D.6 Accounting for Shares and Warrants Issued by a SPAC

The guidance in this section is based on the typical terms and conditions that have been observed in practice. Since the specific terms can affect the accounting, consultation with an entity’s accounting advisers is recommended.

In its IPO, a SPAC typically issues units to third-party investors at $10 per unit. Each unit generally contains both of the following:

One Class A ordinary share (a “Class A share”).
A fraction of a warrant to purchase one Class A share at an exercise price of $11.50 (a “public warrant”).

The sponsor and its affiliates generally receive Class B ordinary shares (“Class B shares”) in return for forming the SPAC. They may also purchase warrants (“private placement warrants”) to acquire Class A shares at an exercise price of $11.50 per share. Alternatively, in lieu of the sponsor, a so-called anchor investor may purchase private placement warrants. The private placement warrants are generally purchased at $1 or $1.50 per warrant, and the proceeds received by the SPAC are used to pay the underwriting fees incurred in conjunction with the SPAC’s IPO.

In addition, entities may enter into other arrangements upon the formation of a SPAC or at a later date before the SPAC completes a merger. Such arrangements may include the following:

Forward contracts that (1) obligate the SPAC to issue additional Class A shares to a counterparty at a fixed price and (2) are settled immediately before the SPAC completes a merger with a target.
Warrants on Class A shares or on Class B shares that are issued to the sponsor, its affiliates, or third parties in return for providing financing to the SPAC.
Classes of preferred stock issued to third-party investors, the sponsor, or the sponsor’s affiliates.
Class A shares or Class B shares (or warrants on such shares) that are issued to the SPAC’s employees or third-party service providers as compensation for services provided.

While the discussion in this publication does not specifically address these other arrangements, the accounting analysis for some of these arrangements (e.g., the forward contracts and warrants described in the first two bullet points) may be similar to that for public warrants or private placement warrants, which are discussed below. SPACs that issue preferred shares or enter into share-based payment arrangements should consider other applicable GAAP to determine the appropriate accounting, including the potential effect of those instruments on reported EPS. Any shares or warrants issued as part of a share-based payment arrangement must be accounted for in accordance with ASC 718.

D.6.1 Unit of Account

Although initially issued as a unit, the Class A shares and public warrants become separately tradable shortly after the IPO. In addition, upon exercise, the public warrants do not alter the terms of the Class A shares previously issued. Therefore, the public warrants (1) are legally detachable and separately exercisable from the Class A shares issued as part of the units and (2) meet the definition of a freestanding financial instrument in ASC 480-10-20.

Since the Class A shares and public warrants constitute separate units of account, the proceeds from the issuance of these units (net of any direct and incremental offering costs paid to the investors1) must be allocated between the two components. The appropriate allocation method depends on how the public warrants are classified:2

Public warrants classified as liabilities — The SPAC must use the with-and-without method to allocate the net proceeds among the Class A shares and public warrants. Under that method, a portion of the net proceeds from the issuance of the units that equals the issuance-date fair value of the public warrants must first be allocated to such warrants. The entity then allocates the remaining net proceeds to the Class A shares. The with-and-without allocation approach avoids the recognition of a “day 1” gain or loss in earnings on the public warrants that is not associated with a change in their fair value (i.e., an entity does not recognize a day 1 gain or loss for the public warrants, which are subsequently measured at fair value, with changes in fair value recognized in earnings).
Public warrants classified as equity instruments — The SPAC must use the relative fair value method to allocate the net proceeds among the Class A shares and public warrants. Under that method, the SPAC separately estimates the fair values of the Class A shares and public warrants and then allocates the net proceeds in proportion to those fair value amounts. Because SPACs that apply the relative fair value method are required to independently measure each instrument, entities must make more fair value estimates under this method than under the with-and-without method. The Class B shares and any private placement warrants issued by the SPAC also generally represent separate units of account. If the private placement warrants were purchased by the sponsor in contemplation of the formation of the SPAC, the entity should consider (1) the need to allocate the amount it paid for these warrants between the Class B shares and private placement warrants and (2) whether such warrants represent share-based payment awards to the sponsor. In the discussion of the classification of the private placement warrants below, it is assumed that the warrants are not share-based payment arrangements. In a manner consistent with the above discussion of Class A shares and public warrants, if the private placement warrants are classified as liabilities, the initial amount allocated to those warrants must equal their initial fair value.

To perform the allocations discussed above, entities must measure the fair value of the instruments in accordance with ASC 820. Although public warrants and private placement warrants are generally not “in-the-money” on the issuance date and are often contingently exercisable, their fair value is nevertheless greater than zero. When measuring fair value, the entity must take into account the relatively high probability that the SPAC will successfully merge with a target and the warrants will subsequently become exercisable and contain intrinsic value. The issuance-date fair value of a public warrant or private placement warrant is not zero because there is no intrinsic value on that date. All warrants on equity shares have time value, which equals the fair value of the warrant when it is not in-the-money.

For more information about allocating proceeds to multiple freestanding financial instruments, see Section 3.4 of Deloitte’s Roadmap Issuer’s Accounting for Debt. For more information about fair value measurements, see Deloitte’s Roadmap Fair Value Measurements and Disclosures (Including the Fair Value Option).

D.6.2 Classification of Class A Shares

Class A shares issued by a SPAC are equity in legal form. Therefore, these shares should only be classified as liabilities if they represent (1) mandatorily redeemable financial instruments under ASC 480-10-25-4 or (2) unconditional obligations to deliver a variable number of equity shares that are liabilities under ASC 480-10-25-14. In practice, liability classification of the Class A shares has not been required under this guidance.

Since a SPAC is an SEC registrant, it must apply the guidance in ASC 480-10-S99-3A on redeemable equity securities. Class A shares generally contain the following redemption provisions:

If the SPAC does not consummate a business combination by a specified date after the IPO (e.g., two years after the IPO), the SPAC will be liquidated and the Class A shares will automatically be redeemed at approximately $10 per share.
If the SPAC does consummate a business combination, all holders of the Class A shares have the right to redeem their shares at approximately $10 per share immediately before the consummation (generally subject to the requirement that the SPAC maintain a minimum amount of net tangible assets [e.g., $5 million]).

