Accounting considerations for a Special Purpose Acquisition Company (“SPAC”)

STANDARDSETTINGAccounting considerations for aSpecial Purpose Acquisition Company(SPAC)

JANUARY 2022Foreword

1.Structure and lifecycle of a typical SPAC

2.Prior to the De-SPAC Transaction

3.The De-SPAC Transaction

3.1 Identifying the accounting acquirer and determining whether it is abusiness combinationScenario 1: De-SPAC Target is the accounting acquirer in an asset acquisitionScenario 2: SPAC is the accounting acquirer in an asset acquisitionScenario 3: De-SPAC Target is the accounting acquirer in a business combinationScenario 4: SPAC is the accounting acquirer in a business combination

3.2 Private investment in public equity (PIPE) investment

3.3 Earn-out arrangements and contingent share-based payments

3.4 Transaction costs

4.Following the De-SPAC Transaction

4.1 Reassessing the classification of Shares and Warrants

4.2 Earnings per share and operating segments

4.3 Other considerationsCONTENTSForewordIn September 2021, the Hong Kong Stock Exchange (“HKEX”) published a Consultation Paperin which it proposed to amend the listing rules to introduce a listing regime for Special PurposeAcquisition Companies (“SPACs”) in Hong Kong. The related Consultation Conclusions waspublished in December 2021 and the regime became effective from 1 January 2022.1The structure and lifecycle of a typical SPAC give rise to various complex financial reportingissues. Practice is developing as these issues continue to evolve. This publication highlightscertain key accounting considerations that have come to our attention at the time of writingthat may be relevant to a SPAC throughout its lifecycle. Given the newly established SPACregime in Hong Kong, this publication draws on the experience of other jurisdictions with activeSPAC listings (e.g. the US and Singapore) and describes common accounting issues faced by atypical SPAC.Readers should take note of the relevant listing rules stipulated by the HKEX, the provisions ofthe SPAC’s own constitutional documents, shareholders’ agreements as well as applicable lawsand regulations when assessing the accounting treatment of the various issues noted in thispublication and other issues that may arise. Readers are also advised to seek professional advicewhere necessary.We hope you will find this publication useful.Cecilia KweiDirector, Standard SettingJanuary 2022https://www.hkex.com.hk/News/Regulatory-Announcements/2021/211217news?sc_lang=enHKICPASSDAccounting considerations for a SPAC

1.Structure and lifecycle of a typical SPACA SPAC is a shell company whose sole purpose is to raise funds through an initial offering2(“IPO”) and to acquire an operating company within a pre-defined period after listing, usuallywithin 18-24 months. SPACs typically do not have business operations and do not have assetsother than (a) the proceeds from their IPOs and (b) the initial capital raised from SPACpromoters to pay for the SPAC’s initial expenses. In terms of Chapter 18B of the HKEX MainBoard Listing Rules (“Listing Rules” / “LR”), the IPO proceeds are held in an escrow account untilthe SPAC acquires a target operating company (“De-SPAC Target”) or until such time as theinvestors request redemption of their shares upon various events.Once the SPAC has identified a De-SPAC Target, its management team will negotiate with theDe-SPAC Target and execute the acquisition as approved by the SPAC shareholders. Theacquisition is usually structured as a reverse acquisition in which the De-SPAC Target mergeswith the SPAC or becomes a subsidiary of the SPAC. While there are different ways to structurethe acquisition transaction, the resulting group or combined entity (“Successor Company”) is alisted entity and carries on the De-SPAC Target’s original business activities. The acquisitiontransaction is often referred to as the SPAC merger or the de-SPAC transaction (“De-SPACTransaction”).If the SPAC does not complete the De-SPAC Transaction within the prescribed timeframe(including any extension), the SPAC will be required to return the IPO proceeds (at a minimum)

held in the escrow account to the investors. The SPAC will then be delisted. Liquidation mayfollow but it is not a requirement under the Listing Rules.The typical lifecycle of a SPAC is illustrated overleaf.As can be seen from the diagram, a typical SPAC’s lifecycle can be broken down into threestages:

1.Prior to the De-SPAC Transaction. This incorporates the first two phases i.e. SPACformation, IPO, De-SPAC Target search and negotiations;

2.The De-SPAC Transaction; and

3.Following the De-SPAC Transaction.HKICPASSDAccounting considerations for a SPACSPAC Shares and SPAC Warrants can only be offered to Professional Investors in terms of Chapter 18B of the Listing Rules(capitalised terms as defined in the Listing Rules).HKICPASSDAccounting considerations for a SPACThe accounting considerations at each stage are discussed below.YesYesApprovedNoNoNotapprovedFormation of the SPAC bypromotersIPO in a stock exchangeDe-SPAC Target companysearch and negotiationsAnyremaining/extended timefor De-SPAC Targetsearch?Acquisitionagreementreached?Shareholderapproval?Phase 1: SPAC formationand IPOPhase 2: De-SPAC Targetsearch and negotiationsPhase 3: De-SPACTransactionPhase 4: Following theDe-SPAC TransactionDe-SPAC Targetacquired by the SPACThe Successor Companyoperates as a listed entitySPAC returns capital toinvestors and cancellationof listing

