Accounting for Warrants at Acquisition (SPAC)

Date recorded:

Special Purpose Acquisition Companies (SPAC): Accounting for Warrants at Acquisition (Agenda Paper 3)

Background

In its March 2022 meeting, the Committee discussed a submission about how an entity accounts for warrants on acquiring a SPAC. The Committee concluded that IFRS 2 is applied in accounting for instruments issued to acquire the stock exchange listing service and IAS 32 is applied in accounting for instruments issued to acquire cash and assume any liabilities related to the SPAC warrants. Most of the Committee members agreed with the technical analysis and with the staff recommendation to publish a tentative agenda decision.

10 comment letters were received. Most respondents to the tentative agenda decision agreed (or did not disagree) with the technical analysis and conclusions but raised comments on the analysis or concerns about the potential unintended consequences for other fact patterns.

Staff analysis

Some respondents still suggested that the agenda decision should also comment on SPAC acquisitions that are structured as reverse acquisitions because they are the common structure of a SPAC and thus considering them is helpful. However, the staff recommended not to add it at this stage given the Committee had already discussed this in its March 2022 meeting and there was no new information provided by the respondents.

Some respondents said assessing whether an entity assumes the SPAC warrants as part of the acquisition is judgmental and challenging and suggested the agenda decision provide additional guidance on this. The staff explained the agenda decision mentions that an entity has to consider specific facts and circumstances and legal structure and there are examples of factors to consider in the agenda paper. The staff considered adding further guidance or examples would add requirements to IFRS Accounting Standards which is not in line with the purpose of agenda decisions. Another respondent asked the Committee to clarify whether the assumption of the SPAC warrants would result in the need to allocate between those issued to acquire the net assets and those to acquire the listing service and the components to which the instruments are allocated. The staff said that the agenda decision explains that an entity would have to determine which types of instruments it issued for the SPAC’s net assets and which it issued for the service only if the entity does not assume the SPAC warrants. If the entity concludes that it assumes the SPAC warrants, then a single type of instrument (ordinary shares) is issued and thus no allocation is required. The staff recommended clarifying this by making edits and adding separate boxes to include additional considerations applicable if the entity concludes that it does not assume the SPAC warrants.

Given an entity can account for the replacement of the SPAC warrants as part of the acquisition, a respondent asked whether only the incremental value or all new warrants were the consideration for the acquisition. The staff explained that the agenda paper includes the analysis of how entities would develop an accounting policy applying IAS 8:11(a) for the replacement of the SPAC warrants by considering the requirements in IFRS 3:B50. The agenda decision conveys the message that an entity concludes that at least part of the new warrants issued is additional consideration for the acquisition of the SPAC. The staff recommended changes to the wording to make this clearer.

Some respondents commented that IFRS Accounting Standards do not specifically require an allocation between IFRS 2 and IAS 32 to a transaction that involves the acquisition of both goods and services and financial assets. Therefore, an entity should develop an accounting policy applying IAS 8 to account for the instruments issued and could apply IFRS 2 in accounting for a transaction that meets the definition of a share-based payment arrangement in its entirety. The staff responded that the scope of IAS 32 and IFRS 2 prohibit the application of IFRS 2 in accounting for financial instruments issued to acquire cash, and IAS 32 in accounting for financial instruments issued to acquire goods or services. Therefore, an entity must apply IFRS 2 to share-based payment transactions in which it acquires goods and services. This is because IFRS 2 includes specific requirements that apply to such transactions, while IAS 32 and IFRS 9 apply to transactions in which an entity acquires cash or another financial asset in exchange for issuing a financial instrument. Moreover, the staff continued to see no basis in IFRS Accounting Standards to account for the SPAC acquisition in its entirety as a share-based payment transaction because the entity acquires both cash and a stock exchange listing service.

Staff recommendation

The staff recommended finalising the agenda decision with some suggested changes.

Committee discussion

The Committee generally agreed with the staff anlaysis of the comment letters and the conclusion in the agenda paper.

Most of the Committee members expressed their concerns on adding a cross-reference to the March 2013 agenda decision as suggested in the staff analysis of the agenda paper. They said that the specific fact pattern of this submission focuses on the articulation of listing by a non-listed operating entity by issuing warrants which is different from the fact pattern in the March 2013 agenda decision. Also, that agenda decision is about a reverse takeover transaction while the Committee decided not to include the reverse takeover transaction in the current agenda decision. The Chair commented that each agenda decision’s fact pattern is very narrow and specific. Cross-referencing would add confusion to the current fact pattern.

Some Committee members were not comfortable with the cross-reference to paragraph B50 of IFRS 3 in the tentative agenda decision. They considered that there was no allocation issue if an entity concludes that it assumes the SPAC warrants. Also, it would be confusing to do so given the fact pattern in this submission is not exactly the same as the one in paragraph B50. The staff decided to remove the cross-reference but to state that the entity determines the extent to which it accounts for the replacement of the SPAC warrants as part of the acquisition.

One Committee member specifically commented that the agenda decision should not be that explicit in stating how the allocation (i.e. which types of instruments were issued for the SPAC’s net assets and which were issued for the service) is performed if the entity concludes that it does not assume the SPAC warrants. It could not be precluded that all warrants issued could be for services. He suggested only to state that an entity should develop an accounting policy for this.

The other aspect of the agenda decision that the Committee members discussed the most was the development of an accounting policy if the entity concludes that it does not assume the SPAC warrants as part of the acquisition. Some Committee members did not agree with adding an example of the allocation of the fair value or stating which kind of accounting policy is not allowed. After considering the comments, the staff decided to re-order the text to make it flow better. A majority of the Committee members agreed with this.

Committee decision

The Committee decided, by a vote of 12 out of 14, to finalise the agenda decision with suggested amendments to the text.

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