Key points

Reverse listings provide an alternative way for management teams and sponsors to take companies public. This can be achieved in a number of ways.
One of these ways is via a special purpose acquisition company (‘SPAC’). A SPAC raises capital through an initial public offering (‘IPO’) with the intention of acquiring a private operating company or group (‘OpCo’). Where the OpCo is acquired by a publicly traded SPAC, it effectively becomes a public company without executing its own IPO.
SPAC transactions present a number of challenges. This In depth highlights several of the financial reporting and accounting considerations and our responses to frequently asked questions on the SPAC merger process.
We plan to update this In depth as additional guidance and financial reporting or accounting considerations are identified.
What's inside:
  1. Background
  2. SPAC overview and lifecycle
  3. Accounting considerations - SPAC Formation and IPO
  4. Accounting considerations of the SPAC merger
  5. Considerations following the SPAC merger

1. Background

A company can list on a stock exchange in many different ways. One such way is a reverse listing. In a reverse listing, an OpCo might be legally acquired by a public company. However, when the public company issues shares as the consideration to acquire the OpCo, the OpCo’s shareholders obtain control of the public company. The issues and principles related to SPACs are typically consistent for other forms of reverse listings which might be labelled differently depending on the jurisdiction in question. The paragraph below describes one of the common approaches to SPAC arrangements; however, other variations are also common.
A SPAC is created with capital from its initial investors, and it undergoes an IPO to raise additional capital, with the intention of acquiring one or more unspecified OpCos. The IPO proceeds are placed into a trust account and, based on the terms of its governing documents, the SPAC typically has 18–24 months to identify and complete the acquisition of a target company (‘SPAC merger’), sometimes also referred to as ‘de-SPACing’. After the SPAC merger, the OpCo becomes a public company (or the legal subsidiary of a public company). If the SPAC does not complete the SPAC merger within the specified time frame, and in the absence of an extension, the SPAC will liquidate and return the remaining IPO proceeds to its shareholders.
The SPAC merger presents several challenges, including having policies and processes in place to perform as a public company, assessing complex accounting considerations and various financial reporting requirements.
Challenges that a company might face when accounting for SPAC transactions are addressed in this In depth.

2. SPAC overview and lifecycle

There are three distinct phases in the life of a SPAC: SPAC formation and IPO; SPAC target search; and the SPAC merger or de-SPAC. Management teams of the OpCo need to plan ahead of the SPAC merger, and be prepared for the financial reporting and regulatory filing requirements, in much the same way as for a traditional IPO.
2.1 SPAC formation and IPO
A SPAC is formed by a management team, or a sponsor, with nominal invested capital (commonly known as ‘founder shares’). The SPAC subsequently issues ‘units’' in an IPO, which results in approximately 80% of the outstanding shares being held by public shareholders and approximately 20% of the shares being held by the founders. The shares issued in the IPO are often redeemable, at any time before the SPAC merger, at the option of the holder (generally at the same price at which they were issued). Each unit consists of a share of common stock and a fraction of a warrant.
Founder shares and public shares generally have similar voting rights, except that founder shares usually have the sole right to elect SPAC directors. It is common for the SPAC founders or management team to be incentivised for performance via the award of additional warrants, or as a result of subscribing for their shares in the SPAC at a discount to the public shareholders.
The IPO proceeds are held in a trust account that earns interest while the SPAC conducts its search for a target company. In many cases, the public shares will include specified redemption rights. A SPAC generally has very limited operating activity (that is, it generally does not meet the definition of a business), and the financial statements consist of cash, shareholders’ funding (equity and/or a liability), and general and administrative expenses associated with start-up activities and operating as a public company during the target search.
2.2 SPAC target search
The SPAC formation agreements typically specify a period of 18 to 24 months to identify a target company and complete the acquisition. After identifying the target, the SPAC will execute a letter of intent, complete due diligence, and negotiate the terms of the SPAC merger, including the proposed transaction structure and governance of the combined entity.
A SPAC might need to secure additional financing to fund (a) the SPAC merger, or (b) shareholder share redemptions in advance of the SPAC merger. A SPAC can secure additional funding for a SPAC merger in various ways, including:
  • private investment in public equity (PIPE) deals, typically forward purchase commitments by affiliates of the sponsor or institutional investors to purchase ordinary shares;
  • additional common stock offerings to the public;
  • preferred equity investments; or
  • debt financing (for example, registered notes, private placement, term loans or revolving credit facilities).
Once the terms of the transaction are finalised, the SPAC proceeds with the acquisition or merger.
