Special Purpose Acquisition Companies: Classification of Public Shares as Financial Liabilities or Equity (IAS 32)

by | Mar 26, 2022 | Accounting, Tech News

On or about 24 Mar 2022, the IFRS Interpretations Committee has discussed the following agenda decision and tentatively decided not to add a standard-setting project to the work plan.

Tentative Agenda Decision

A request about applying IAS 32 in relation to the classification of shares issued by a special purpose acquisition company (SPAC) as financial liabilities or equity was received. A SPAC is a listed entity that is established to acquire a yet to be identified target entity.

The request described a SPAC that issues two classes of shares (Class A and Class B). The Class B shareholders:

  1. individually have the contractual right to demand a reimbursement of their shares if the SPAC’s shareholders approve the acquisition of a target entity.
  2. are reimbursed if the SPAC is liquidated. The SPAC is liquidated if no target entity is acquired within a specified period.
  3. along with the Class A shareholders, have the contractual right to extend the SPAC’s life beyond that specified period if no target entity is acquired. Extension of 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 request asked about the effect of the shareholders’ contractual right to extend the SPAC’s life on the classification of the Class B shares—in particular, whether the decision of shareholders to extend the SPAC’s life is considered to be within the control of the SPAC. This assessment is needed to determine whether the SPAC has the unconditional right to avoid delivering cash or another financial asset to settle a contractual obligation.

In assessing whether a decision of shareholders is treated as a decision of the entity has been identified as one of the practice issues the International Accounting Standards Board (IASB) will address in its Financial Instruments with Characteristics of Equity (FICE) project. The IFRS Interpretation Committee concluded that this matter is, in isolation, too narrow for the IASB or the Committee to address in a cost-effective manner.

The IFRS Interpretation Committee decided not to add a standard-setting project to the work plan.

The deadline for commenting on the tentative agenda decision is 23 May 2022.