Because it is certain that the Class A shares will be redeemed or become redeemable and no exceptions in ASC 480-10-S99-3A apply, the shares (1) must be classified within temporary equity in the SPAC’s financial statements and (2) are subject to the subsequent-measurement guidance in ASC 480-10-S99-3A. An entity must subsequently measure the shares at their redemption amount because, as a result of the allocation of net proceeds to the public warrants, the initial carrying amount of the Class A shares will be less than $10 per share. In accordance with ASC 480-10-S99-3A(15), there are two alternative methods that an entity can apply when subsequently measuring Class A shares:

Remeasure the Class A shares at their redemption amount (i.e., $10 per share) immediately as if the end of the first reporting period after the IPO was the redemption date.
Accrete changes in the difference between the initial carrying amount and the redemption amount from the IPO date to the redemption date. To apply this method, the SPAC must consider the date on which it expects a business combination to occur, rather than merely accreting to the automatic redemption date.

Because a SPAC has two classes of shares (i.e., Class A shares and Class B shares), it must apply the EPS guidance in ASC 480-10-S99-3A, which requires specific accounting for the measurement adjustments. That is, the SPAC must apply the two-class method of calculating EPS while taking into account the measurement adjustments under an assumption that they represent dividends to the holders of the Class A shares. Generally, public warrants and private placement warrants do not represent participating securities; therefore, the application of the two-class method of calculating EPS is limited to the allocation of the SPAC’s net income or loss between the Class A shares and Class B shares.

After the completion of a business combination with a target, the redemption features on the Class A Shares generally lapse. Therefore, in the absence of other redemption provisions, the classification of such shares in temporary equity is no longer required. That is, provided that the Class A shares are redeemable only on an ordinary liquidation of the SPAC after a business combination, which is generally the case, they do not have to be classified in temporary equity.

D.6.3 Classification of Class B Shares

The Class B shares issued by a SPAC are equity in legal form. SPACs should consider whether these shares are within the scope of ASC 718 on the basis of the specific terms of the shares as well as other relevant facts and circumstances. The classification guidance in ASC 718 refers to the classification guidance in ASC 480, but there are additional considerations under ASC 718 that SPACs should take into account. The Class B shares should be classified as liabilities if they represent (1) mandatorily redeemable financial instruments under ASC 480-10-25-4 or (2) unconditional obligations to deliver a variable number of equity shares that are liabilities under ASC 480-10-25-14. In practice, liability classification of the Class B shares has not been observed.

Class B shares are generally not redeemable by the holder, and a holder is not entitled to any proceeds if the SPAC is liquidated because of a failure to complete a business combination. That is, in the absence of a merger of the SPAC with a target, the Class B shares will be worthless.3 Because there are no redemption provisions, entities are not required to classify Class B shares in temporary equity under ASC 480-10-S99-3A.

D.6.4 Public Warrants

To determine the appropriate classification of the public warrants, SPACs must first consider the liability classification guidance in ASC 480. ASC 480-10-25-8 states:

An entity shall classify as a liability (or an asset in some circumstances) any financial instrument, other than an outstanding share, that, at inception, has both of the following characteristics:

It embodies an obligation to repurchase the issuer’s equity shares, or is indexed to such an obligation.
It requires or may require the issuer to settle the obligation by transferring assets.

The evaluation of whether public warrants are liabilities under ASC 480-10-25-8 will generally depend on when the warrants become exercisable.

The public warrants may be exercised before a merger with a target.	The public warrants are liabilities under ASC 480-10-25-8 because the Class A shares received upon exercise of the warrants may be redeemed at the holder’s option upon a merger of the SPAC. The SPAC is obligated to use its best efforts to complete a merger.
The public warrants may be exercised only after a merger with a target. For example, they may be exercised only upon the later of (1) 30 days after the SPAC completes a business combination or (2) 12 months from the date on which the SPAC’s IPO closes.	The public warrants are not liabilities under ASC 480-10-25-8 because, once the warrants are exercisable, the holder will receive Class A shares that are not redeemable. As discussed above, once a merger with a target is completed, the holders of Class A shares can no longer redeem their shares. Rather, such shares are redeemable only upon an ordinary liquidation of the combined company.

If the public warrants are not liabilities under ASC 480-10-25-8, the SPAC should consider whether they represent liabilities under ASC 480-10-25-14. In practice, it would be unusual for such warrants to represent an obligation to issue a variable number of equity shares whose monetary value is based solely or predominantly on (1) a fixed amount, (2) variations in something other than the fair value of the Class A shares, or (3) variations that are inversely related to the fair value of the Class A shares. Public warrants that are not liabilities under ASC 480 are classified as liabilities or equity in accordance with ASC 815-40.4

To be classified as an equity instrument under ASC 815-40, the public warrants must meet two conditions:

They are indexed to the SPAC’s stock.
They meet the criteria for equity classification (i.e., the SPAC controls the ability to settle the warrants in shares; note that these criteria are relevant even if the contract requires settlement in shares).

D.6.4.1 Indexation

ASC 815-40-15 contains a two-step model that an entity must apply to determine whether the public warrants are indexed to the SPAC’s stock. The evaluation must consider the following:

Step 1 — The exercise or settlement of the contract (“contingent exercise provisions”).
Step 2 — The monetary value of the settlement amount (i.e., factors that affect the settlement amount, or “settlement provisions”).

For each unit of account, the entity evaluates the indexation requirements in ASC 815-40-15. If the entity determines that the contract is not considered indexed to the company’s stock, the contract must be classified as a liability (i.e., equity classification is never permitted).

ASC 815-40-15-7A addresses step 1 of the two-step indexation evaluation and states, in part:

An exercise contingency shall not preclude an instrument (or embedded feature) from being considered indexed to an entity’s own stock provided that it is not based on either of the following:

An observable market, other than the market for the issuer’s stock (if applicable)
An observable index, other than an index calculated or measured solely by reference to the issuer’s own operations (for example, sales revenue of the issuer; earnings before interest, taxes, depreciation, and amortization of the issuer; net income of the issuer; or total equity of the issuer).

The following features, which are exercise contingencies that generally exist in public warrants, would not preclude the warrants from being indexed to the SPAC’s stock in step 1 under ASC 815-40-15:

The public warrants are exercisable only if the SPAC completes a business combination.
The public warrants are no longer exercisable if the SPAC is liquidated.
The SPAC can force early exercise of the public warrants by means of certain redemption features.

While the above features represent the typical contingent exercise provisions in public warrants, there may be other features that must be evaluated in step 1 under ASC 815-40-15.