2.3 SPAC merger (de-SPAC)
Public shareholders of the SPAC have an opportunity to redeem their common shares, prior to the close of a transaction, if they do not want to be investors in the target(s). Warrants issued to these shareholders are typically not forfeited on redemption of the common shares. If the SPAC does not identify a suitable target company or the proposed transaction is unsuccessful, the SPAC liquidates and the remaining IPO proceeds are returned to the public shareholders.

3. Accounting considerations - SPAC Formation and IPO

3.1 Control assessment
Where SPACs are sponsored by corporate entities, a control assessment needs to be performed to determine whether the sponsor has control over the SPAC.
If the sponsor controls a SPAC, IFRS 10 requires the sponsor (that is, the parent) to present consolidated financial statements [IFRS 10 para 2], unless the sponsor is exempt from having to present consolidated financial statements, or unless the sponsor is an investment entity (as defined in para 31 of IFRS 10). [IFRS 10 para 4B]. Paragraph 4(a) of IFRS 10 sets out the criteria that must be met for an entity to be exempt from having to present consolidated financial statements.
A sponsor that does not consolidate a SPAC would have to determine whether the sponsor has significant influence over the SPAC, in which case IAS 28 applies to its investment in the associate. IFRS 9 would apply to other interests.
Detailed considerations
A sponsor controls a SPAC where the sponsor is exposed, or has rights, to variable returns from its involvement with the SPAC, and the sponsor has the ability to affect those returns through its power over the SPAC. [IFRS 10 para 6].
When assessing control of the SPAC, the sponsor should consider the purpose and design of the SPAC in order to identify the relevant activities, how decisions about the relevant activities are made, who has the current ability to direct those activities, and who receives returns from those activities. [IFRS 10 App B para B5].
One of the key factors in determining whether the SPAC is controlled by the sponsor is that the sponsor has power over the relevant activities that most significantly affect the returns of the SPAC. [IFRS 10 para 10]. ‘Relevant activities’ are activities of the SPAC that significantly affect the investee’s returns. [IFRS 10 App A]. Usually, the relevant activities of the SPAC are the search for, and ultimate acquisition of, the target company.
In addition to having power over the relevant activities, the sponsor needs to have exposure or rights to the SPAC’s variable returns in order to demonstrate control. [IFRS 10 para 7(b)]. ‘Variable returns’ is a broad concept under IFRS 10; examples range from dividends to economies of scale, cost savings, tax benefits, access to future liquidity and access to proprietary knowledge. [IFRS 10 App B para B56]. [IFRS 10 App B para B57].
To have exposure, or rights, to variable returns, the sponsor’s involvement in the SPAC needs to be one that absorbs variability from the SPAC rather than contributes variability to it. [IFRS 10 para BC66]. [IFRS 10 para BC67]. The sponsor typically absorbs fluctuations in the residual returns of the SPAC through its ownership of shares and warrants, and it is therefore exposed to variable returns (that is, it absorbs variability).
A sponsor that is exposed to variable returns, and has the ability to use its power to affect the amount of the returns, would typically consolidate the SPAC.
A sponsor that does not consolidate a SPAC would have to determine whether the sponsor applies IAS 28, because it has significant influence over the SPAC, or whether IFRS 9 applies. In some cases, even though the sponsor’s interest in the SPAC might give it significant influence, the instruments would still be accounted for under IFRS 9 (for example, warrants that meet the definition of a derivative).
3.2 Classification of founder shares and warrants
In many cases, the SPAC issues warrants and shares to the founder or sponsor. In the SPAC’s financial statements, a key consideration is whether the founder shares and warrants should be accounted for by applying IFRS 2 or IAS 32. That determination requires careful consideration of all of the facts and circumstances, such as whether the rights of the founders differ from those of the public shareholders. The distinction between applying IFRS 2 or IAS 32 is important, because the classification as debt or equity is different when applying IFRS 2 and IAS 32.
Detailed considerations
a. Which standard, IFRS 2 or IAS 32, applies for the SPAC?
IAS 32 applies to all financial instruments, with specific exceptions. A notable exception is contracts and obligations under share-based payment transactions to which IFRS 2 applies.
IFRS 2 applies to any transaction in which an entity receives goods or services as part of a share-based payment arrangement. A transfer that is clearly for a purpose other than payment for goods or services, such as a rights issue, would be outside the scope of IFRS 2.
Transactions with shareholders in their capacity as shareholders are also specifically excluded from IFRS 2. It might be difficult to determine whether a particular arrangement is within the scope of IFRS 2 or is simply the issue of a financial instrument. Careful consideration needs to be given to all of the facts, in particular where there is, or appears to be, a shortfall between the fair value of instruments issued and the consideration received.
