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Technical Line
A closer look at accounting for financial instruments issued by SPACs 3 March 2022
Redemption feature Analysis
$0.01 redemption feature. The SPAC can
redeem the warrants for $0.01 per warrant
when the Class A share price exceeds $18
per share for a period of time. The holder is
given an opportunity during the redemption
period (typically 30 days) to exercise the
warrants. This redemption feature effectively
forces the warrant holders to exercise the
warrants (rather than receive the nominal
redemption amount of $0.01 per warrant)
and, therefore, caps the return to the holders.
Step 1 — The feature that allows the SPAC
to redeem the warrants for $0.01 per
warrant when the Class A share price
exceeds $18 per share is considered an
exercise contingency. It is not an observable
market or an observable index that is
unrelated to the SPAC, so this feature does
not preclude the warrants from being
considered indexed to the SPAC’s own stock
under Step 1. Proceed to Step 2.
Step 2 — Once the exercise contingency is
triggered, the settlement amount would
equal the difference between the fair value
of a fixed number of Class A shares
underlying the warrants and a fixed strike
price ($11.50 per share). Therefore, the
warrants would be considered indexed to
the SPAC’s own stock.
$0.10 redemption feature. The SPAC can
redeem the warrants for $0.10 per warrant
when the underlying share price equals or
exceeds $10 per share. During the
redemption period, a holder can exercise its
warrants on a “cashless basis” and receive a
number of shares determined by using a
“make-whole” table in the warrant
agreement that is designed to compensate
holders for the loss of time value in the
warrants for any settlement that occurs
when the Class A shares trade below $18.
Step 1 — The feature that allows the SPAC to
redeem the warrants for $0.10 per warrant
when the Class A share price equals or
exceeds $10 per share is considered an
exercise contingency. It is not an observable
market or an observable index that is
unrelated to the SPAC, so the feature does
not preclude the warrants from being
considered indexed to the entity’s own stock
under Step 1. Proceed to Step 2.
Step 2 — For the warrants not to be
precluded from being classified in equity
(i.e., not to fail Step 2), the “make-whole”
table in the warrants should generally
present the following characteristics:
•
The number of shares in the “make-whole”
table is determined by reference to the
table with axes of stock price and time.
•
The table is designed to compensate the
holders for intrinsic value plus lost time
value determined by assuming no change
in relevant pricing inputs (other than stock
price and time) and using reasonable
assumptions (e.g., volatility, dividends,
interest rates) known at the issuance
date of the warrants. This determination
would require an understanding and
evaluation of the appropriateness of the
pricing model used to determine the
time value.