The examples consider various contingent consideration arrangements and provide analysis for determining the classification of contingent consideration arrangements as a liability or as equity. The examples assume Company A is a public company and would issue the same class of shares as its publicly traded shares if the contingent performance measures are achieved. The analyses below for nonpublic entities would generally be the same, except that most nonpublic companies would not have a means to net cash settle the arrangement outside the contract since their shares are not readily convertible to cash. However, our experience is that most contingent consideration arrangements involving nonpublic companies include net settlement provisions within the contract. Without net settlement, the arrangement would not be considered a derivative within the scope of ASC 815. If an arrangement was not considered a derivative due to physical settlement terms or for any other reason, it would still need to meet the conditions of ASC 815-40 to be classified as equity. If the contingent consideration is not classified in equity, it is required to be reported at fair value with changes in fair value reflected in earnings in accordance with ASC 805-30-35-1(b). The examples provided in this section assume common shares are non-redeemable.
EXAMPLE BCG 2-22 Company A, a publicly traded company, acquires Company B in a business combination by issuing 1 million of Company A’s common shares to Company B’s shareholders. Company A also agrees to issue 100,000 additional common shares to the former shareholders of Company B if Company B’s revenues (as a wholly owned subsidiary of Company A) exceed $200 million during the one-year period following the acquisition. Company A has sufficient authorized and unissued shares available to settle the arrangement after considering all other commitments. The contingent consideration arrangement permits settlement in unregistered shares and meets all of the other criteria required by ASC 815-40 for equity classification. The company has concluded that there is one unit of account since there is only one performance target. How should the issuance of a fixed number of shares based on Company B's performance be recognized? Analysis The common shares of Company A that have been issued at the acquisition date are recorded at fair value within equity. The contingent consideration arrangement is not within the scope of ASC 480. That is, at inception, the arrangement will not result in the issuance of a variable number of shares and the arrangement does not obligate Company A to transfer cash or other assets to settle the arrangement. The contingent consideration arrangement meets the characteristics of a derivative because it (1) has one or more underlyings (Company B’s revenues and Company A’s share price) and notional amount (100,000 common shares), (2) has an initial investment that is “less by more than a nominal amount” than the initial net investment that would be required to acquire the asset, and (3) can be settled net by means outside the contract because the underlying shares are publicly traded with sufficient float so that the shares are readily convertible to cash. In determining whether the derivative instrument is in the scope of ASC 815, the instrument must be evaluated to determine if it is subject to the exception in ASC 815-10-15-74(a) (i.e., the arrangement is indexed to an entity’s own stock and classified in shareholders’ equity). In determining whether the arrangement is considered indexed to Company A’s own shares, the first step is to determine whether there are exercise contingencies and, if so, if they are based on an observable market, other than the market for the issuer’s shares, or an observable index, other than an index calculated solely by reference to the issuer’s operations. The exercise contingency (i.e., meeting the revenue target) is based on an index calculated solely by reference to the “operations” of the issuer’s consolidated subsidiary, so step one of ASC 815-40-15 does not preclude the arrangement from being considered indexed to Company A’s own shares. In performing step two of ASC 815-40-15, it has been determined that the settlement of the arrangement is considered fixed-for-fixed, since the exercise price is fixed and the number of shares is fixed (i.e., the settlement amount equals the difference between the fair value of a fixed number of the entity’s equity shares and a fixed monetary amount). Based on the analysis performed, the contingent consideration arrangement would be classified as equity if all of the other criteria in ASC 815-40 for equity classification have been satisfied and classification as mezzanine equity is not required under ASC 480-10-S99. EXAMPLE BCG 2-23 Company A, a publicly traded company, purchases Company B in a business combination by issuing 1 million of Company A’s common shares to Company B’s shareholders. Company A also agrees to issue 100,000 additional common shares to the former shareholders of Company B if Company B’s revenues (as a wholly owned subsidiary of Company A) equal or exceed $200 million during the one-year period following the acquisition. In addition, if Company’s B’s revenues exceed $200 million, Company A will issue an additional 1,000 shares for each $2 million increase in revenues in excess of $200 million, not to exceed 100,000 additional shares (i.e., 200,000 total shares for revenues of $400 million or more). Company A has sufficient authorized and unissued shares