Some of the considerations include (but are not limited to):
  • At what value are the founder shares issued? Equity instruments of the SPAC that have been issued at a discount to fair value might bring the transaction within the scope of IFRS 2.
    FAQ 43.1.1 – What is an indicator of an instrument being within the scope of IFRS 2?
  • Do the founders receive additional warrants for no consideration (or discounted consideration), and what does this difference compensate for?
  • Do the rights/interests of founder shareholders differ from those of public shareholders (for example, venture capitalists)? Are there ratchet mechanisms/incentives to increase the value of the founder shares? For example, do the founders have rights to receive more shares, depending on business performance?
  • What is the commercial rationale for issuing the equity instruments to the founders?
  • Are there any service conditions attached to the founder shares, or do the founders forfeit their shares if they leave employment or the SPAC fails to find a target within a specified time period? Service vesting conditions would make it more likely that an instrument is within the scope of IFRS 2. However, an absence of service vesting conditions for the founders will not preclude founder shares from being within the scope of IFRS 2.
  • Do the founder shareholders have different rights from the other shareholders following an exit event? The articles of association of the SPAC could give founders different rights (for example, an option to elect to receive cash or shares) on the SPAC merger.
b. Classification and measurement under IFRS 2 for the SPAC
Share-based payments are classified as either equity-settled or cash-settled, depending on the terms of the arrangement. Equity-settled share-based payment arrangements are those in which an entity either (a) receives goods or services as consideration in exchange for its own equity instruments, or (b) receives goods or services but has no obligation to settle the transaction with the supplier of the goods or services. Cash-settled share-based payments are those in which an entity acquires goods or services by incurring liabilities to the supplier of those goods or services for amounts that are based on the price (or value) of the entity’s or another group entity’s equity instruments. The way in which performance earn-outs are settled should be considered in the classification assessment. The IFRS 2 classification will determine the accounting for the arrangement.
IFRS 2 provides detailed guidance for the recognition and measurement of share-based payments. The SPAC measures the goods or services received in connection with a share-based payment with a corresponding increase in equity or liability at fair value (as defined by IFRS 2, not IFRS 13) over the vesting period. [IFRS 2 para 10]. [IFRS 2 App A].
  • Equity-settled share-based payments. The fair value of goods or services received by the SPAC should be measured directly, unless the fair value cannot be estimated reliably. If this presumption is rebutted, the fair value is measured by reference to the fair value of the equity instruments granted as consideration. The measurement of goods or services is as at the date on which the goods are received or the services are rendered. Employee services or unidentifiable goods or services are measured indirectly at the date on which the equity instruments are granted. The fair value of equity-settled share-based payments is not subsequently remeasured after the grant date. [IFRS 2 para 11]. [IFRS 2 para 13].
  • Cash-settled share-based payments. The goods or services acquired and the liability incurred by the SPAC is measured at the fair value of the liability. The fair value of the liability is remeasured at each reporting date and at the date of settlement. Any changes in fair value are recognised in profit or loss for the period. [IFRS 2 para 30].
c. Classification and measurement under IAS 32 for the SPAC
We expect that the founder shares and warrants will, in many cases, be within the scope of IFRS 2. However, if IFRS 2 does not apply, the instruments will be within the scope of IAS 32. See Section 3.3 below.
The accounting for shares and warrants at the merger date is addressed in section 4.9.
3.3 Classification of public shares and warrants
In the SPAC’s financial statements, the shares and warrants issued to investors (‘public shares and warrants’) will generally be accounted for by applying IAS 32, because transactions with shareholders acting in their capacity as shareholders are outside the scope of IFRS 2. [IFRS 2 para 4]. However, the classification of public shares and warrants as equity or liability 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).
Detailed considerations
Public shareholders might also hold warrants, that are written call options, where the holder pays the strike price and receives shares. The paragraphs below analyse the classification of the shares and the warrants separately.
a. Do the public shares meet liability or equity classification under IAS 32 for the SPAC?
IAS 32 classifies as an equity instrument any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities.
SPAC IPOs provide an option for the public shareholder to redeem the public shares in particular circumstances, typically depending on the outcome of a merger. Such redemption features or put options would generally prevent the instrument from being classified as equity, resulting in liability classification for the public shares.