ASC 815-40-15-7C through 15-7I discuss the evaluation of settlement provisions. Any provision that (1) can potentially alter either the exercise price or the number of Class A shares that are issuable upon exercise of the public warrants and (2) is not considered a down-round provision must be evaluated to determine whether it represents an input into the pricing of a fixed-for-fixed forward or an option on equity shares. Common provisions that must be evaluated include the following:

Antidilution-type adjustment provisions.
Replacement of the Class A shares with other consideration in a reorganization or recapitalization.
Adjustments to the exercise price or number of Class A shares as a result of the SPAC’s issuance of additional Class A shares or other equity instruments at a price or effective price that is less than the public warrants’ exercise price (note that for such a provision not to preclude the public warrants from being indexed to the SPAC’s stock, the provision must meet the ASC master glossary definition of a down-round feature).
Adjustments to the number of Class A shares issuable to compensate the holder for lost time value upon an early settlement of the public warrants.
Adjustments to the exercise price or number of Class A shares that are made at the discretion of the SPAC to benefit the holders of the public warrants.

Public warrants generally contain multiple provisions under which the settlement amount is adjusted to compensate the holders for lost time value upon an early exercise or settlement. For such provisions not to preclude the public warrants from being considered indexed to the SPAC’s stock in step 2 under ASC 815-40-15, the entity must conclude that the adjustment (e.g., the increase in the number of additional Class A shares issuable) represents a reasonable amount of compensation to the holder for lost time value. We generally believe that if the additional value paid to the holder does not exceed the amount of lost time value, the adjustment will not preclude the public warrants from being indexed to the SPAC’s stock in step 2 under ASC 815-40-15. That is, as long as the holder would receive a monetary amount upon settlement that is (1) not less than the intrinsic value of the public warrants on the early settlement date and (2) not more than the fair value of the public warrants on the early settlement date, the settlement provision would not preclude the public warrants from being indexed to the SPAC’s stock in step 2 under ASC 815-40-15. In this determination, “fair value” means an amount that is consistent with the fair value measurement guidance in ASC 820.

Many public warrants contain a provision that allows the SPAC to call them for either (1) $0.10 per warrant or (2) Class A shares, provided that the shares’ fair value equals or exceeds $10.5 If the SPAC exercises this call right, the holders are entitled to exercise and settle the public warrants on a net-share basis. While such a feature may specify the payment of $0.10 per warrant, the economic substance of the feature is the same even if the $0.10 payment is not specified. (Hereafter, such a call right is also referred to as a “redemption-for-stock” feature.) The determination of the number of Class A shares issuable upon a settlement of a redemption-for-stock feature is based on a table whose axes are share price and time to maturity. The purpose of the table is to prescribe the amount of compensation the holder should receive for lost time value for any settlement that occurs when the Class A share price is below $18. For the settlement amounts in this table not to preclude the public warrants from being indexed to the SPAC’s stock in step 2 under ASC 815-40-15, the entity must conclude, on the basis of reasonable assumptions as of the issuance date of the public warrants, that each settlement number in the table represents a reasonable amount of compensation for lost time value. The assumptions that affect the estimated fair value of the public warrants should affect the number of shares included in each cell in the settlement table and should be determined in a commercially reasonable manner. Those assumptions include stock volatility, interest rates, and dividends. Because these assumptions change over time, a SPAC cannot conclude that a potential settlement based on share amounts in the table does not preclude the public warrants from being indexed to the SPAC’s stock in step 2 under ASC 815-40-15 solely because the share amounts in the table are the same as those in other public warrant agreements issued by other SPACs. Rather, each SPAC will generally need to consult with valuation specialists to determine whether the settlement provisions that apply in accordance with these settlement tables preclude the public warrants from being indexed to the SPAC’s stock under step 2 of ASC 815-40-15. See Chapter 4 of Deloitte’s Roadmap Contracts on an Entity’s Own Equity for more information about the indexation requirements.

Some public warrants contain a provision indicating that the settlement amount could differ if the warrants are held by the SPAC’s officers or directors. This settlement difference would arise if the SPAC exercises its redemption-for-stock feature. In such cases, holders of public warrants that are not officers or directors of the SPAC would receive a number of Class A shares per warrant on the basis of the table described in the previous paragraph, but holders of public warrants that are officers or directors of the SPAC would receive a number of Class A shares on the basis of the fair value of their warrants. The following example illustrates such a provision:

Example Provision

Public Warrants held by the Company’s officers or directors. The Company agrees that if Public Warrants are held by any of the Company’s officers or directors, the Public Warrants held by such officers and directors will be subject to the redemption rights provided in Section [X], except that such officers and directors shall only receive “Fair Market Value” (“Fair Market Value” in this Section [X.X] shall mean the last sale price of the Public Warrants on the Alternative Redemption Date) for such Public Warrants so redeemed.

On April 12, 2021, the SEC staff issued Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”) (the “SEC Staff Statement”), which addresses certain balance sheet classification matters related to warrants issued by SPACs. The SEC Staff Statement discusses a scenario related to the terms of warrants that were issued by a SPAC and states, in part:

[T]he warrants included provisions that provided for potential changes to the settlement amounts dependent upon the characteristics of the holder of the warrant. Because the holder of the instrument is not an input into the pricing of a fixed-for-fixed option on equity shares, OCA staff concluded that, in this fact pattern, such a provision would preclude the warrants from being indexed to the entity’s stock, and thus the warrants should be classified as a liability measured at fair value, with changes in fair value each period reported in earnings.

ASC 815-40-15-7E discusses the inputs into the pricing of a fixed-for-fixed option on equity shares. As indicated in the SEC Staff Statement, the holder is not an input into the pricing of an option on equity shares. Therefore, if the settlement terms of the instrument (i.e., the exercise price or number of shares) could potentially vary on the basis of its holder, the instrument is not considered indexed to the SPAC’s stock. Public warrants with an officer or director provision such as the one described above have settlement terms that depend on the holder. Accordingly, such public warrants are not considered indexed to the SPAC’s stock and must be classified as liabilities. Note that such liability classification is required both before and after a SPAC merges with a target.

In addition, some public warrants contain a provision that caps the holder to 0.361 shares per warrant in some, but not all, circumstances. The holder of such a warrant may avoid being subject to the cap if (1) it exercises the warrant on a physical (cash) basis and (2) such exercise is allowed only if there is an effective registration statement for the underlying shares. In such circumstances, the warrant would be considered indexed to the condition that there is an effective registration statement in a manner that is inconsistent with ASC 815-40’s requirements for equity classification (i.e., the holder would potentially receive less value when the underlying shares are not registered for resale). As a result, such public warrants would not be considered indexed to the issuer’s shares under ASC 815-40-15 and must be classified as liabilities.

