Challenges when accounting for special purpose acquisition company transactions

A special purpose acquisition company (‘SPAC’) raises capital through an initial listing with the intention of acquiring or merging with a private operating company (‘OpCo’). Where an OpCo is acquired by a publicly traded SPAC, it effectively becomes a public company without executing its own initial public offering (‘IPO’).

Globally, SPACs have completed nearly $26 billion of share sales in January 2021. Such transactions present challenges, including satisfying listed company disclosure requirements and complex accounting considerations. Although the term ‘SPAC’ is generally used in the context of US listings, this type of vehicle and listing can occur in other capital markets.

Accounting issues can be separated into pre- and post-acquisition issues. Please find a summary of considerations for both of them here.

Pre-acquisition issues

What is the issue?

A SPAC is created with capital from initial investors (‘sponsor’ or ‘founder’), and it undergoes an IPO to raise additional capital, with the intention of acquiring one or more unspecified OpCos. After being acquired, the OpCo becomes a public company (or a subsidiary of a public company). Accounting and reporting for such transactions is complex, in terms of both the accounting and the regulatory requirements.

What is the impact and for whom?

There are many accounting challenges for the SPAC entity. The most common pre-acquisition issues are listed below:

• Does the sponsor consolidate the SPAC? Where SPACs are sponsored by corporate entities, a consolidation analysis needs to be performed, to determine whether the sponsor has control over the SPAC for the period before the acquisition. The analysis needs to consider the extent to which the sponsor has power over the relevant activities, exposure to variable returns, and the ability to use power to affect the variable returns.
• Where the sponsor does not consolidate the SPAC, what is the nature of the sponsor’s interest in the SPAC? A sponsor that does not consolidate a SPAC would have to determine whether the sponsor has significant influence over the SPAC, and whether the equity method of accounting (applying IAS 28) or IFRS 9 applies.
• How are the founder shares and warrants accounted for? In many cases, the SPAC issues warrants and shares to the founder or sponsor. In the SPAC’s stand-alone financial statements, a key consideration is whether the founder shares and warrants should be accounted for applying IFRS 2 or IAS 32. Careful consideration of all of the facts and circumstances will be needed, such as whether the rights of the founders differ from those of the public shareholders. This distinction is important, because the classification as debt or equity is different when applying IFRS 2 and IAS 32.  
• How are the public shares and warrants accounted for? Do the warrants and shares issued to investors meet the definition of equity under IAS 32? This assessment will require careful consideration of all of the features in the agreement, including, but not limited to, contingent puts and potential variability in the exercise price or number of shares on exercise (such as cashless exercise features).

What is next?

In general, these transactions are complex, and consultation with subject matter experts is strongly advised.

Post-acquisition issues

What is the issue?

A SPAC is created with capital from initial investors, and it undergoes an IPO to raise additional capital, with the intention of acquiring one or more unspecified OpCos. After being acquired, the OpCo becomes a public company (or a subsidiary of a public company). Accounting and reporting for such transactions is complex, both in terms of the accounting and regulatory requirements.

What is the impact and for whom?

When accounting for a SPAC transaction, there are many accounting challenges. The most common are listed below:

• Which entity is the acquirer? The SPAC is the legal acquirer, and the OpCo is the legal acquiree. However, in substance the transaction might be the other way around if the SPAC issues equity, or a combination of cash and equity, to legally acquire the OpCo. If this is the case, the arrangement is typically accounted for as a reverse merger. This is equivalent to the issuance of shares by the OpCo for the net assets of the SPAC.
• Is this a business combination? This determination often depends on which entity is identified as the accounting acquirer. If the SPAC is the accounting acquiree, the transaction might not be a business combination, because the SPAC generally would not meet the definition of a business. In many cases, IFRS 2, rather than IFRS 3, will be the applicable guidance for accounting in relation to the SPAC merger if the arrangement is not a business combination.
• How would the associated transaction costs be accounted for? Transaction costs are recognised in equity if they are incremental and directly attributable to the issuance of equity. In a SPAC arrangement, it might be challenging to determine whether the costs relate to the issuance of new equity if the legal acquisition is accounted for as a reverse merger.
• How would contingent share issuances be accounted for? Often, the SPAC or OpCo will enter into agreements with shareholders or employees, to issue additional shares post transaction if certain performance measures are met. Determining whether IFRS 3, IFRS 2 or IAS 32 applies to these contingent share issuances will depend on the substance of the arrangement and the assessment of the accounting acquirer in a SPAC merger.
• What about taxes? The tax implications would be impacted by the determination of whether the arrangement is a business combination and of the entity that is identified as the acquirer. The tax implications would also be impacted by the way in which the relevant tax authority considers the arrangement.
• What about presentation challenges? When the transaction occurs, the SPAC will typically issue shares in exchange for shares in the OpCo. Where the OpCo is identified as the accounting acquirer, complexities can arise in relation to how the comparative and merger equity structure is presented. The merged entity might also need to consider adjustments to calculate earnings per share if the arrangement is deemed to be a reverse merger.
  

Compliance with local regulation and presentation of information for investors

The paragraphs above highlight some typical accounting complexities that need to be considered for SPAC arrangements. However, there are usually additional capital markets regulatory requirements that need to be taken into account, including assessing various financial reporting and filing requirements. There might also be pro-forma reporting requirements that need to be considered. These regulatory requirements can be complex and burdensome.

What is next?

In general, these transactions are complex, and consultation with subject matter experts is strongly advised.