Accounting Standards that specifically apply in such allocation.

If the terms and conditions are such that the entity assumes the SPAC warrants as part of the acquisition and then replaces them with new warrants, it considers whether to account for the replacement as part of the acquisition or separately from it. Since the acquisition transaction is not a business combination in the scope of IFRS 3, there are no requirements in IFRS Accounting Standards that specifically apply to this consideration but the entity should develop an accounting policy for it applying IAS 8:10 & 11. The staff were of the view that an entity could refer to, and consider the applicability of, the requirements in paragraph B50 of IFRS 3. If the terms of the new warrants are the same as the old warrants and there is no transfer of value in the replacement, the entity would account for the replacement separately and applies the applicable requirements in IAS 32 and IFRS 9 to do so. In contrast, if the terms of the new warrants differ from those of the SPAC warrants and there is a transfer of value in the replacement those terms would indicate that at least part of the replacement relates to the SPAC acquisition and would be accounted for as part of that transaction. In this case, the entity applies IAS 32 to determine whether the warrants are financial liabilities or equity instruments. Assuming the SPAC warrants as part of the acquisition does not mean that the entity assumes a share-based payment transaction in the scope of IFRS 2. In the fact pattern discussed, the SPAC’s founder shareholders are not SPAC employees nor will they provide services to the entity after the acquisition. Instead, the entity assumes the founders warrants as instruments held by the founders solely in their capacity as owners of the SPAC.

Similarly, IFRS 2 would be applied to the new ordinary shares issued to acquire the stock exchange listing while IAS 32 is applied to those issued to acquire cash and assuming any liability. Both the public warrants and the founder warrants would be classified as financial liabilities applying IAS 32 and, therefore, would be recognised as such as part of the acquisition.

Staff recommendation

The staff concluded that the principles and requirements in IFRS Accounting Standards provide an adequate basis for an entity to determine the accounting for warrants on acquiring a SPAC in the submitted fact pattern and recommend not adding a standard-setting project and instead to publish a tentative agenda decision.

Committee discussion

Most of the Committee members agreed with the staff analysis and conclusion made on the treatment of the warrants issued by the entity to acquire the SPAC but they raised concerns on a number aspects of the analysis.

Some Committee members considered that it is not clear which are the specific facts and circumstances of the acquisition the entity needs to consider to determine whether it assumes the SPAC warrants as part of the acquisition or not. The staff responded that the terms of the new and old warrants are the same (which is included in one paragraph in the proposed tentative agenda decision). Whether the old warrants are legally extinguished are the facts and circumstances to consider and this would be made clearer in the tentative agenda decision.

A number of Committee members had concerns that the proposed tentative agenda decision includes an allocation method for the acquisition and the stock listing service (i.e. on the basis of the relative fair values of the instruments issued) while no specific accounting standard could apply to this determination. They considered that as long as the method is systematic and rational and is not attempting to achieve a particular outcome, there are other methods that could be applied for the allocation. The allocation hierarchy in IFRS 9 may be one of the methods. The staff agreed with this and said that the proposed tentative agenda decision only gives an example of the method but does not preclude the use of other allocation methods.

Some Committee members did not agree that the listing services do not meet the criteria of an intangible asset. They considered that it is separable, and the legal terms of the acquisition agreement could meet the criteria of an intangible asset. The staff referred to an agenda decision published in March 2013 for a similar scenario. The staff explained that the acquisition of a listing status is unidentified and only embedded in the contract. If there is difference in value in the shares issued and net asset acquired, the extra element the entity receives would be a service, which is in the scope of IFRS 2.

A few Committee member said that they are not convinced that there is no alternative view that would bring the whole transaction within the scope of IFRS 2. One Committee member quoted the example of an employee share option where the entity receives both cash and services and it is, as a whole, regarded as a share-based payment transaction. A few Committee members were not persuaded that share-based payment could not be for cash. The staff explained that in an employee share option scheme, only the option itself is in the scope of IFRS 2. Cash is only a part of the contractual terms but not part of the share-based payment. IFRS 2:5 indicates that goods that an entity acquires only include "non-financial assets".

With regard as to whether to add the analysis for "reverse acquisition" in the tentative agenda decision, the staff explained that though an agenda decision generally does not do that, it would be helpful in this scenario given that they are aware that this is a common way to achieve the acquisition. It is worth informing the reader that where it is a different legal form but it is economically identical to a direct acquisition, this would result in a different accounting outcome.

However, most of the Committee members questioned why an agenda decision would analyse something that is beyond the fact pattern. There is no provision in the due process handbook which would allow the Committee to do so. A few Committee members were concerned that doing so may open the door for future cases for analysing variations beyond the fact pattern provided in submissions. One Committee member did not expect diversity in interpretation for the reverse takeover case if the agenda decision is published without analysing it. Therefore, most of the committee members preferred not adding the reverse acquisition analysis to the tentative agenda decision.

Committee decision

The Committee decided, by a vote of 12 out of 13, not to add the matter to the standard-setting agenda but to publish a tentative agenda decision for the lessor's accounting on warrants issued by the entity on acquiring a SPAC in the submission. In addition, the Committee decided, by a vote of 9 out of 13, not to add the reverse acquisition analysis to the tentative agenda decision.