D.6.4.2 Equity Classification Conditions

If an entity determines that the public warrants are considered indexed to the SPAC’s stock under ASC 815-40, it must evaluate the conditions in ASC 815-40-25 to determine whether it controls the ability to settle the contract in its shares. Only contracts for which the entity controls settlement in shares (i.e., that meet the conditions in ASC 815-40-25) may be classified in equity. For example, the public warrants would not meet the equity classification requirements in ASC 815-40-25 if (1) the holder of public warrants is able to net-cash-settle its warrants upon the occurrence of an event outside the SPAC’s control and (2) holders of the common shares underlying such warrants are not entitled to the same cash settlement right.

Public warrants often contain a provision that allows their holders to receive cash in the event of a tender or exchange offer involving the common shares underlying such warrants. (Note that private placement warrants may also be subject to this provision; therefore, the discussion in this section applies to both public warrants and private placement warrants.) An example of such a provision (a tender offer provision) is as follows:6

Example Provision

(ii) [I]f a tender, exchange or redemption offer shall have been made to and accepted by the holders of the Common Stock (other than a tender, exchange or redemption offer made by the Company in connection with redemption rights held by stockholders of the Company as provided for in the Company’s amended and restated certificate of incorporation or as a result of the repurchase of shares of Common Stock by the Company if a proposed initial Business Combination is presented to the stockholders of the Company for approval) under circumstances in which, upon completion of such tender or exchange offer, the maker thereof, together with members of any group (within the meaning of Rule 13d-5(b)(1) under the Exchange Act (or any successor rule)) of which such maker is a part, and together with any affiliate or associate of such maker (within the meaning of Rule 12b-2 under the Exchange Act (or any successor rule)) and any members of any such group of which any such affiliate or associate is a part, own beneficially (within the meaning of Rule 13d-3 under the Exchange Act (or any successor rule)) more than 50% of the outstanding shares of Common Stock, the holder of a Warrant shall be entitled to receive as the Alternative Issuance, the highest amount of cash, securities or other property to which such holder would actually have been entitled as a stockholder if such Warrant holder had exercised the Warrant prior to the expiration of such tender or exchange offer, accepted such offer and all of the Common Stock held by such holder had been purchased pursuant to such tender or exchange offer, subject to adjustments (from and after the consummation of such tender or exchange offer) as nearly equivalent as possible to the [antidilution] adjustments.

The SEC Staff Statement addresses the effect of this type of provision on the classification of public warrants and private placement warrants issued by a SPAC. It states, in part:

GAAP further includes a general principle that if an event that is not within the entity’s control could require net cash settlement, then the contract should be classified as an asset or a liability rather than as equity. However, GAAP provides an exception to this general principle whereby equity classification would not be precluded if net cash settlement can only be triggered in circumstances in which the holders of the shares underlying the contract also would receive cash. Scenarios where this exception would apply include events that fundamentally change the ownership or capitalization of an entity, such as a change in control of the entity, or a nationalization of the entity.

We recently evaluated a fact pattern involving warrants issued by a SPAC. The terms of those warrants included a provision that in the event of a tender or exchange offer made to and accepted by holders of more than 50% of the outstanding shares of a single class of common stock, all holders of the warrants would be entitled to receive cash for their warrants. In other words, in the event of a qualifying cash tender offer (which could be outside the control of the entity), all warrant holders would be entitled to cash, while only certain of the holders of the underlying shares of common stock would be entitled to cash. OCA staff concluded that, in this fact pattern, the tender offer provision would require the warrants to be classified as a liability measured at fair value, with changes in fair value reported each period in earnings.

The evaluation of the accounting for contracts in an entity’s own equity, such as warrants issued by a SPAC, requires careful consideration of the specific facts and circumstances for each entity and each contract. OCA is available for consultation on accounting and financial reporting issues, including relating to an entity’s specific fact pattern on issues similar to those described above or on other instruments and accounting issues. [Footnotes omitted]

The SEC Staff Statement addresses a scenario in which a SPAC and a target merge, and after the transaction, the combined company has two classes of common shares — Class A and Class B. The tender offer provision pertains to the public warrants and private placement warrants, which are both exercisable into Class A shares. The Class B shares control the entity and would continue to have such control regardless of the number of Class A shares involved in a tender or exchange offer (i.e., there would not be a change in control of the entity). The SEC staff concluded that as a result of the tender offer provision, the public warrants and private placement warrants would not meet the ASC 815-40-25 conditions for equity classification because (1) all such warrants could be cash settled upon an event outside the entity’s control and it is possible that less than all or substantially all of the Class A shares would be eligible to receive cash (e.g., the tender offer provision applies if 50.1 percent of the Class A shares are involved in a tender or exchange offer) and (2) the provision that would result in such a cash settlement would not lead to a change in control of the entity.

In reaching this conclusion, the SEC staff acknowledged that ASC 815-40-55-2 through 55-4 can be interpreted as providing a limited exception to the general principle that an equity-linked holder cannot be entitled to receive cash unless the holders of all shares underlying the contract are also entitled to receive cash. The paragraphs that describe this limited exception state:

55-2 An event that causes a change in control of an entity is not within the entity’s control and, therefore, if a contract requires net cash settlement upon a change in control, the contract generally must be classified as an asset or a liability.

55-3 However, if a change-in-control provision requires that the counterparty receive, or permits the counterparty to deliver upon settlement, the same form of consideration (for example, cash, debt, or other assets) as holders of the shares underlying the contract, permanent equity classification would not be precluded as a result of the change-in-control provision. In that circumstance, if the holders of the shares underlying the contract were to receive cash in the transaction causing the change in control, the counterparty to the contract could also receive cash based on the value of its position under the contract.

55-4 If, instead of cash, holders of the shares underlying the contract receive other forms of consideration (for example, debt), the counterparty also must receive debt (cash in an amount equal to the fair value of the debt would not be considered the same form of consideration as debt).

However, the SEC staff concluded that this exception could only be applied if the event giving rise to the cash settlement of the equity-linked financial instrument would always cause a change in control of the entity. Because a change in control could never occur in the situation in the example, the SEC staff concluded that the limited exception would not apply and, therefore, that the registrant’s public warrants and private placement warrants would not meet the equity classification conditions in ASC 815-40-25 (i.e., the cash settlement associated with the tender offer provision violated the general principle in ASC 815-40-25 for equity classification). As a result, the registrant would be required to classify those warrants as liabilities.

On the basis of informal discussions, we understand that the SEC staff’s conclusion specifically addresses the particular facts and circumstances of the registrant, which has a dual common-share structure. Therefore, the warrant would not meet the equity classification conditions in ASC 815-40-25 and must be classified as a liability if (1) a public warrant or private placement warrant contains a provision similar to the tender offer provision described above and (2) the registrant has a dual common-share structure in which holders of both classes are entitled to vote on matters submitted to the vote of the entity’s stockholders (which is usually the case before any acquisition of a target by the SPAC). The same conclusion would apply if there was a single common-share structure but holders of other classes of securities were entitled to currently vote on matters submitted to the vote of the entity’s stockholders.