available to settle the arrangement after considering all other commitments. The contingent consideration arrangement permits settlement in unregistered shares and meets all of the other criteria required by ASC 815-40 for equity classification. How should the issuance of a variable number of shares based on Company B's performance be recognized? Analysis The common shares of Company A that have been issued at the acquisition date are recorded at fair value within equity. The contingent consideration arrangement must first be assessed to determine whether each of the performance targets represents a separate contract. Since the number of Company A shares that could be issued under the arrangement is variable and relates to the same risk exposure (i.e., the number of shares to be delivered will vary depending on which performance target is achieved in the one-year period following the acquisition), the contingent consideration arrangement would be considered one contractual arrangement. The arrangement may be within the scope of ASC 480 since it is an obligation to issue a variable number of shares and it varies based on something other than the fair value of the issuer’s equity shares (in this case, based on Company B’s revenues). A determination would need to be made as to whether the arrangement’s monetary value at inception is based solely or predominantly on Company B’s revenues (versus Company A’s share price), which, if so, would require liability classification. This determination would be based on facts and circumstances, but generally the more substantive (i.e., difficult to achieve) the revenue target, the more likely the arrangement is based predominantly on the revenue target. If the arrangement is determined to be predominantly based on revenues, it would be considered a liability under ASC 480. For the purpose of this example, assume that Company A determines the arrangement is not based solely or predominantly on Company B’s revenues. Although the contingent consideration arrangement is not required to be classified as a liability under ASC 480, liability classification would still be required because the arrangement would also not meet the second step of ASC 815-40-15 for equity classification. The settlement amount of the contingent consideration arrangement incorporates variables other than those used to determine the fair value of a fixed-for-fixed forward or option on equity shares (i.e., one of the key variables to determine fair value for this contingent consideration arrangement is Company B’s revenues). In other words, the amount of revenues not only determines whether the exercise contingency is achieved, but also adjusts the settlement amount after the exercise contingency is met. Therefore, the contingent consideration arrangement would not be considered indexed to Company A’s shares because the settlement provisions are affected by the amount of revenues which is not an input in valuing a fixed-for-fixed equity award. Therefore, the contingent consideration arrangement would be recorded as a liability at its fair value following the guidance in ASC 805-30-25-6. Further, changes in the liability will be recognized in Company A’s earnings until the arrangement is resolved in accordance with ASC 805-30-35-1(b). EXAMPLE BCG 2-24 Company A, a publicly traded company, acquires Company B in a business combination by issuing 1 million of Company A’s common shares to Company B’s shareholders. At the acquisition date, Company A’s share price is $40 per share. Company A also provides Company B’s former shareholders contingent consideration whereby if the common shares of Company A are trading below $40 per share one year after the acquisition date, Company A will issue additional common shares to the former shareholders of Company B sufficient to make the current value of the acquisition date consideration equal to $40 million (i.e., the acquisition-date fair value of the consideration transferred). However, the number of shares that can be issued under the arrangement cannot exceed 2 million shares. Company A has sufficient authorized and unissued shares available to settle the arrangement after considering all other commitments. The contingent consideration arrangement permits settlement in unregistered shares and meets all of the other criteria required by ASC 815-40 for equity classification. How should the contingent consideration agreement linked to the acquisition-date fair value be recognized? Analysis The common shares of Company A that have been issued at the acquisition date are recorded at fair value within equity. The security price guarantee feature of the contingent consideration arrangement should be assessed to determine whether it is a freestanding feature or whether it is embedded within the shares issued in the business combination. In this instance, the guarantee is a freestanding financial instrument that was entered into in conjunction with the purchase agreement and is legally detachable and separately exercisable. The guarantee arrangement is within the scope of ASC 480 (ASC 480-10-25-14(c)) since, at inception, the guarantee arrangement creates an obligation that Company A would be required to settle with a variable number of Company A’s equity shares, the amount of which varies inversely to changes in the fair value of Company A’s equity shares. For example, if Company A’s share price decreases from $40 per share to $35 per share one year after the acquisition date, the amount of the obligation would be $5 million. Therefore, the