However, equity classification might result if the redemption right is within the control of the SPAC, and the SPAC has an unconditional right to avoid the payment of cash. Public shareholders can make decisions as part of the SPAC (that is, the entity) or they can make the decisions as holders of the instrument, separate and distinct from the SPAC. The role of the SPAC’s shareholders – that is, whether they are viewed as ‘part of the entity’ or as ‘separate and distinct from the entity’ – is therefore critical to determining the classification of financial instruments. [IAS 32 para 19].
FAQ 43.17.1 – How do you determine which role a shareholder is playing?
FAQ 43.17.2 – What is an example of how the shareholder role impacts classification?
Additionally, IAS 32 provides an exception to liability classification for some puttable instruments/obligations arising on liquidation (referred to collectively as ‘puttables’), requiring these puttables to be classified as equity where the criteria in paragraphs 16A to 16D of IAS 32 are met. In practice, the public shares would likely not meet these criteria; this is because (amongst other reasons) they are typically not the most subordinated instruments.
b. Do the public warrants meet liability or equity classification under IAS 32?
The public warrants are derivative instruments, and they will generally include features (for example, variability in either the number of own shares delivered or the cash received) that will have the effect of violating IAS 32’s ‘fixed for fixed’ requirement and result in financial liability classification. Furthermore, paragraph 26 of IAS 32 requires derivative instruments which contain settlement options that give either party a choice over how the contract is settled to be classified as liabilities, unless all of the settlement alternatives would result in it being an equity instrument.
Equity classification for warrants would arise only if they will be settled by the SPAC delivering a fixed number of its own equity instruments in exchange for a fixed amount of cash or another financial asset. [IAS 32 para 22].
Thus, warrants for which liability classification arises include, but are not limited to:
In practice, such warrants often contain terms that would violate the ‘fixed for fixed’ criterion in IAS 32 and therefore often would not qualify as equity.

4. Accounting considerations of the SPAC merger

4.1 Determining the accounting acquirer
In a SPAC merger, an important accounting judgement is the determination of which entity is the accounting acquirer. The accounting acquirer is the entity that obtains control of the reporting entity, and it might be different from the legal acquirer.
If the SPAC merger consideration, paid to the OpCo’s shareholders, is equity or a combination of cash and equity, it might not be clear which entity is the accounting acquirer, or whether the arrangement is a capital reorganisation rather than a business combination. The cash might be retained within the combined business or paid to shareholders of the OpCo. These situations require consideration of all pertinent facts and circumstances. The guidance in IFRS 10, ‘Consolidated Financial Statements’, is used to identify the accounting acquirer (that is, the entity that obtains control of another entity, the acquiree). In some cases, it will be clear that the previous owners of the legal acquiree have obtained control of the SPAC. However, in other cases this might not be clear, in which case the factors in paragraphs B14–B18 of IFRS 3, ‘Business combinations’, should be considered in making the determination.
If the SPAC merger is carried out primarily by transferring cash or other assets or by incurring liabilities, the SPAC can be the accounting acquirer (refer to Example 2 of FAQ 29.39.1 and IFRIC Rejection December 2005 – whether a new entity that pays cash can be identified as the acquirer). In the unlikely event that the SPAC is the accounting acquirer, it would apply acquisition accounting and recognise the assets and liabilities of the OpCo at fair value in accordance with IFRS 3.
In a business combination effected primarily by exchanging equity interests, the acquirer is usually the entity that issues its equity interests. However, in some business combinations, commonly called 'reverse acquisitions' or ‘reverse listing’, the issuing entity (that is, the SPAC) is the acquiree.
The merger of an OpCo into a non-operating public shell corporation with nominal net assets typically results in:
  1. the owners of the private entity gaining control over the combined entity after the transaction; and
  2. the shareholders of the former public shell corporation continuing only as passive investors.
The OpCo is seeking to obtain the listing status of the non-operating public SPAC. This transaction is often not considered to be a business combination, because the SPAC does not meet the definition of a business. Refer to FAQ 29.37.1 – Is the acquisition of an established private entity by a small listed entity an example of a reverse acquisition? and FAQ 13.4.12 – How should the reverse acquisition of a listed shell company be accounted for?.
4.2 Reverse listing – capital reorganisation versus business combination
To account for a transaction under IFRS 3, an acquirer must always be identified and the acquiree must be a business. The acquirer is the entity that obtains control over the acquiree. As discussed in Section 4.1, in the SPAC transaction, the OpCo (the legal subsidiary) will often be identified as the accounting acquirer.
A SPAC merger is typically accounted for as a capital reorganisation, and the accounting is similar to a reverse acquisition under IFRS 3. This is because, in a SPAC merger, the OpCo will most likely be identified as the accounting acquirer, and the SPAC generally does not meet the definition of a business. Often, the SPAC’s only asset at the SPAC merger date is cash received from investors.