However, we do not believe that the SEC staff’s conclusion must be applied when there is a similar tender offer provision if (1) there is only a single class of voting common shares and (2) only holders of that class of shares are entitled to vote on matters submitted to the entity’s stockholders (i.e., the entity has no other class of voting securities). We believe that, in these circumstances, it is acceptable to apply the limited exception for changes in control in ASC 815-40-55-2 through 55-4.7

The table below provides examples of tender offer provisions similar to the one described above and explains when liability classification of public warrants and private placement warrants is and is not required.

Liability Classification Is Required	Liability Classification Is Not Required
Before a merger with a target, a SPAC has two classes of voting shares (Class A and Class B). The tender offer provision pertains only to the warrants on the Class A shares. Liability classification of such warrants is required as a result of the tender offer provision because (1) it is possible that the warrants will be cash settled in a tender or exchange offer made by a third party (even if those warrants are not otherwise currently exercisable) and (2) such a tender or exchange offer may not result in a change in control of the SPAC.	After a merger with a SPAC, the combined company has a single class of common shares that controls the entity. The tender offer provision pertains only to the warrants on this single class of shares. The entity has no other voting securities. Liability classification of such warrants is not required as a result of the tender offer provision because, in any cash settlement of the warrants, the group of common shareholders before the tender or exchange offer will no longer control the entity after the tender or exchange offer (i.e., a third party or group obtains control of the entity).
After a merger with a SPAC, the combined company has a single class of common shares. Although the common shareholders collectively control the entity, there are outstanding preferred shares that are entitled to currently vote on an as-converted basis. Liability classification of such warrants is required as a result of the tender offer provision because (1) it is possible that the warrants will be cash settled in a tender or exchange offer made by a third party and (2) such a tender or exchange offer may not result in a change in control of the entity.	After a merger with a SPAC, the combined company has two classes of shares (Class A and Class B). The Class A shares have voting rights and control the entity; the Class B shares have no voting rights. The entity has no other securities with voting rights. The tender offer provision pertains only to the warrants on the Class A shares. Although there is a dual-class common-share structure, liability classification of such warrants is not required as a result of the tender offer provision. This is because, in any cash settlement of the warrants, the group of common shareholders before the tender or exchange offer will no longer control the entity after the tender or exchange offer (i.e., a third party or group obtains control of the entity).

Liability Classification Is Required

Liability Classification Is Not Required

Before a merger with a target, a SPAC has two classes of voting shares (Class A and Class B). The tender offer provision pertains only to the warrants on the Class A shares.

Liability classification of such warrants is required as a result of the tender offer provision because (1) it is possible that the warrants will be cash settled in a tender or exchange offer made by a third party (even if those warrants are not otherwise currently exercisable) and (2) such a tender or exchange offer may not result in a change in control of the SPAC.

After a merger with a SPAC, the combined company has a single class of common shares that controls the entity. The tender offer provision pertains only to the warrants on this single class of shares. The entity has no other voting securities.

Liability classification of such warrants is not required as a result of the tender offer provision because, in any cash settlement of the warrants, the group of common shareholders before the tender or exchange offer will no longer control the entity after the tender or exchange offer (i.e., a third party or group obtains control of the entity).

After a merger with a SPAC, the combined company has a single class of common shares. Although the common shareholders collectively control the entity, there are outstanding preferred shares that are entitled to currently vote on an as-converted basis.

Liability classification of such warrants is required as a result of the tender offer provision because (1) it is possible that the warrants will be cash settled in a tender or exchange offer made by a third party and (2) such a tender or exchange offer may not result in a change in control of the entity.

After a merger with a SPAC, the combined company has two classes of shares (Class A and Class B). The Class A shares have voting rights and control the entity; the Class B shares have no voting rights. The entity has no other securities with voting rights. The tender offer provision pertains only to the warrants on the Class A shares.

Although there is a dual-class common-share structure, liability classification of such warrants is not required as a result of the tender offer provision. This is because, in any cash settlement of the warrants, the group of common shareholders before the tender or exchange offer will no longer control the entity after the tender or exchange offer (i.e., a third party or group obtains control of the entity).

The above table only addresses certain scenarios. Consultation with an entity’s independent advisers is recommended if (1) unique facts and circumstances are associated with the terms of the tender offer provision or the entity’s capital structure or (2) contracts other than equity shares convey control to their holder.

See Chapter 5 of Deloitte’s Roadmap Contracts on an Entity’s Own Equity for more information about the equity classification conditions in ASC 815-40-25.

Connecting the Dots

On the basis of the SEC Staff Statement, a registrant may conclude that its historical accounting for warrants was incorrect (e.g., equity classification when terms consistent with the SEC Staff Statement require liability classification). In such situations, the registrant must evaluate the materiality of the error to the previously filed financial statements in accordance with the guidance in SAB Topic 1.M. For more information about assessing materiality and SEC comments on this topic, see Section 2.15 of Deloitte’s Roadmap SEC Comment Letter Considerations, Including Industry Insights.

If a registrant concludes that the error was material to previously issued financial statements, it must disclose the error by filing Form 8-K, Item 4.02, within four business days of determining that the previously issued financial statements and related audits and reviews should not be relied upon. The registrant also must amend its most recently filed Form 10-K and any subsequently filed Forms 10-Q to restate (1) the financial statements, including applicable disclosures required for error corrections (i.e., ASC 250-50); (2) MD&A; (3) CAEs that are related to the warrants; (4) quarterly financial information for interim periods during the fiscal periods that were affected by the error (in accordance with Regulation S-K, Item 302); and (5) any other information in the filings that was affected by the change (e.g., risk factors, the business section). If the registrant’s auditor communicated CAMs in its auditor’s report (see Section D.3.1.4), it needs to reevaluate CAMs in light of restatements related to the warrant matter and determine whether it needs to make a change in an existing CAM or identify a new CAM.

The registrant should also consider whether the factors that led to the restatement represent a material weakness in ICFR or ineffective DCPs. The SEC staff often comments when companies conclude that either ICFR or DCPs remained effective after a material restatement. For more information, see Sections 3.5 and 3.6 of Deloitte’s Roadmap SEC Comment Letter Considerations, Including Industry Insights.