freestanding guarantee would be recorded as a liability at its fair value following the guidance in ASC 805-30-25-6. Further, changes in the liability will be recognized in Company A’s earnings until the arrangement is resolved in accordance with ASC 805-30-35-1(b). EXAMPLE BCG 2-25 Company A, a publicly traded company, acquires Company B in a business combination by issuing 1 million of Company A’s common shares to Company B’s shareholders. Company A also agrees to issue 100,000 additional common shares to the former shareholders of Company B if Company B’s operating revenues (as a wholly-owned subsidiary of Company A) exceed Company X’s (its largest third-party competitor) operating revenues by $1 million at the end of the one-year period following the acquisition. Company A has sufficient authorized and unissued shares available to settle the arrangement after considering all other commitments. The contingent consideration arrangement permits settlement in unregistered shares and meets all of the other criteria required by ASC 815-40 for equity classification. Company A has concluded that there is one unit of account since there is only one performance target. How should the issuance of a fixed number of shares based on another entity’s operations be recognized? Analysis The common shares of Company A that have been issued at the acquisition date are recorded at fair value within equity. The contingent consideration arrangement is not within the scope of ASC 480. That is, at inception the arrangement will not result in the issuance of a variable number of shares and the arrangement does not obligate the Company to transfer cash or other assets to settle the arrangement. The contingent consideration arrangement meets the characteristics of a derivative because it (1) has one or more underlyings (Company B’s operating revenues, Company X’s operating revenues, and Company A’s share price) and notional amount (100,000 common shares), (2) has an initial investment that is “less by more than a nominal amount” than the initial net investment that would be required to acquire the asset, and (3) can be settled net by means outside the contract because the underlying shares are publicly traded with sufficient float so that the shares are readily convertible to cash. In determining whether the derivative instrument is in the scope of ASC 815, the instrument must be evaluated to determine if it is subject to the exception in ASC 815-10-15-74(a) (i.e., the arrangement is indexed to an entity’s own stock and classified in shareholders’ equity). In making the determination of whether the arrangement is considered indexed to Company A’s own stock, the first step would be to determine whether there are exercise contingencies and, if so, if they are based on an observable market, other than the market for the issuer’s shares, or an observable index, other than an index calculated solely by reference to the issuer’s operations. The exercise contingency requires Company B’s operating revenues to exceed Company X’s (largest third-party competitor) operating revenues by $1 million at the end of the one-year period following the acquisition and, therefore, is based on an index that is not calculated solely by reference to the issuer’s operations (i.e., the index is a comparison to Company X’s revenues). This precludes the arrangement from being considered indexed to Company A’s own stock. Therefore, it is not necessary to perform the second step of ASC 815-40-15. Since the arrangement is not considered indexed to Company A’s own stock under ASC 815-40-15, the arrangement is a liability and should be subsequently measured at fair value with changes in fair value recorded in earnings in accordance with ASC 805-30-35-1(b). EXAMPLE BCG 2-26 Company A, a publicly traded company, acquires Company B in a business combination by issuing 1 million of Company A’s common shares to Company B’s shareholders. Company A also agrees to issue 100,000 common shares to the former shareholders of Company B if Company B’s revenues (as a wholly-owned subsidiary of Company A) equal or exceed $200 million during the one-year period following the acquisition. Furthermore, Company A agrees to issue an additional 50,000 common shares to the former shareholders of Company B if Company B’s revenues (as a wholly-owned subsidiary of Company A) equal or exceed $300 million during the second one-year period following the acquisition. The achievement of the earnouts is independent of each other (i.e., outcomes could be zero, 50,000, 100,000 or 150,000 additional shares issued). Company A has sufficient authorized and unissued shares available to settle the arrangement after considering all other commitments. The contingent consideration arrangement permits settlement in unregistered shares and meets all of the other criteria required by ASC 815-40 for equity classification. How should the issuance of a variable number of shares based on Company B's performance be recognized? Analysis The common shares of Company A that have been issued at the acquisition date are recorded at fair value within equity. The contingent consideration arrangement must first be assessed to determine whether each of the performance targets represents a separate contract. Since this is a contingent consideration arrangement subject to ASC 805, and the year one and year two outcomes are independent and do not relate to the same risk exposures (i.e., the number of shares to be delivered will vary depending on performance targets achieved in independent