2.Prior to the De-SPAC TransactionThis includes Phase 1 SPAC formation and IPO as well as Phase 2 De-SPAC Target search andnegotiations.At the time of formation, the SPAC often issues various kinds of financial instruments such aspromoter shares (“Promoter Shares”) and promoter warrants (“Promoter Warrants”) to thepromoters.Upon IPO, the SPAC usually issues public shares (“SPAC Shares”) and public warrants (“SPACWarrants”, together with Promoter Warrants, “Warrants”) of the SPAC to external investors. Interms of the Listing Rules, SPAC Shares and SPAC Warrants are issued and traded separatelyunder their own unique trading symbols. The IPO proceeds are held in an escrow account andearn interest while the SPAC conducts the De-SPAC Target search.Prior to the De-SPAC Transaction, the SPAC usually has a limited number of financial statementbalances as it has minimal activities. The financial statements of the SPAC comprise mainly cashraised from the IPO and from the promoters, shareholders’ funding (equity and/or liability) aswell as general and administrative expenses incurred for the De-SPAC Target search.The accounting for the Promoter Shares, SPAC Shares and Warrants could be complex and mayrequire significant judgement. The key questions are (1) which standard applies (e.g. HKFRS 2Share-based Payment or HKAS 32 Financial Instruments: Presentation), and (2) whether theseinstruments should be classified as liabilities, equity or compound instruments in the SPAC’sfinancial statements. The table below describes the commonly seen features and the relevantaccounting considerations for these instruments.HKICPASSDAccounting considerations for a SPACPromoter sharesCommonly seen features• The SPAC may issue Promoter Shares to promoters at its formation in exchange for anominal amount of cash, for services or for both.• The promoters usually have significant experience with SPAC transactions and providesignificant support to the SPAC in terms of the IPO, target search, negotiation andconsummation of the deal. The promoters also typically hold management or boardpositions at the SPAC.• Generally, Promoter Shares have similar voting rights as SPAC Shares except they mayhave the additional right to elect directors of the SPAC.• Promoter Shares convert into SPAC Shares upon completion of the De-SPAC Transaction.• Promoter Shares are not redeemable.Accounting considerations• Given the significant services provided by the promoters to the SPAC, it is critical toassess whether the Promoter Shares are given to these individuals in return for servicesreceived by the SPAC (in the scope of HKFRS 2) or in their capacity as shareholders (inthe scope of HKAS 32).• This assessment should take into account all relevant facts and circumstances and mayrequire significant judgment. Some relevant considerations include the following (thepresence or absence of any individual indicators is not determinative):

a. What is the commercial rationale for issuing the Promoter Shares?b. Do the promoters have an obligation to provide services for free or below marketvalue in exchange for the Promoter Shares?c. Are the Promoter Shares subject to any service or vesting conditions, includingimplicit conditions?d. Is the remuneration received by the Promoter Shareholders (apart from thePromoter Shares) commensurate with the services rendered by them to the SPAC?e. What would happen to the Promoter Shares if the promoters left the SPAC or if theDe-SPAC Transaction does not happen?f. Are there any additional rights attached to the Promoter Shares compared to theSPAC Shares?HKICPASSDAccounting considerations for a SPAC• In many cases it is likely that the Promoter Shares will fall within the scope of HKFRS 2.In this case, the share-based payment would be classified as equity-settled orcash-settled depending on the terms of the arrangement. The fair value ofequity-settled share-based payments is measured at the grant date and is notsubsequently remeasured. For cash-settled share-based payments, the fair value of theliability is remeasured at the end of each reporting period up to the date of settlement.• Under HKFRS 2, management will need to assess what the appropriate grant date andvesting period is, as well as whether the conditions attached are vesting or non-vestingconditions and how they will affect the grant date fair value of the Promoter Shares(and subsequent reporting date fair value for cash-settled share-based payments),amongst other things.• HKAS 32 specifically scopes out transactions that are within the scope of HKFRS 2. Ifthe Promoter Shares are indeed within the scope of HKAS 32, their classification willbe driven by whether the conversion into SPAC Shares meets the requirement in HKAS

32.16(b). Management should also consider whether the SPAC is a limited lifecompany in making this assessment.• Another point to note is that if the Promoter Shares are convertible into SPAC Sharesat a time when the latter are classified as financial liabilities (at least in part), thePromoter Shares will also be classified as financial liabilities.SPAC ShareCommonly seen features• SPAC Shares are typically redeemable regardless of whether a De-SPAC Transactionoccurs:

º prior to a general meeting to approve a De-SPAC Transaction, the shareholders mayelect to redeem the shares for cash in case they do not want to invest in theDe-SPAC Target, with the completion of the redemption being subject to approvaland completion of the De-SPAC Transaction;3º if no De-SPAC Transaction is completed within the prescribed period (including anyextension), the SPAC will be required to return the IPO proceeds to all the holdersof SPAC Shares, which will in effect become mandatorily redeemable.HKICPASSDAccounting considerations for a SPACIn terms of the Listing Rules, two other events requiring shareholders’ approval at a general meeting will trigger a redemptionright: (i) continuation of the SPAC following a material change in certain SPAC Promoter or SPAC directors, and (ii) extension ofthe deadlines relating to the announcement or completion of a De-SPAC Transaction.• In terms of Listing Rule 18B.57, the redemption price of each SPAC Share is at leastequal to the price at which it was issued at the SPAC’s IPO.• SPAC Shares typically have dividend and voting rights, including the right to approveany proposed acquisitions.• The detailed terms of the SPAC Shares can vary substantially among different SPACs.For example, the SPAC Shares may or may not provide interest return to the investor ifno De-SPAC Transaction occurs; the voting mechanisms for approving the De-SPACTransaction and/or extending the De-SPAC timeframe could vary, or the redemptionright may be exercisable at different times.Accounting considerations• Management should consider whether the SPAC is a limited life company in light ofthe Listing Rule requirements, together with other relevant laws and regulations,constitutional documents of the SPAC and shareholder agreements. Furtherconsideration should be given to whether the SPAC Shares meet the criteria in HKAS

32.16A to 16D to be presented as equity.• Given the redemption features of SPAC Shares, the SPAC does not have anunconditional right to avoid delivering cash or another financial asset. The SPAC Shareswill hence give rise to a financial liability component until the redemption featurelapses (usually at the time of the De-SPAC Transaction).• Any interest return obligations will also affect the measurement of the financial liabilitycomponent.• It is critical to fully understand the terms and voting mechanisms of the SPAC, inparticular whether the shareholders’ participation in key decision-making processes ofthe SPAC should be considered “an action of the SPAC” or “a private action of theshareholders and distinct from the entity”.4• The classification of the SPAC Shares may have to be reassessed when the redemptionfeature lapses. See section 4 Following the De-SPAC Transaction.In October 2021, the European Securities and Markets Authority submitted an Agenda Item Request to the IFRS InterpretationsCommittee for clarification on this very issue and whether the duty to present a De-SPAC Target for approval by theshareholders is a contractual obligation of the SPAC or merely an economic compulsion. These two questions will affectwhether the SPAC Shares should be classified as equity or liability. The HKICPA will monitor the development of the discussionand provide updates as appropriate.HKICPASSDAccounting considerations for a SPACHKICPASSDAccounting considerations for a SPACWarrantsCommonly seen features• SPAC Warrants and SPAC Shares are separate instruments that are often issuedtogether as a package at the time of the IPO. Promoter Warrants may be issuedseparately to the promoters.• Warrants give their holders the right to purchase SPAC Shares at a pre-determinedprice.• The Warrants could be settled gross, net in cash or shares or in a combination ofdifferent ways.Accounting considerations• Similar to Promoter Shares, it is necessary to consider whether Promoter Warrantsissued to promoters are within the scope of HKFRS 2 or HKAS 32. See relateddiscussions above.• Warrants generally include features that violate the “fixed-for-fixed” criterion in HKAS32 resulting in their being classified as financial liabilities. Such features include:

➢ variability in either the number of shares to be delivered or cash to be received(including a fixed amount of cash in a foreign currency), apart from adjustmentsthat are purely anti-dilutive;

➢ the underlying shares are classified at least in part as liabilities during the periodwhen the Warrants may be exercised;

➢ the underlying shares are presented as equity due solely to the application of HKAS

32.16A to 16D;

➢ settlement options that do not all result in equity classification; and➢ net cash/ shares settlement features.• The Warrants will be classified as equity if (i) the underlying SPAC Shares will beclassified as equity and (ii) they can only be settled gross by the delivery of a fixednumber of shares in exchange for a fixed amount of cash in the SPAC’s functionalcurrency.HKICPASSDAccounting considerations for a SPACThe fair value measurement of the various instruments and/or components therein may becomplex and the involvement of valuation experts may be required.Given the Promoter Shares, SPAC Shares and Warrants of different SPACs are subject todifferent jurisdictional features as well as terms and conditions, it is imperative for SPACmanagement to understand the listing rules of the relevant stock exchanges (Chapter 18B ofthe Listing Rules in the Hong Kong context), the provisions of the SPAC’s own constitutionaldocuments, shareholders’ agreements as well as other relevant laws and regulations thoroughlywhen determining the appropriate accounting treatment for these instruments. Any significantjudgements made should be disclosed in accordance with paragraph 122 of HKAS 1Presentation of Financial Statements.HKICPASSDAccounting considerations for a SPAC

3.The De-SPAC TransactionAs the sole purpose of the SPAC after its IPO is to look for a De-SPAC Target, the De-SPACTransaction is a significant event in the lifecycle of a SPAC. The accounting issues that comewith it are of equal significance.