If the registrant concludes that the error was either (1) not material to the prior period being changed but would be material to the current period if corrected in the current period or (2) not material to any periods being presented in the required financial statements and disclosures, it may update the prior periods in future filings. In addition, as noted in the SEC Staff Statement, registrants that determine that the errors are not material to the required financial statements and disclosures included in a pending transaction may provide the staff, via EDGAR correspondence, with a written representation to that effect. A registrant must also evaluate the impact of an immaterial misstatement on ICFR and DCPs since the severity of a deficiency in ICFR depends on whether it is reasonably possible that the deficiency could have resulted in a material misstatement. For more information, see Section 3.6.2 of Deloitte’s Roadmap SEC Comment Letter Considerations, Including Industry Insights.

D.6.4.3 Earnings per Share

Because public warrants represent potential common shares, an entity must apply ASC 260 in accounting for and disclosing such warrants. In calculating diluted EPS, the SPAC should consider the guidance on contingently issuable shares.

In addition, regardless of whether they are classified as equity or liability instruments, public warrants that give the holders nonforfeitable rights to dividends represent participating securities regardless of whether the SPAC actually declares or pays dividends.

See Deloitte’s Roadmap Earnings per Share for more information about contingently issuable shares and participating securities.

D.6.5 Private Placement Warrants

Although the terms of private placement warrants are often similar to the terms of public warrants, there may be key differences, such as the following:

Public warrants often have a redemption-for-stock feature or a feature that allows the SPAC to call such warrants for $0.01 in the event that the holder does not exercise them. Private placement warrants do not contain redemption features that allow the SPAC to call the warrants to force early exercise.
Some exercise price adjustments are calculated differently for private placement warrants than they are for public warrants.
The cashless (net share) settlement formulas for private placement warrants differ from those for public warrants.

The terms of private placement warrants generally change if they are transferred to a nonpermitted transferee (e.g., a party other than the sponsor or its affiliates). In such situations, the private placement warrants become public warrants.

D.6.5.1 Indexation

As noted in the discussion of the indexation of public warrants (see Section D.6.4.1), ASC 815-40-15 contains a two-step model that an entity must apply to determine whether private placement warrants are indexed to the SPAC’s stock. Under this model, in addition to evaluating contingent exercise provisions, an entity must determine whether any potential adjustment to the exercise price or settlement amount represents an input into the pricing of a fixed-for-fixed option on equity shares. ASC 815-40-15-7E discusses such inputs.

As indicated in the SEC Staff Statement, the holder is not an input into the pricing of an option on equity shares. Therefore, a private placement warrant that contains any of the provisions below is considered not indexed to the SPAC’s stock and must be classified as a liability because the provision either (1) ceases to apply or (2) is applied differently if the private placement warrants are transferred to a nonpermitted transferee and thus become public warrants. That is, in these cases, the settlement amount (i.e., exercise price or number of shares) of the private placement warrants depends on the holder. Note that the provisions below only affect the classification of private placement warrants because public warrants cannot become private placement warrants.

Redemption-for-stock feature — Public warrants may contain a provision that allows the SPAC to call them for either (1) $0.10 per warrant or (2) Class A shares, provided that the shares’ fair value equals or exceeds $10. When the SPAC exercises this call right, the holders are entitled to exercise and settle the public warrants on a net-share basis. While such a feature may specify the payment of $0.10 per warrant, the economic substance of the feature is the same even if the $0.10 payment is not specified. An example of a redemption-for-stock feature is as follows:

Example Provision

Redemption of warrants for common stock. Subject to Sections [X] and [Y] hereof, not less than all of the outstanding Warrants may be redeemed, at the option of the Company, ninety (90) days after they are first exercisable and prior to their expiration, at the office of the Warrant Agent, upon notice to the Registered Holders of the Warrants, as described in Section [Z] below, at a price equal to a number of shares of Common Stock determined by reference to the table below, based on the redemption date (calculated for purposes of the table as the period to expiration of the Warrants) and the “Fair Market Value” (as such term is defined in subsection [W](b)) (the “Alternative Redemption Price”), provided that the last sales price of the Common Stock reported has been at least $10.00 per share (subject to adjustment in compliance with Section [V] hereof), on the trading day prior to the date on which notice of the redemption is given and provided that there is an effective registration statement covering the Common Stock issuable upon exercise of the Warrants, and a current prospectus relating thereto, available throughout the 30-day Redemption Period (as defined in Section [Z] below) or the Company has elected to require the exercise of the Warrants on a “cashless basis” pursuant to subsection [W].

The exact Fair Market Value and Redemption Date (as defined below) may not be set forth in the table above, in which case, if the Fair Market Value is between two values in the table or the Redemption Date is between two redemption dates in the table, the number of Common Stock to be issued for each Warrant redeemed will be determined by a straight-line interpolation between the number of shares set forth for the higher and lower Fair Market Values and the earlier and later redemption dates, as applicable, based on a 365- or 366-day year, as applicable.

The stock prices set forth in the column headings of the table above shall be adjusted as of any date on which the number of shares issuable upon exercise of a Warrant is adjusted pursuant to Section V. The adjusted stock prices in the column headings shall equal the stock prices immediately prior to such adjustment, multiplied by a fraction, the numerator of which is the number of shares deliverable upon exercise of a Warrant immediately prior to such adjustment and the denominator of which is the number of shares deliverable upon exercise of a Warrant as so adjusted. The number of shares in the table above shall be adjusted in the same manner and at the same time as the number of shares issuable upon exercise of a Warrant.
Exercise price adjustment upon certain changes of control — Many warrants issued by a SPAC contain a provision that requires adjustment of the exercise price if (1) there is a change of control of the entity and (2) less than 70 percent of the consideration received is stock listed on an exchange. The calculation of the exercise price adjustment for public warrants differs from that for private placement warrants. That is, for public warrants, the adjustment is calculated on the basis of a capped American call option; however, for private placement warrants, the adjustment is calculated on the basis of an uncapped American call option.8 If, however, the private placement warrants are transferred to a nonpermitted transferee, the exercise price adjustment changes from being calculated on the basis of an uncapped American call option to being calculated on the basis of a capped American call option. An example of such a provision is shown below.