The IFRS Interpretations Committee considered a transaction similar to this and confirmed that, if the listed non- operating entity (that is, the SPAC) is not a business, the transaction is not a business combination, but there might be a share-based payment transaction under IFRS 2 to be accounted for (refer to the March 2013 agenda decision IFRS 3 Business Combinations: Accounting for reverse acquisitions that do not constitute a business).
To account for the share-based payment, the deemed shares issued by the OpCo (that is, the consideration for the acquisition of the SPAC) are recognised at fair value and compared to the fair value of the net assets of the SPAC. Refer to EX A1.49.1 – Reverse acquisition into shell company.
Any difference between the fair value of the shares deemed to have been issued by the OpCo and the fair value of the SPAC’s identifiable net assets represents a service received by the OpCo (that is, a listing service). No portion of this listing service as a result of the share-based payment is considered to be a cost of raising capital. In accordance with paragraph 13A of IFRS 2, the service received does not meet the definition of an asset, and the cost of the service received should be recognised as an expense. Refer to FAQ 13.21.1 – How should an entity account for a transaction where unidentifiable goods or services are received?.
4.3 Determining the fair value of the consideration transferred in a reverse acquisition
The value of the consideration transferred by the accounting acquirer (OpCo) is based on the number of equity interests that the OpCo would have had to issue to the owners of the accounting acquiree (SPAC) in order to give the owners of the SPAC the same percentage of equity interests in the combined entity that results from the reverse acquisition.
So, the OpCo should fair value the consideration that a SPAC’s shareholders received (that is, the interest in the combined company that the SPAC shareholders retained) and the identifiable net assets of the SPAC that the accounting acquirer acquired. Any resulting difference would be unidentifiable goods or services, which should be expensed (refer to Section 4.2 above).
While it is possible to calculate the number of shares that the OpCo would have issued as consideration if it legally acquired the SPAC, in practice, it might be challenging to determine the fair value of the OpCo equity, because this entity is not listed. In this case, it might be appropriate to use the SPAC’s listed price and the number of shares owned by the existing SPAC shareholders to derive the fair value of the equity granted by the accounting acquirer. Judgement will need to be applied in making this assessment, and an entity should consider the outcome of applying this approach for reasonableness. Refer to EX 29.61.1 – Consideration in a reverse acquisition.
4.4 Classification and measurement of contingent payments
In some cases, there might be uncertainty regarding the fair value of the OpCo (and, therefore, its shares). In other cases, the SPAC sponsors might agree to receive incremental value if the merger achieves a target return for the OpCo shareholders. One way of addressing this uncertainty is for the SPAC to enter into agreements with its sponsors, the selling shareholders of the OpCo, or employees whereby the combined entity will issue additional shares/warrants (or release existing shares from escrow or other restrictions) after the SPAC merger if certain performance measures (frequently based on share price) are met. These arrangements are commonly referred to as ‘contingent share payments'’ and might involve:
  1. contingent share payments to SPAC shareholders or sponsors;
  2. contingent share payments to shareholders of the OpCo;
  3. contingent share payments to employees of the SPAC or OpCo; or
  4. a combination of payments to various parties in the arrangement.
The assessment of the accounting acquirer in a SPAC merger should be performed prior to the evaluation of all other arrangements (refer to Section 4.1). If the transaction is accounted for as a business combination (that is, the SPAC is the accounting acquirer), the ‘normal’ guidance in IFRS 3 relating to contingent and deferred consideration applies for the consideration paid to the selling OpCo shareholders and employees (the flowchart in FAQ 29.86.1 – What is the framework used to determine the classification of contingent consideration arrangements? illustrates the framework to determine the classification of contingent consideration arrangements). This is not the focus of the guidance that follows in this section.
The guidance that follows considers the implications of contingent payments in arrangements where the OpCo acquires a SPAC and the SPAC does not constitute a business. We consider the accounting implications, depending on the counterparty to the contingent share payments, as follows:
a. Contingent share payments with the SPAC shareholders or sponsors
As mentioned in Section 4.2 above, the transaction is within IFRS 2’s scope. The parties might agree that, if the listed price per share of the merged entity increases past a certain target, then as an incentive, the SPAC sponsors receive more shares as additional compensation for the successful listing. The commercial rationale of such a contingent payment is that the SPAC sponsors are receiving a bonus for a successful listing.
