Simple Agreement for Future Equity (SAFE) is a kind of investment instrument that has become quite popular among start-up companies. As the name suggests, it is an agreement between an investor and a start-up company for the purchase of future equity. This article will explore the accounting treatment of SAFEs under International Financial Reporting Standards (IFRS).
SAFEs are essentially convertible debt instruments that allow investors to purchase the company`s equity at a discounted price in the future. SAFEs do not have an expiry date or a maturity date, but rather, they convert to equity when a specific event occurs, such as a funding round or an IPO.
Under IFRS, SAFEs are classified as financial instruments and are subject to accounting standards. The accounting treatment of SAFEs depends on whether they are classified as debt or equity instruments.
If SAFEs are classified as debt instruments, they are recorded as a liability on the company`s balance sheet. The initial proceeds received from the sale of the SAFEs are recorded as a liability, and the interest expense is recognized over the life of the instrument. When the SAFE is converted to equity, the liability is extinguished, and the equity is recorded at fair value.
If SAFEs are classified as equity instruments, they are not recorded as a liability on the company`s balance sheet. Instead, they are recorded directly as equity. Equity SAFEs do not generate interest expense, and no liability is recorded until the instrument is converted to equity.
The accounting treatment of SAFEs is important because it can have a significant impact on a company`s financial statements. If SAFEs are recorded as liabilities, they can negatively impact a company`s debt-to-equity ratio, which is a key metric used by lenders and investors to evaluate a company`s financial health. Conversely, if SAFEs are recorded as equity, they can positively impact a company`s equity-to-assets ratio, which is another important metric used by investors.
In conclusion, the accounting treatment of SAFEs under IFRS depends on whether they are classified as debt or equity instruments. Companies should carefully consider the impact of SAFEs on their financial statements and consult with a qualified accountant or financial advisor to ensure compliance with accounting standards.