Example Provision

[I]f less than 70% of the consideration receivable by the holders of the Common Stock in the applicable event is payable in the form of common stock in the successor entity that is listed for trading on a national securities exchange or is quoted in an established over-the-counter market, or is to be so listed for trading or quoted immediately following such event, and if the Registered Holder properly exercises the Warrant within thirty (30) days following the public disclosure of the consummation of such applicable event by the Company pursuant to a Current Report on Form 8-K filed with the Commission, the Warrant Price shall be reduced by an amount (in dollars) equal to the difference of (i) the Warrant Price in effect prior to such reduction minus (ii) (A) the Per Share Consideration (as defined below) (but in no event less than zero) minus (B) the Black-Scholes Warrant Value (as defined below). The “Black-Scholes Warrant Value” means the value of a Warrant immediately prior to the consummation of the applicable event based on the Black-Scholes Warrant Model for a Capped American Call on Bloomberg Financial Markets (“Bloomberg”). For purposes of calculating such amount, (1) Section [X] of this Agreement shall be taken into account, (2) the price of each share of Common Stock shall be the volume weighted average price of the Common Stock as reported during the ten (10) trading day period ending on the trading day prior to the effective date of the applicable event, (3) the assumed volatility shall be the 90 day volatility obtained from the HVT function on Bloomberg determined as of the trading day immediately prior to the day of the announcement of the applicable event, and (4) the assumed risk-free interest rate shall correspond to the U.S. Treasury rate for a period equal to the remaining term of the Warrant. “Per Share Consideration” means (i) if the consideration paid to holders of the Common Stock consists exclusively of cash, the amount of such cash per share of Common Stock, and (ii) in all other cases, the volume weighted average price of the Common Stock as reported during the ten (10) trading day period ending on the trading day prior to the effective date of the applicable event. If any reclassification or reorganization also results in a change in shares of Common Stock covered by subsection [X.1.1], then such adjustment shall be made pursuant to subsection [X.1.1] or Sections [X.2, X.3] and this Section [X.4]. The provisions of this Section [X.4] shall similarly apply to successive reclassifications, reorganizations, mergers or consolidations, sales or other transfers. In no event will the Warrant Price be reduced to less than the par value per share issuable upon exercise of the Warrant.
Different formulas used to determine the number of shares delivered in a cashless (net share) settlement — There are often multiple definitions of “fair market value” that may apply in the event of a cashless settlement. If the definition(s) applicable to public warrants differ from the definition(s) applicable to private placement warrants in any respect, the private placement warrants are not considered indexed to the SPAC’s stock because the applicable definitions change if the private placement warrants are transferred to a nonpermitted transferee and thus become public warrants. Two examples of a potential difference are as follows:
- For public warrants:
  
  Example Provision
  
  [T]he volume weighted average price of the Common Stock as reported during the ten (10) trading day period ending on the trading day prior to the date that notice of exercise is received by the Warrant Agent from the holder of such Warrants or its securities broker or intermediary.
- For private placement warrants:
  
  Example Provision
  
  [T]he average last sale price of the Common Stock for the ten (10) trading days ending on the third trading day prior to the date on which notice of exercise of the Warrant is sent to the Warrant Agent.
- For public warrants in the case of notice of redemption at $0.01:
  
  Example Provision
  
  The average reported last sale price of the shares of Common Stock for the ten trading days ending on the third trading day prior to the date on which the notice of redemption is sent to the holders of warrant.
- For private placement warrants:
  
  Example Provision
  
  [T]he average reported last sale price of the shares of Common Stock for the ten trading days ending on the third trading day prior to the date of exercise.

If a private placement warrant (1) does not contain any settlement provision (i.e., a provision other than a standard antidilution adjustment that affects the exercise price or number of shares) or (2) could never become a public warrant, the private placement warrant could be classified as equity provided that no other provisions or circumstances cause the warrant not to be considered indexed to the SPAC’s stock or not to meet the equity classification conditions in ASC 815-40-25. As discussed above, as a result of a tender offer provision, private placement warrants may not meet the equity classification conditions in ASC 815-40-25.

In current practice, because warrant agreements generally have one or more of the provisions above, most private placement warrants are not considered indexed to the SPAC’s stock and must be classified as a liability both before and after a merger of the SPAC with a target.9 On the basis of the SEC Staff Statement, some registrants may need to determine whether they have classified such warrants incorrectly in previously filed financial statements. For information about evaluating errors, see the Connecting the Dots above.

D.6.6 Accounting for Issuance Costs

Nonauthoritative AICPA Guidance

Technical Q&As Section 4110, “Issuance of Capital Stock”

.01 Expenses Incurred in Public Sale of Capital Stock

Inquiry — A closely held corporation is issuing stock for the first time to the public.

How would costs, such as legal and accounting fees, incurred as a result of this issue, be handled in the accounting records?

Reply — Direct costs of obtaining capital by issuing stock should be deducted from the related proceeds, and the net amount recorded as contributed stockholders’ equity. Assuming no legal prohibitions, issue costs should be deducted from capital stock or capital in excess of par or stated value.

Such costs should be limited to the direct cost of issuing the security. Thus, there should be no allocation of officers’ salaries, and care should be taken that legal and accounting fees do not include any fees that would have been incurred in the absence of such issuance.

SEC Staff Accounting Bulletins

SAB Topic 5.A, Expenses of Offering [Reproduced in ASC 340-10-S99-1]

Facts: Prior to the effective date of an offering of equity securities, Company Y incurs certain expenses related to the offering.

Question: Should such costs be deferred?

Interpretive Response: Specific incremental costs directly attributable to a proposed or actual offering of securities may properly be deferred and charged against the gross proceeds of the offering. However, management salaries or other general and administrative expenses may not be allocated as costs of the offering and deferred costs of an aborted offering may not be deferred and charged against proceeds of a subsequent offering. A short postponement (up to 90 days) does not represent an aborted offering.

D.6.6.1 Issuance Costs Incurred in Conjunction With a SPAC’s IPO

In addition to the above guidance, SAB Topic 2.A.6 states, in part, that “[f]ees paid to an investment banker in connection with a business combination or asset acquisition, when the investment banker is also providing interim financing or underwriting services, must be allocated between acquisition related services and debt issue costs.”

In accordance with this guidance, a SPAC should evaluate which fees and costs incurred in conjunction with its IPO, as well as with any issuance of private placement warrants or other securities, represent direct and incremental costs that would be eligible for deferral. For example, underwriting costs incurred to issue the units, as well as certain legal and accounting fees, may be direct and incremental costs. However, costs that are not direct or incremental must be expensed as incurred.

After identifying the group of eligible costs that would qualify for deferral, the SPAC should appropriately allocate such costs to the various instruments issued. For example, when a SPAC incurs underwriting costs with an investment bank (including deferred costs) and the amount of those costs is directly related to the proceeds received from issuing the units, those costs should only be allocated to the units. Other costs that are not directly related to a specific type of instrument may be allocated by using a rational basis.