At the date of the SPAC merger, the transaction was within the scope of IFRS 2 for the OpCo. As part of that arrangement, there was an initial payment for the listing service, as well as a contingent additional payment, for which there is no service condition. The contingent payment feature therefore typically represents a non-vesting condition that is taken into account at the grant date and not subsequently updated. Therefore, at the date of the initial share-based payment, the entity would have needed to determine the grant date fair value of the potential incremental award.
b. Contingent share payments with shareholders of the OpCo
The parties might agree as part of the SPAC merger negotiation that if the listed price per share increases past a target price per share, then the merged entity will issue a bonus number of shares to the previous shareholders of the OpCo. In other words, the shareholders of the OpCo will receive more potential shares and possibly end up with a larger relative shareholding in the merged entity compared to the date of the SPAC merger. The commercial rationale of such payment is often to protect the shareholders of the OpCo where they believe that the business they have contributed to be more valuable than could be agreed with the SPAC shareholders at the time. Because the OpCo’s value is estimated, there is a risk that the OpCo will issue too much equity (ie overpay) for the listing service and net assets of the SPAC. The contingent share payment is one method to address this potential overpayment.
c. Contingent share payments with employees of the SPAC or OpCo
Where there are contingent share arrangements with employees or service providers of the SPAC or the OpCo, consideration should be given to whether the arrangement should be viewed as a compensation arrangement.
Share-based payments to employees might be provided for various reasons. The commercial rationale behind issuing the contingent shares to employees of the OpCo or SPAC might be to incentivise SPAC management to continue providing services after the merger. In addition, the SPAC sponsors can be provided free or discounted warrants at the time of the initial SPAC IPO, as an incentive to complete the SPAC merger.
SPAC transactions accounted for as a capital reorganisation might also include situations where holders of unvested restricted shares or unexercised share options of the OpCo receive the right to contingent shares. Depending on the terms, this could lead to additional compensation cost being recorded, and could also impact the subsequent accounting for the award. For example, an arrangement that requires continued employment or service in order to vest in, or be eligible for, the earn-out shares would typically result in treatment of the related cost as compensation cost (IFRIC January 2013 Update IFRS 2 Share-based Payment – definition of vesting condition within Annual Improvements to IFRSs – 2010–2012 Cycle). Further, an earn-out provided in the form of modifying an existing share option agreement would also be a modification of the existing award, and any incremental fair value would be recognised as additional compensation cost. Guidance on modifications is considered in EX 13.44.1 – Accounting treatment of modifications and EX 13.43.1 – Modifications.
Additionally, even if the contingent share arrangement is independent of the existing share-based payment award and not dependent on continued employment, the entity would need to consider the facts and circumstances to determine the reason for providing employees with an incremental award. Typically, these would be accounted for as an incremental share-based payment.
4.5 Transaction costs
An entity typically incurs various costs in issuing or acquiring its own equity instruments, most of which are transaction costs. Transaction costs are incremental costs that are directly attributable to the equity transaction that otherwise would have been avoided if the equity instruments had not been issued. Transaction costs of an equity transaction should be accounted for as a deduction from equity, net of any related income tax benefit. [IAS 32 para 35].
Questions might arise as to what types of costs at the time of the SPAC merger would be deemed to be incremental and directly attributable to an equity issuance. Refer to FAQ 43.88.1 - What are examples of transaction costs arising on the issue of equity instruments?.
Qualifying transaction costs might be incurred in anticipation of an issuance of equity instruments and across reporting periods (for example, transaction costs might be incurred before an entity’s year end, but the issuance of the equity instruments does not occur until after the year end). Accounting for such costs might be a policy choice. Refer to FAQ 43.89.1 – How should transaction costs incurred in anticipation of an equity issuance be accounted for?.
In many SPAC mergers, the transaction is, in substance, a listing and concurrent capital raise for the OpCo. This is because the OpCo issues its shares for both the cash in the SPAC and the listing service.
This might create a challenge. If an entity was only listing its existing equity, there would be no new equity issued, and the costs related to listing the existing equity would not be incremental costs related to the issuance of new equity. In this case, the costs would all be expensed through profit and loss. Conversely, if an entity issues equity in exchange for cash, it is likely that some of the costs related to that issuance would be incremental and recorded as a reduction of the proceeds. In many SPAC arrangements accounted for as a capital reorganisation, the OpCo is both issuing equity in exchange for cash and obtaining a listing of its existing equity. Transaction costs that relate jointly to more than one transaction (for example, costs of a concurrent offering of some shares and a stock exchange listing of other shares) are allocated to those transactions using a rational basis of allocation, which is consistent with similar transactions. [IAS 32 para 38]. Refer to FAQ 43.91.1 – How should transaction costs relating to more than one transaction be accounted for?.
