IFRS IC agenda decision on SPACs: classification of public shares as financial liabilities or equity

In July 2022, the IFRS IC published a final agenda decision (available here and now approved by the IASB) on whether public shares issued by a SPAC (Special Purpose Acquisition Company) should be classified as financial liabilities or equity. A SPAC is an ad hoc entity created by its founders to raise capital through an initial public offering, for the purposes of acquiring a target company within a time frame specified from the outset (e.g. 18 months).

Keywords: Mazars, Thailand, IFRS, IFRS IC, IASB, SPACs, IAS 32, FICE

19 October 2022

In the fact pattern described in the request, the SPAC issues two classes of shares: class A shares, held by the founders, and class B shares, held by public investors. Class B shareholders:

  • may ask for a reimbursement of their shares in cash if the general shareholders’ meeting approves the acquisition of a target entity;
  • are likewise reimbursed if the SPAC is liquidated because no target has been acquired within the specified time frame;
  • may nonetheless decide, in conjunction with the class A shareholders, to extend the SPAC’s life indefinitely if the target entity has not been acquired within the specified time frame.

The question submitted to the IFRS IC was whether the decision to extend the SPAC’s life, which is made by the entire body of shareholders, is considered to be within the control of the SPAC, thus giving it the unconditional right not to reimburse class B shares – which would imply their classification as equity rather than as liabilities.

The IFRS IC observed that IAS 32 does not specify how to determine whether a decision of shareholders is treated as being under the control of the entity. Hence, this has been identified as one of the practice issues to be addressed as part of the FICE (Financial Instruments with Characteristics of Equity) project. The aim of the FICE project is to clarify the principles set out in IAS 32, to address issues around practical application, and to improve disclosures in the notes.

As a result, the IFRS IC decided not to respond to this request, and instead to discuss the matter as part of the FICE project. However, it reminded preparers that it is important for SPACs to disclose information in the notes on whether public shares are classified as financial liabilities or equity.