The underwriting fees are generally allocated only to the units because the amount of such costs is directly related to the number of units issued. Since the units contain two separate units of account (i.e., Class A shares and public warrants), such costs will be further allocated to those separate units of account. Any amounts allocated to Class A shares would be classified in temporary equity because those shares are redeemable securities. Any costs allocated to public warrants would be allocated to permanent equity if the public warrants are classified as equity instruments and would be immediately expensed if the public warrants are classified as liabilities that are initially and subsequently measured at fair value, with changes in fair value reported in earnings. For further discussion of the allocation of costs, see Section 3.3.4.4 of Deloitte’s Roadmap Distinguishing Liabilities From Equity.

D.6.6.2 Issuance Costs Incurred in Conjunction With the Merger of a SPAC and Target

Certain costs that the target company incurs in conjunction with a merger with a SPAC may represent direct and incremental costs (i.e., costs that qualify for deferral as part of the reverse capitalization). To properly account for them, the target company may need to allocate the eligible costs to the respective instruments issued or assumed in the SPAC merger.

If the target company in the SPAC merger does not recognize any liabilities that must be subsequently accounted for at fair value, with changes in fair value reported in earnings, it can recognize all direct and incremental costs in equity (i.e., APIC). However, the target company must take additional considerations into account if it recognizes any liability-classified instrument that is subsequently measured at fair value through earnings because the costs related (or allocated) to such instruments must be expensed as incurred.

When the target company issues, or assumes in the SPAC merger, any liability-classified instruments that are subsequently accounted for at fair value, the company should first evaluate whether any eligible costs are directly related to a specific instrument. Such costs should be allocated to that instrument and capitalized or expensed as appropriate (i.e., costs allocated to an equity instrument are recognized in equity, and costs allocated to a liability instrument that is subsequently reported at fair value through earnings are expensed as incurred). Other direct and incremental costs that are not directly related to a specific instrument should be allocated by using a rational basis. The accounting for costs incurred in a reverse capitalization involving a SPAC is not specifically addressed in U.S. GAAP. However, we believe that there are two acceptable views on how to allocate direct and incremental costs that are not directly related to a specific instrument:

View A: Allocate costs to all instruments assumed or issued in the SPAC merger on a relative fair value basis — Under this approach, eligible costs would be allocated to all the SPAC shares, SPAC warrants, and earn-out arrangements involved in the merger. Costs allocated to liability-classified instruments that are subsequently measured at fair value through earnings (e.g., SPAC warrants and earn-out arrangements entered into with the SPAC sponsor10) must be expensed as incurred.
View B: Allocate costs only to the SPAC shares and any newly issued instruments in the SPAC merger on a relative fair value basis — Under this approach, eligible costs would not be allocated to assumed liabilities such as liability-classified SPAC warrants. Rather, eligible costs would only be allocated to the SPAC shares and any newly issued instruments, such as earn-out arrangements. Costs allocated to liability-classified instruments that are subsequently measured at fair value through earnings (e.g., earn-out arrangements with the SPAC sponsor11) must be expensed as incurred.

D.6.7 SPAC Backstop Arrangements

During the panel discussion on current OCA projects at the 2023 AICPA & CIMA Conference on Current SEC and PCAOB Developments, SEC Associate Chief Accountant Carlton Tartar noted that there are still many complexities related to debt-versus-equity classification of financial instruments, particularly in SPAC transactions even though the volume of such transactions has declined. He further stated that SPACs have historically used various types of financings to ensure that they have the necessary funds to close their proposed business combinations once a target has been identified. He observed that, more recently, there has been an uptick in the use of a financing vehicle commonly referred to as a backstop arrangement. In such an arrangement, an issuer would prepay an amount to a counterparty to purchase a stated (or maximum) number of shares that the counterparty holds and vote in favor of the business combination, or merger. The counterparty has the right to (1) deliver the shares to the issuer at a later date for a stated amount per share or (2) retain the shares and return the prepayment.

Mr. Tartar highlighted an example in which a registrant proposed initially recognizing the prepayment as an asset under ASC 480 to reflect the up-front cash payment made to the counterparty. The SEC staff ultimately objected to this approach because it believes that the substance of the prepayment is more akin to a subscription receivable for transactions related to an entity’s own shares. Accordingly, the staff determined that it is appropriate to record the prepayment amount in contra equity in the manner described in Regulation S-X, Rule 5-02. The staff did not provide a view on the subsequent accounting for the instrument.

Footnotes

Direct and incremental costs associated with the offering that are paid to third parties should be allocated to the associated freestanding financial instruments after the allocation of proceeds discussed here (see Section D.6.6 for more information).

The classification of the public warrants and Class A shares is discussed below. In the discussion of the allocation of proceeds, it is assumed that the Class A shares are classified as equity instruments.

Class B shares are generally converted into Class A shares upon a merger of the SPAC with a target. In some cases, the holders can elect to convert the Class B shares into Class A shares before completion of a business combination. However, such conversion generally does not change the fact that the shares held by the sponsor and its affiliates do not have any redemption rights or rights to participate in the distribution of proceeds upon a liquidation of the SPAC.

Public warrants generally possess the characteristics of a derivative instrument in ASC 815-10-15-83. However, the guidance in ASC 815-40 must be applied regardless of whether such warrants have all of these characteristics.

Public warrants may also contain a provision that allows the SPAC to call them for $0.01 per warrant if the fair value of the Class A shares exceeds $18 for a defined number of trading days. This feature is only considered an exercise contingency because it does not change the settlement terms.

Note that in this example, “Common Stock” refers to the Class A shares of the SPAC. After a merger of the SPAC with a target, common stock refers to either (1) the single class of common shares of the combined entity or (2) the Class A common shares if the combined entity has multiple classes of common shares.

It is also acceptable to classify the public warrants as liabilities provided that the approach selected is applied consistently to all instruments with such features.

In the example, the difference arises because of the reference to Section [Z] of the warrant agreement, which explains that public warrants are subject to redemption (i.e., forced exercise) while private placement warrants are not.

As discussed above, in this section, it is assumed that the private placement warrants are not within the scope of ASC 718. If a private placement warrant is within the scope of ASC 718, the classification would be determined on the basis of the classification guidance in ASC 718. In these circumstances, if the holder has no continuing service requirement after the SPAC merges with a target and the transaction is accounted for as a reverse recapitalization, the combined company should reassess the accounting classification of the private placement warrant as of the date of the merger with the SPAC in accordance with the classification guidance in ASC 480-10 and ASC 815-40.

Earn-out arrangements entered into with all the target’s shareholders on a pro rata basis are treated as dividends. As a result, it is acceptable to recognize the amounts allocated to these arrangements in equity.

See footnote 10.