4.6 Taxes
The tax implications of the SPAC merger would be based on whether the arrangement is a business combination and which entity is identified as the acquirer.
If the SPAC is the accounting acquiree, the OpCo is the acquirer and the SPAC does not meet the definition of a business (which is likely in a typical SPAC transaction). The transaction is therefore not a business combination. From the OpCo’s perspective, this is a capital reorganisation and a continuation of the OpCo as the reporting entity (that is, it is the initial recognition of the SPAC from the OpCo’s perspective. A deferred tax asset or liability is not recognised in respect of a temporary difference that arises on initial recognition of an asset or liability, in a transaction that is not a business combination, and the recognition does not affect accounting profit or taxable profit at the time of the transaction. A review of all specific facts and circumstances (including the existence of contingent payments and share-based payment agreements), as well as the tax implications of the arrangement, will be required to be able to conclude whether any deferred tax might arise as a result of the SPAC merger.
If the SPAC is the accounting acquirer, it would generally apply acquisition accounting and recognise the assets and liabilities of the OpCo at fair value in accordance with IFRS 3. Deferred taxes are provided on all of the temporary differences arising between the values assigned to identifiable assets and liabilities and their tax bases, subject to certain exceptions. The accounting treatment of income taxes in a business combination is addressed in detail in chapter 14 of the PwC Manual of Accounting.
If the SPAC is the accounting acquiree, the OpCo is the acquirer, and the SPAC meets the definition of a business (which is unlikely in a typical SPAC transaction), reverse acquisition accounting is applied. Refer to FAQ 14.118.7 – What are the tax accounting considerations for reverse acquisitions?.
4.7 Comparative information in a reverse acquisition
If the transaction is accounted for as a capital reorganisation, the consolidated financial information for the SPAC will be presented as a continuation of the OpCo. In the year of the capital reorganisation, the comparative information presented in the consolidated financial statements of the SPAC should be that of the OpCo, and the historical financial information of the SPAC will not be included. Specifically:
  • The assets and liabilities of the OpCo are recognised and measured in the consolidated financial statements at their pre-combination carrying amounts.
  • The retained earnings and other equity balances recognised in the consolidated financial statements are those of the OpCo immediately before the reverse merger.
  • The final equity structure (that is, the number and type of equity instruments issued) shown in the consolidated financial statements reflects the SPAC’s legal equity structure. The equity structure of the OpCo is used for the comparative period, and it is restated using the exchange ratio established in the reverse merger agreement to reflect the legal number of shares issued by the SPAC.
Other areas that might present complexities when preparing the financial statements include different year ends for the SPAC and the OpCo, or the acquisition of a division or business that results in the need for carve-out financial statements. Refer to the following guides for further details on the preparation of carve-out financial statements: Appendix 2 – Preparation of combined and carve-out financial statements, and EX 2.143.2 – Carve-out financial statements.
4.8 Earnings per share
The earnings per share calculations would be based on whether the arrangement is a business combination, and which entity is identified as the acquirer.
If the SPAC merger is a capital reorganisation, the earnings per share calculation would follow the one that is applied for a reverse acquisition. Therefore, the equity structure in the consolidated financial statements following the capital reorganisation reflects the equity structure of the SPAC, including the equity interests issued by the SPAC to effect the SPAC merger.
In calculating the weighted average number of ordinary shares outstanding (the denominator of the earnings per share calculation) during the period in which a reverse acquisition occurs:
  1. the number of ordinary shares outstanding, from the beginning of that period to the acquisition date, should be computed on the basis of the weighted average number of ordinary shares of the OpCo outstanding during the period multiplied by the exchange ratio established in the merger agreement; and
  2. the number of ordinary shares outstanding, from the acquisition date to the end of that period, should be the actual number of ordinary shares of the SPAC outstanding during that period.
If the SPAC is the accounting acquirer, it would apply acquisition accounting. Ordinary shares issued as part of the consideration transferred in a business combination are included in the weighted average number of shares from the acquisition date, because the acquirer incorporates into its statement of comprehensive income the acquiree's profits and losses from that date.
Any financial instruments or other contracts that might entitle their holder to ordinary shares in the future must be assessed, to determine if they are dilutive instruments or participating instruments. As mentioned in Section 4.4 above, the SPAC or the OpCo might enter into agreements with shareholders or employees, to issue additional shares after the transaction if specified targets are met. The possibility of ordinary shares being issued in future (these are called ‘contingently issuable ordinary shares’) could lead to an adjustment being required for diluted EPS purposes. Guidance in paragraphs 52–57 of IAS 33 should be applied for contingently issuable ordinary shares, and in paragraphs A13–A14 of IAS 33 for participating shares.