3.1 Identifying the accounting acquirer and determining whether it is a business combinationOnce the promoters and management team have finalised negotiations with a De-SPAC Targetand the shareholders have approved the acquisition, the SPAC would acquire the De-SPAC Targetresulting in a listed Successor Company. The key questions at this stage are (i) which entity is theaccounting acquirer and (ii) is the transaction a business combination or an asset acquisition?The accounting acquirer is the entity that obtains control of another entity and could bedifferent from the legal acquirer. HKFRS 10 Consolidated Financial Statements containsguidance on which entity has control over another entity and this should be used to identify theaccounting acquirer. If applying the guidance in HKFRS 10 does not provide a clear answer, theentity should consider the factors in paragraphs B14 to B18 of HKFRS 3 Business Combinationsin making the assessment.As regards whether the transaction is a business combination or an asset acquisition,HKFRS 3.B5 to B12D provide relevant guidance. If the assets acquired do not constitute abusiness, the transaction is accounted for as an asset acquisition and the accounting acquirershould identify and recognise the individual identifiable assets acquired and liabilities assumedin accordance with HKFRS 3.2(b). On the other hand, if the De-SPAC Transaction is a businesscombination, the transaction is within the scope of HKFRS 3.The table below summarises a few of the accounting permutations for a De-SPAC Transaction:

Accounting acquirerAsset acquistionBusiness combinationDe-SPAC TargetScenario 1Scenario 3SPACScenario 2Scenario 4Each of the scenarios is discussed further below.Scenario 1: De-SPAC Target is the accounting acquirer in an asset acquisitionThis is a common scenario.The merger of the De-SPAC Target into a non-operating listed cash shell typically results in theshareholders of the De-SPAC Target obtaining control over the Successor Company after theacquisition. The purpose of the transaction is for the De-SPAC Target to obtain a listing on astock exchange. Furthermore, the SPAC’s being a cash shell with limited activities is unlikely tomeet the definition of a business in terms of HKFRS 3. As such, it is common for the De-SPACTarget to be identified as the accounting acquirer of a set of assets in the De-SPAC Transaction.The transaction is not a reverse acquisition as the SPAC is not a business as defined. Instead, thetransaction could be described as a capital reorganisation or a reverse asset acquisition.The IFRS Interpretations Committee (IFRS IC) issued an Agenda Decision in March 2013 inwhich it considered a similar scenario. The Agenda Decision confirmed that if the listed entity(SPAC) is not a business, the transaction is not a business combination but rather a share-basedpayment transaction under IFRS 25. In this case, the De-SPAC Target is deemed to have issuedits own shares to the SPAC shareholders to obtain control over the SPAC and to acquire a listingon a stock exchange.Applying HKFRS 2, any excess of the fair value of the shares deemed to have been issued bythe De-SPAC Target over the fair value of the SPAC’s identifiable net assets represents alisting service received by the De-SPAC Target. The Agenda Decision further confirms thatregardless of the level of monetary or non-monetary assets owned by the non-listed operatingentity (De-SPAC Target), the entire difference between the two fair values should be consideredto be a payment for obtaining a listing and no amount should be considered to be a cost ofraising capital.HKFRS/HKAS are converged with IFRS/IAS.HKICPASSDAccounting considerations for a SPACThe payment for obtaining a listing cannot be capitalised because it is neither “identifiable” inaccordance with paragraph 12 of HKAS 38 Intangible Assets nor does it meet the definition ofan asset that should be recognised in accordance with other HKFRS or the ConceptualFramework. As such, the cost should be expensed as incurred in accordance with HKFRS 2.8.Refer to Illustration 1 below for a numerical example.The resulting consolidated financial statements of the Successor Company is similar to a reverseacquisition under HKFRS 3:

• they are prepared in the name of the legal acquirer (SPAC) but reflect a continuation of thelegal acquiree’s (De-SPAC Target’s) financial information with an adjustment to the De-SPACTarget’s legal capital to reflect that of the SPAC upon the De-SPAC Transaction.• the pre-combination financial information (including comparatives) includes only that of theDe-SPAC Target.• the SPAC’s financial information is included in the consolidated financial statementsprospectively from the date of acquisition.• the pre-combination equity structure of the De-SPAC Target may, by analogy to HKFRS 3’srequirement on reverse acquisitions, be restated using the exchange ratio established in theacquisition agreement to reflect the number of shares issued by the SPAC in the transaction.• the cash of the SPAC acquired by the De-SPAC Target through the De-SPAC Transaction isexpected to be presented within financing activities as it relates to a change in the size andcomposition of the contributed equity of the Successor Company.• however, as the transaction is not a business combination, no goodwill is recognised.Deferred tax would also not be recognised on any temporary difference arising from theinitial recognition of assets or liabilities at the time of the De-SPAC Transaction unless (i) theyaffect either accounting or taxable profit at the time of the transaction or (ii) they give rise toequal taxable and deductible temporary differences at the time of the transaction.HKICPASSDAccounting considerations for a SPACIllustration 1 - De-SPAC Target is the accounting acquirer in an asset acquisitionBackgroundSpaceCo is a listed SPAC that is not a business as defined. It is actively searching foran acquisition target in the technology field. TargetCo is an unlisted operatingcompany that focuses on the development of high-tech products such as AI drones.To acquire TargetCo, SpaceCo issues new shares to the shareholders of TargetCo inexchange for all their shares in TargetCo. After the transaction, the originalshareholders of TargetCo own 80% of the merged entity, and the remaining 20% isheld by the original SpaceCo shareholders.Pertinent information immediately before the acquisition is as follows:

SpaceCo• Share price: $12.5/share• Fair value and book value of identifiable net assets (cash only)*: $100million• 10 million shares in issueTargetCo• Fair value of shares: $500 million• 1.6 million shares in issueAnalysisAlthough the legal acquirer is SpaceCo, the accounting acquirer is the entity thatobtains control of another entity which may not always be the legal acquirer. Theguidance in HKFRS 10 and the factors in HKFRS 3.B14 to B18 should be consideredto identify the accounting acquirer.The substance of this transaction is that TargetCo has acquired SpaceCo for its listingstatus. TargetCo is the accounting acquirer and as SpaceCo is not a business asdefined, the transaction falls outside the scope of HKFRS 3 and is accounted for inaccordance with HKFRS 2 as a share-based payment from TargetCo’s perspective.* There are no warrants in this example and assume there are no liabilities associatedwith the Promoter Shares or SPAC Shares.HKICPASSDAccounting considerations for a SPACTargetCo is deemed to have issued its own shares to acquire control of SpaceCo. Inorder for the original shareholders of TargetCo to retain 80% interest in the mergedentity, TargetCo would need to issue 400,000 shares (1.6m / 80% x 20%) toSpaceCo shareholders. The original TargetCo shareholders would then hold 80% inthe merged entity (1.6m / 2m) and the original SpaceCo shareholders would hold20% in the merged entity (0.4m / 2m).The total fair value of shares deemed to have been issued by TargetCo to acquireSpaceCo is therefore: ($500m / 1.6m shares x 400,000 shares) = $125 million. This isthe consideration transferred for the reverse asset acquisition.Based on the guidance in HKFRS 2.13A, any difference between the fair value of theshares deemed to have been issued by TargetCo ($125m) and the fair value ofSpaceCo’s identifiable net assets ($100m) represents a listing service received byTargetCo ($125m - $100m = $25m).The payment of $25 million for obtaining a listing cannot be capitalised because it isneither “identifiable” in accordance with HKAS 38.12 nor does it meet the definitionof an asset that should be recognised in accordance with other HKFRS or theConceptual Framework. As such, the cost should be expensed as incurred (i.e. on thedate of the reverse asset acquisition) in accordance with HKFRS 2.8.The following journal entry should be processed for the transaction in theconsolidated financial statements of the Successor Company:

Dr.Cash (from SpaceCo)

$100 millionDr.Listing expense (profit or loss)

$25 millionCr.Equity (deemed issue by TargetCo)

$125 millionThe SPAC typically has outstanding Warrants at the time of the De-SPAC Transaction. Althoughthe 2013 IFRIC Agenda Decision does not address such a case, the Warrants should generallybe taken into account when determining the listing expense. This could be done either throughan adjustment to the consideration transferred or including the Warrants in the net assetsacquired especially if they are classified as liabilities by the SPAC. The resulting listing expensewill be the same either way.HKICPASSDAccounting considerations for a SPACCare should be taken that the adjustment is made only once to ensure nodouble-counting. See illustration 2.Illustration 2 – Treatment of outstanding warrants at the time of the reverseasset acquisitionBackgroundSame fact pattern as in illustration 1, except that SpaceCo has outstanding warrantsat the time of the De-SPAC Transaction. The warrants are classified as liabilities inSpaceCo’s financial statements with a fair value of $10 million. The fair value andbook value of the identifiable net assets of SpaceCo is thus $90 million ($100m cashless $10m warrant liabilities).AnalysisTargetCo could account for the fair value of the warrants as part of the considerationtransferred, i.e. $135 million comprising $125m (fair value of equity deemed to have beenissued by TargetCo) and $10m (fair value of the warrant liabilities). Since an adjustmenthas been made to the consideration transferred, the net assets acquired would be just thecash of $100m, resulting in a listing expense of $35m ($135m - $100m).Alternatively, the warrant liability could be accounted for as part of the net assetsacquired ($90m) and no adjustment is made to the consideration transferred($125m). The resulting listing expense is also $35m ($135m - $100m) in this case.Either way, the following journal entry should be processed for the transaction in theconsolidated financial statements of TargetCo:

Dr.Cash (from SpaceCo)

$100 millionDr.Listing expense (profit or loss)

$35 millionCr.Warrant (liability)

$10 millionCr.Equity (deemed issue by TargetCo)

$125 millionHKICPASSDAccounting considerations for a SPACScenario 2: SPAC is the accounting acquirer in an asset acquisitionThis scenario is unlikely under the HK SPAC regime because according to LR18B.36 theSuccessor Company has to comply with all the relevant listing requirements. Given the SPAC isa shell company, if the De-SPAC Target is not a business as defined then LR18B.36 is unlikely tobe met.If in the unlikely event that this scenario applies, the transaction will be accounted for by theSPAC just like any other asset acquisitions. In other words:

• the De-SPAC Target’s assets and liabilities are included in the Successor Company’s financialstatements prospectively from the date of acquisition.• The pre-combination financial information (including comparatives) of the SuccessorCompany includes only that of the SPAC.• The cost of the asset acquisition is allocated to the individual identifiable assets and liabilitiesof the De-SPAC Target based on their relative fair values at the date of acquisition.• No goodwill is recognised.• Deferred tax would also not be recognised on any temporary difference arising from theinitial recognition of assets or liabilities at the time of the De-SPAC Transaction unless (i) theyaffect either accounting or taxable profit at the time of the transaction or (ii) they give rise toequal taxable and deductible temporary differences at the time of the transaction.Scenario 3: De-SPAC Target is the accounting acquirer in a business combinationThis scenario is expected to be rare given the SPAC has limited operations and its assets consistlargely of cash. The SPAC is thus unlikely to meet the definition of a business.If in the unlikely event that the SPAC does indeed meet the definition of a business, thetransaction will be accounted for as a reverse acquisition and all the recognition andmeasurement requirements in HKFRS 3 apply, including the recognition of goodwill.The Successor Company also needs to comply with the guidance in HKFRS 3.B19 to B27. Forexample, the consolidated financial statements of the Successor Company will be preparedunder the name of the legal parent (i.e. SPAC) but will reflect a continuation of the financialstatements of the legal subsidiary (De-SPAC Target), with an adjustment to the De-SPAC Target’slegal capital to reflect that of the SPAC.HKICPASSDAccounting considerations for a SPACScenario 4: SPAC is the accounting acquirer in a business combinationThis will be accounted for similarly to a typical business combination. The HKFRS 3 recognitionand measurement requirements apply in full:

• The SPAC would recognise the De-SPAC Target’s identifiable assets and liabilities at fair value(subject to exceptions in HKFRS 3) on the acquisition date.• Any resulting goodwill would be recognised and be subject to annual impairment reviews.• Acquisition-related costs are expensed as incurred unless they are directly attributable to theissue of equity or debt instruments.• The pre-combination financial information (including comparatives) include only that of theSPAC.

3.2 Private investment in public equity (PIPE) investmentA PIPE investment is a private issue of SPAC Shares to professional, sophisticated and/orinstitutional investors, the completion of which is contingent upon the closing of the De-SPACTransaction. The proceeds from the PIPE investment are often used to compensate for any shareredemptions prior to the De-SPAC Transaction, to fund the De-SPAC Transaction itself or forfuture operations of the Successor Company. The Listing Rules mandate minimum independentPIPE investments to complete a De-SPAC Transaction to mitigate the risk of artificial valuationsof the De-SPAC Target.SPAC management needs to consider how to account for such a contract to issue SPAC Sharesand how the PIPE investment should be incorporated into the calculation of the listing expensein a reverse asset acquisition scenario.

3.3 Earn-out arrangements and contingent share-based paymentsDe-SPAC Transactions often involve earn-out arrangements or other contingent share-basedpayments whereby additional shares will be issued to the original shareholders of the SPAC,those of the De-SPAC Target, employees of either company or a combination of theseindividuals if certain targets are met. These arrangements may be entered into for variousreasons, e.g. uncertainties over the valuation of the De-SPAC Target (such that more shares willbe issued to the original shareholders of the De-SPAC Target if the Successor Company’sperformance exceeds expectation) or to retain the services of key employees.HKICPASSDAccounting considerations for a SPACIt is therefore important to assess whether such earn-out or share-based paymentarrangements are part of the combination transaction or whether they relate to separatetransactions such as remuneration for post-combination services. This assessment requires athorough analysis of the facts and circumstances specific to each case and may involvesignificant judgement. HKFRS 3.B54 to B55 provide relevant guidance in this regard (and byanalogy to asset acquisitions).If the arrangement is part of the combination transaction, it will affect the fair value of theconsideration transferred for the De-SPAC Transaction and hence the resulting amount of listingexpense (in the case of the De-SPAC Target’s being the accounting acquirer in an assetacquisition) or goodwill (if it is a business combination). In contrast, if the arrangement relatesto a separate transaction such as remuneration for post-combination services, it will not affectthe fair value of the consideration transferred. Instead, the fair value of the share awards isexpensed over the vesting period unless it meets the criteria for capitalisation in accordancewith another HKFRS.How such arrangements are accounted for also depends on whether the SPAC or the De-SPACTarget is the accounting acquirer and whether the De-SPAC Transaction is a businesscombination. Given the more common scenario of the De-SPAC Target’s being the accountingacquirer in an asset acquisition, the table below outlines a few typical earn-out and share-basedpayment arrangements and their respective accounting considerations in this context.HKICPASSDAccounting considerations for a SPACAccounting considerations for typical earn-out and share-based paymentarrangements (assuming De-SPAC Target is the accounting acquirer in an assetacquisition)

