Here’s a recent tentative agenda decision issued for comment by IFRIC:

• The Committee received 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. 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:
  • individually have the contractual right to demand a reimbursement of their shares if the SPAC’s shareholders approve the acquisition of a target entity.
  • are reimbursed if the SPAC is liquidated. The SPAC is liquidated if no target entity is acquired within a specified period.
  • 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.
• The Committee observed that IAS 32 contains no requirements for assessing whether a decision of shareholders is treated as a decision of the entity. The Committee acknowledged that similar questions about shareholder decisions arise in other circumstances. 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 Committee concluded that the matter described in the request is, in isolation, too narrow for the IASB or the Committee to address in a cost-effective manner. Instead, the IASB should consider the matter as part of its broader discussions on the FICE project. For these reasons, the Committee [decided] not to add a standard-setting project to the work plan. The Committee nonetheless noted the importance of the SPAC disclosing information in the notes to its financial statements about the classification of its public shares.

The opinion didn’t attract much interest, with only one of the major accounting firms issuing a (very brief) comment letter. To the extent that anyone had anything to say, they seemed to take the view that a decision made by an entity’s shareholders wouldn’t be viewed as a decision of the entity itself. The Public Accountants and Auditors Board, Zimbabwe, said:

• It is generally accepted that in common company structures (public or private companies) the shareholder and the entities are treated as two separate entities and there is law that guide what decision the shareholder can make and how…
• Where a shareholder has a right to make a decision that will result in a contractual obligation to deliver cash or another financial asset by the entity, then the instrument will not meet the definition of an equity instrument but rather a financial liability…

The Saudi Organization for Chartered and Professional Accountants threw this in:

• …although IAS 32 does not state any principles for assessing whether a decision by the shareholders should be considered as a decision of the entity, or if the decision should be deemed to be beyond the control of the entity, it is understood that the entity’s decisions may need the approval by the general assembly according to the bylaw of the entity or according to laws and regulations of the jurisdiction.
• …the FICE project should build on the above paragraph in the Conceptual Framework to clarify that there would be instances in which a decision by the shareholders should be considered as a decision of the entity and there will be instances a decision should be deemed to be beyond the control of the entity.

The Accounting Standards Committee of Germany issued something of a mild rebuke:

• we basically agree with the IFRS IC’s findings. However, we acknowledge that the issue comprises a more general and broadly relevant question, whether an action (or a decision) of the shareholders, e.g. at a shareholders meeting, is an action (or a decision) of the entity. This question seems crucial and, as mentioned in the IFRIC Update, arises equally in other circumstances. Therefore, it deserves a timely answer.
• Overall, we like to note that any matter being deferred to the FICE project – as has been repeatedly the case in the past – leads to a delayed answer or none at all. While this allows for comprehensive consideration of those issues, which – on its own – would be beneficial, the respective issue(s) often will not be solved in a timely manner, which is rather detrimental to accounting

In other words, IFRIC, if you thought it was worth spending time on the question at all, you should have answered it! And before the SPAC boom ends!

The opinions expressed are solely those of the author.