4.9 Accounting for shares and warrants issued in a merger
Specific guidance was issued in the agenda decision, ‘Special Purpose Acquisition Companies (SPAC): Accounting for Warrants at Acquisition’, on how warrants issued by an acquirer to existing shareholders and investors of a SPAC should be accounted for at the merger date. FAQ 4.9.1 provides an overview of the principles included in the agenda decision.

5. Considerations following the SPAC merger

5.1 Pro-forma financial information requirements
Any pro-forma information required as part of the regulatory filing needs to comply with that jurisdiction's requirements. The basis of presentation for the pro-forma information might be dependent on the expected accounting treatment of the transaction. The identification of the accounting acquirer (refer to Section 4.1 above) is key to determining the form and content of the pro-forma financial information.
5.2 Compliance with local regulation and presentation of information for investors
Depending on the jurisdiction of the SPAC merger, the merger and post-merger reporting and filing might require compliance with additional local requirements, including having policies and processes in place to perform as a public company.
In many cases, the OpCo will need to prepare a commentary (that is, a management discussion and analysis (MD&A) or other front half report) for all periods presented in the financial statements, so that investors understand the OpCo’s financial condition and results of operation. The commentary usually requires extensive data analysis and will generally contain sensitive financial and operating information.

Illustrative text

FAQ 4.9.1 – How should shares and warrants issued by an acquirer in a merger be accounted for?

A newly formed special purpose acquisition company (‘SPAC’) raised cash in an initial public offering (‘IPO’). Within a short time thereafter, the SPAC was acquired by an operating company (‘OpCo’) that issued shares and warrants to the shareholders of the SPAC in exchange for all of the SPAC’s equity.
Accounting by the SPAC pre-merger
Before the acquisition, the SPAC’s ordinary shares were held by its founder shareholders and public investors. The ordinary shares are determined to be equity instruments as defined in IAS 32, ‘Financial Instruments: Presentation’. In addition to ordinary shares, the SPAC had also issued warrants to both its founder shareholders (at the SPAC formation) and public investors (at the time of the SPAC IPO). The warrants were accounted for as follows by the SPAC in its financial statements pre-merger:
  • Public warrants: within the scope of IAS 32. This is because transactions with shareholders, acting in their capacity as shareholders, are outside the scope of IFRS 2, ‘Share-based payment’. [IFRS 2 para 4]. [In depth INT2021-03: Section 3.3].
  • Founder(s) warrants: within the scope of IFRS 2 in the financial statements of the SPAC. This is because the founders provide services to the SPAC in exchange for the warrants. [In depth INT2021-03: Section 3.2].
Instruments issued by OpCo as part of acquisition
As part of the acquisition arrangement, OpCo issues new ordinary shares and new warrants to the SPAC’s founder shareholders and public investors in exchange for the SPAC’s ordinary shares and the legal cancellation of the SPAC warrants. The SPAC becomes a wholly owned subsidiary of the entity, and the entity replaces the SPAC as the entity listed on the stock exchange.
Holders of SPAC shares and warrants exchange their SPAC shares and warrants for shares and warrants of OpCo. The warrants in the OpCo have the same terms and conditions as the warrants of the SPAC, except that they give the holder a right to obtain shares in OpCo rather than the SPAC. None of the OpCo warrants contain any vesting conditions, and the warrants will remain outstanding until exercised. The SPAC warrants which are held by OpCo are then cancelled as part of the acquisition arrangement.
The substance of the transaction is that OpCo is the acquirer from an accounting perspective. The acquisition of the SPAC is the acquisition of a group of assets, which in this case comprises cash, along with a listing service, and does not constitute a business.
At the acquisition date, how should the shares and warrants issued by OpCo be classified and accounted for by OpCo?
Accounting for shares and warrants issued by an acquirer to existing shareholders and investors of a SPAC was considered in the agenda decision, ‘Special Purpose Acquisition Companies (SPAC): Accounting for Warrants at Acquisition’, finalised by the IFRS Interpretation Committee in October 2022.
The flowchart below summarises the key steps which are explained in more detail in the agenda decision. Other structures might be used in SPAC arrangements and, if so, other considerations might be relevant. The agenda decision only relates to the specific structure set out therein and does not necessarily apply to other structures.
In determining the appropriate accounting treatment, the views of the local regulator should be taken into account.
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