The De-SPAC Transaction includes a performance earn-outscheme under which additional shares are issued to the originalshareholders of the SPAC and/or De-SPAC Target, and/or certainkey employees upon the occurrence of certain events (e.g. theshare price of the Successor Company exceeding a targetvalue). No service condition is attached.Accounting considerationsIt is necessary to determine whether the earn-out arrangement is part of the reverseasset acquisition (i.e. contingent consideration for the De-SPAC Transaction) or aseparate post-combination remuneration transaction (i.e. payment for futureservices). HKFRS 3.B54 to B55 provide relevant guidance by analogy in this regard.If the earn-out arrangement is part of the reverse asset acquisition, since there is noservice condition,6 the performance targets are treated as non-vesting conditions.Non-vesting conditions are taken into account when estimating the fair value ofequity-settled share-based payments at grant date. As such, the probability ofmeeting the earn-out targets is taken into account when determining the grant datefair value of the share awards.7 This fair value adjusts the consideration transferredfor the reverse asset acquisition which in turn affects the amount of listing expenserecognised.8The consideration transferred is not subsequently adjusted regardless of whether orthe extent to which the non-vesting conditions are met.See HKFRS 2 for the definitions of vesting condition, service condition and performance condition.More specifically, the probability of meeting the earn-out targets is taken into account when estimating the total number ofshares that the De-SPAC Target is deemed to have issued for obtaining control over the SPAC. This in turn affects the total fairvalue of the consideration transferred. See illustration 1 in section 3.1 for a numerical example.This is consistent with HKFRS 2.21A which requires an entity to recognise the goods or services received (the listing service inthis example) that satisfies all non-market vesting conditions (of which there is none in this example), irrespective of whetherthe non-vesting conditions are satisfied.EXAMPLE 1HKICPASSDAccounting considerations for a SPACSPAC management must continue to work for the SuccessorCompany for three years in order to earn share-based paymentawards granted before the De-SPAC Transaction. The awardsare automatically forfeited if the grantees leave within threeyears of the De-SPAC Transaction.Accounting considerationsThe share-based payment is remuneration for post-combination services and shouldbe accounted for under HKFRS 2.9As the De-SPAC Target is the accounting acquirer, the consolidated financialstatements of the Successor Company will not include any previous accounting forthese share awards. As a result, a new grant date fair value for these awards willneed to be determined.EXAMPLE 2HKFRS 3.B55(a) as confirmed by the IFRIC January 2013 agenda decision IFRS 2 Share-based Payment—Definition of ‘vestingconditions’.Equity-settled share-based payments granted to employees ofthe De-SPAC Target before the De-SPAC Transaction aremodified, exchanged for the Successor Company’s shares,settled for cash or cancelled.Accounting considerationsThe modifications to, settlements or cancellations of existing equity-settledshare-based payments of the De-SPAC Target will need to be accounted for underHKFRS 2.26-29.EXAMPLE 3HKICPASSDAccounting considerations for a SPAC

3.4 Transaction costsAs with all traditional IPOs, management needs to take due care in assessing which costsassociated with the De-SPAC Transaction are incremental costs directly attributable to the issueof equity instruments (i.e. transaction costs as defined in HKFRS 9) in which case the costs willbe recognised as a deduction from equity; versus costs relating to listing the entity’s existingequity instruments, which are not transaction costs as defined and will be expensed as incurred.This assessment is particularly important as in many De-SPAC Transactions accounted for as areverse asset acquisition (see Scenario 1 in section 3.1), the De-SPAC Target is deemed to beconcurrently issuing new shares for cash and obtaining a listing for its existing shares.Transaction costs that relate jointly to more than one transaction need to be allocated to thosetransactions on a rational basis consistently with similar transactions.To sum up, this section outlined certain key accounting considerations at the time of theDe-SPAC Transaction. As with the classification of Promoter Shares, SPAC Shares and Warrantsin section 2, management should consider all relevant facts and circumstances specific to itscase to determine which entity is the accounting acquirer and whether the transaction is abusiness combination as defined. The same goes for share-based payment and otherarrangements that are entered into at the time of the De-SPAC Transaction.HKICPASSDAccounting considerations for a SPAC

4.Following the De-SPAC Transaction

4.1 Reassessing the classification of Shares and WarrantsFollowing the De-SPAC Transaction, all shares will generally become ‘plain vanilla’ shares as thePromoter Shares will have mandatorily converted into SPAC Shares and the SPAC Shares will nolonger be redeemable.Management should assess whether it is appropriate to reconsider whether the Shares andWarrants are within the scope of HKFRS 2 or HKAS 32 (with the ensuing equity v. liabilityconsideration) following the De-SPAC Transaction.If the Shares and Warrants continue to be within the scope of HKAS 32 and there is a changein the effective terms of the instruments (e.g. a lapse of the redemption right of the SPACShares), it is unclear whether the Successor Company should or could reclassify the Sharesand/or Warrants since their contractual terms have not changed. This was discussed in theOctober 2021 IFRIC agenda decision on IAS 32 Financial Instruments: Presentation Accountingfor Warrants that are Classified as Financial Liabilities on Initial Recognition. The IFRS ICobserved that IAS 32 contains no general requirements in this regard and that the IASB willconsider addressing this issue in its Financial Instruments with Characteristics of Equity project.All in all, it is imperative that management makes an assessment based on the Warrants’ (andthe Promoter / SPAC Shares’) specific terms and conditions taking into account all relevant factsand circumstances. Any significant judgement applied in the process should be disclosed inaccordance with HKAS 1.122.

4.2 Earnings per share and operating segmentsCertain HKFRS are generally applicable to listed entities only, such as HKFRS 8 OperatingSegments and HKAS 33 Earnings per Share (“EPS”). The Successor Company needs to considerthe financial reporting implications of applying these standards for the first time after theDe-SPAC Transaction. For example, if the De-SPAC Target is identified as the accountingacquirer, the following may be relevant:

HKICPASSDAccounting considerations for a SPAC• Management may need to spend extra time and costs to gather and verify the historicalfinancial information of the De-SPAC Target for the purposes of compiling operatingsegment disclosures and EPS calculations for the pre-combination period (includingcomparatives).10• The calculation of EPS will need careful consideration. Any event that changes the numberof shares of the Successor Company without a corresponding change in resources must beadjusted retrospectively, i.e. restating the comparative period’s EPS. In terms of current yearEPS, the weighted average number of ordinary shares outstanding for the SuccessorCompany is calculated as follows (assuming the De-SPAC Target is the accounting acquirer)

• In addition, any outstanding financial instruments issued by the Successor Company thatmight entitle their holder to ordinary shares in the future must be assessed for dilutive EPSpurposes (e.g. Warrants issued as part of the SPAC’s IPO, shares that may be issuable underearn-out arrangements, equity-settled share-based payments, etc.).• For equity-settled share-based payments within the scope of HKFRS 2, any unvested portionof the grant date fair value of the equity instruments should be included in the exercise pricereferred to in HKFRS 2.47 when calculating their dilutive impact.• Since it is likely that the Successor Company will have different types of outstanding potentialordinary shares issued at different times, management needs to assess each issue/series ofpotential ordinary shares separately in determining whether each issue/series is dilutive orantidilutive. Each issue/series is considered in sequence from the most dilutive to the leastdilutive in accordance with HKAS 33.44 for this purpose.:

HKICPASSDAccounting considerations for a SPACComputationmethodWeighted average (“WA”) no. of ordinary shares outstandingFrom beginning of period toFrom acquisition date toacquisition dateend of periodWA no. of outstanding shares ofActual no. of outstandingDe-SPAC Target multiplied by theshares of the Successorexchange ratio established in theCompanyreverse asset acquisition agreement10 The listing document for the De-SPAC Transaction prepared under the Listing Rules may already include operating segmentdisclosures and EPS calculations of the De-SPAC Target for the pre-combination period via the Accountants' Report.HKICPASSDAccounting considerations for a SPAC

4.3 Other considerationsFollowing the acquisition of the De-SPAC Target, the Successor Company becomes a listedentity carrying on the business of the De-SPAC Target. As a listed entity it must comply with allthe relevant regulatory requirements that come with this role.In the Hong Kong context, the Companies Ordinance (Cap. 622), the Listing Rules and theFinancial Reporting Council, inter alia, stipulate additional requirements for listed entities. At aminimum this includes having appropriate policies, processes and internal controls in place toperform as a public entity as well as providing management commentary, corporategovernance reports and ESG reports amongst others to accompany the financial statements.Management of the Successor Company should take note of these additional reportingrequirements and other responsibilities as a listed issuer. Given the timeline to becoming a listedentity under the SPAC regime is typically shorter than that of a traditional IPO, managementneeds to allow themselves sufficient time to prepare for all the additional duties that come withbeing a public entity which is subject to public scrutiny.This guidance is developed by the Financial Reporting Standards Committee (FRSC) of the HKICPA and is for generalreference only. The HKICPA, FRSC and their staff do not accept any responsibility or liability in respect of the guidance orany consequence that may arise from any person acting or refraining from action as a result of any materials in theguidance. Members of the HKICPA and other users of this guidance should also read the full HKFRS Standard, as foundin the HKICPA Members’ Handbook for further reference and seek professional advice where necessary when applyingthe references contained in this guidance.The SSD welcomes your comments on this publication. They can be sent to commentletters@hkicpa.org.hk.About the Standard Setting DepartmentThe Hong Kong Institute of Certified Public Accountants (HKICPA) is the only body authorisedby law to set and promulgate standards relating to financial reporting, auditing and ethics forprofessional accountants in Hong Kong. The due process documents of the Standard SettingDepartment (SSD) explain the processes and procedures for developing local standards andadopting international standards.To find out more about how SSD contributes to international standard-setting, please visit:

https://www.hkicpa.org.hk/en/Standards-and-regulation/Standards/How-we-set-standards-and-contribute-to-international-standardsTo access SSD’s latest publications and webcasts, please visit:

https://www.hkicpa.org.hk/en/Standards-and-regulation/Standards/Whats-News/2021Connect with us on social media:

HKICPA SSD@hkicpa.officialHKICPASSDAccounting considerations for a SPACHong Kong Institute of Certified Public Accountants37th Floor, Wu Chung House213 Queen’s Road East, Wanchai, Hong KongTel: (852) 2287 7228Fax: (852) 2865 6603Email: hkicpa@hkicpa.org.hkWebsite: www.hkicpa.org.hk1825_20220120Cecilia KweiDirector,Standard Setting,HKICPAThe authors would like to thank members of the Financial Reporting Standards Committee of theHKICPA for their input in reviewing this publication.Norman ChanAssociate Director,Standard Setting,HKICPAAuthors