one-year periods following the acquisition), the arrangement would be treated as two separate contracts that would each result in the delivery of a fixed number of shares, and not as a single contract that would result in the delivery of a variable number of shares. As a result, the arrangement is not within the scope of ASC 480. That is, at inception, the separate arrangements will not result in the issuance of a variable number of shares and do not obligate Company A to transfer cash or other assets to settle the arrangement. The contingent consideration arrangement meets the characteristics of a derivative because it (1) has one or more underlyings (Company B’s revenues and Company A’s share price) and a notional amount (common shares of Company A), (2) has an initial investment that is “less by more than a nominal amount” than the initial net investment that would be required to acquire the asset, and (3) can be settled net by means outside the contract because the underlying shares are publicly traded with sufficient float so that the shares are readily convertible to cash. In determining whether the derivative instruments are in the scope of ASC 815, the instruments must be evaluated to determine if they are subject to the exception in ASC 815-10-15-74(a) (i.e., the arrangements are indexed to an entity’s own stock and classified in shareholders’ equity). In making the determination of whether the independent arrangements are considered indexed to Company A’s own stock, the first step would be to determine whether each separate, independent contract has an exercise contingency that is based on an observable market, other than the market for the issuer’s shares, or an observable index, other than an index calculated solely by reference to the issuer’s operations. The exercise contingency (i.e., meeting the revenue target) is based on an index calculated solely by reference to the “operations” of the issuer’s consolidated subsidiary, so step one of ASC 815-40-15 does not preclude the independent arrangements from being considered indexed to Company A’s own shares. In performing the second step of ASC 815-40-15, it has been determined that the settlements for each separate, independent contract would be considered fixed-for-fixed since the exercise price is fixed and the number of shares is fixed (i.e., the settlement amounts are equal to the price of a fixed number of equity shares). The arrangement is for the issuance of the common shares of Company A, which are classified as shareholders’ equity. Based on the analysis performed, assuming the other requirements in ASC 815-40 are met and classification as mezzanine equity is not required under ASC 480-10-S99, each independent contract within the contingent consideration arrangement would be classified as equity. For contingent consideration arrangements in a business combination, judgment is required to determine whether the unit of account should be the overall contract or separate contracts within the overall arrangement. For instance, an arrangement to issue 100,000 shares if revenues equal or exceed $200 million in the one-year period following the acquisition or 110,000 shares if revenues equal or exceed $220 million in the one-year and one-month period following the acquisition would likely be considered a single overall contract with multiple performance targets. That is, the performance targets for both the one-year and the one-year and one-month periods are largely dependent on achieving the revenue targets in the first year given the short duration of time (i.e., one month) that elapses between the end of the first period and the end of the second period. If the arrangement (or multiple performance targets) relates to the same risk exposure, the unit of account would be the overall contract rather than two separate, independent contracts. Page 2ASC 805-20-20 defines contingencies as existing conditions, situations, or sets of circumstances resulting in uncertainty about a possible gain or loss that will be resolved if one or more future events occur or fail to occur. ASC 805-20-25-18A through ASC 805-20-25-20A include a framework that acquirers should follow in recognizing preacquisition contingencies. An acquirer should first determine whether the acquisition-date fair value of the asset or liability arising from the preacquisition contingency can be determined as of the acquisition date or during the measurement period. If the acquisition-date fair value of the contingency can be determined, the corresponding asset or liability should be recognized at fair value as part of acquisition accounting. For example, an acquirer will often have sufficient information to determine the fair value of warranty obligations assumed in a business combination. Generally, an acquirer also has sufficient information to determine the fair value of other contractual contingencies assumed in a business combination, such as penalty provisions in a supply agreement. In contrast, the fair value of legal contingencies assumed in a business combination may not be determinable. If the acquisition-date fair value of assets or liabilities arising from the preacquisition contingency cannot be determined as of the acquisition date or during the measurement period, the acquirer should recognize the estimated amount of the asset or liability as part of the acquisition accounting if both of the following criteria are met:
The above recognition criteria should be applied using the guidance provided in ASC 450 (i.e., application of similar criteria in ASC 450-20-25-2). In a business combination, this guidance applies to both assets and liabilities arising from preacquisition contingencies. Contingencies identified during the measurement period that existed as of the acquisition date qualify for recognition as part of acquisition accounting. However, if the above criteria are not met based on information that is available as of the acquisition date or during the measurement period about facts and circumstances that existed as of the acquisition date, the acquirer should not recognize an asset or liability as part of acquisition accounting. In periods after the measurement period, the acquirer should account for such assets or liabilities in accordance with other GAAP, including ASC 450, as appropriate. Example BCG 2-8, Example BCG 2-9, and Example BCG 2-10 illustrate the initial recognition and measurement of acquired contingencies. EXAMPLE BCG 2-8 On June 30, 20X1, Company A purchases all of Company B’s outstanding equity shares for cash. Company B’s products include a standard three-year warranty. An active market does not exist for the transfer of the warranty obligation or similar warranty obligations. Company A expects that the majority of the warranty expenditures associated with products sold in the last three years will be incurred in the remainder of 20X1 and in 20X2 and that all will be incurred by the end of 20X3. Based on Company B’s historical experience with the products in question and Company A’s own experience with similar products, Company A estimates the potential undiscounted amount of all future payments that it could be required to make under the warranty arrangements. Should Company A recognize a warranty obligation as of the acquisition date? Analysis Company A has the ability to estimate the expenditures associated with the warranty obligation assumed from Company B as well as the period over which those expenditures will be incurred. Company A would generally conclude that the fair value of the liability arising from the warranty obligation can be determined at the acquisition date and would determine the fair value of the liability to be recognized at the acquisition date by applying a valuation technique prescribed by ASC 820. In the postcombination period, Company A would subsequently account for and measure the warranty obligation using a systematic and rational approach. A consideration in developing such an approach is Company A’s historical experience and the expected value of claims in each period as compared to the total expected claims over the entire period. EXAMPLE BCG 2-9 In a business combination, Company C assumes a contingency of Company D related to employee litigation. Based upon discovery proceedings to date and advice from its legal counsel, Company C believes that it is reasonably possible that Company D is legally responsible and will be required to pay damages. Neither Company C nor Company D have had previous experience in dealing with this type of employee litigation, and Company C’s attorney has advised that results in this type of case can vary significantly depending on the specific facts and circumstances of the case. An active market does not exist to transfer the potential liability arising from this type of lawsuit to a third party. Company C has concluded that on the acquisition date, and at the end of the measurement period, adequate information is not available to determine the fair value of the lawsuit. Should Company C recognize a contingent liability for the employee litigation? Analysis No. A contingent liability for the employee litigation is not recognized at fair value on the acquisition date. Company C would not record a liability by analogy to ASC 450-20-25-2, because it has determined that an unfavorable outcome is reasonably possible, but not probable. Therefore, Company C would recognize a liability in the postcombination period when the recognition and measurement criteria in ASC 450 are met. EXAMPLE BCG 2-10 In a business combination, Company C assumes a contingency of Company D related to employee litigation. Based upon discovery proceedings to date and advice from its legal counsel, Company C believes that it is reasonably possible that Company D is legally responsible and will be required to pay damages. Neither Company C nor Company D have had previous experience in dealing with this type of employee litigation, and Company C’s attorney has advised that results in this type of case can vary significantly depending on the specific facts and circumstances of the case. An active market does not exist to transfer the potential liability arising from this type of lawsuit to a third party. Company C has decided to pay $1 million to settle the liability on the acquisition date to avoid damage to its brand or further costs associated with the allocation of resources and time to defend the case in the future. Should Company C recognize a contingent liability for the employee litigation? Analysis Question BCG 2-2 PwC response No. Given that the accounting acquirer has historically elected an accounting policy to expense legal fees as incurred, it would not be appropriate to accrue future legal costs as of the acquisition date, even though the related litigation existed as of the acquisition date. Instead, such future legal costs should be expensed as incurred consistent with the acquirer’s policy. However, if the litigation contingency was recognized at fair value on the acquisition date (i.e., if the fair value was determinable at the acquisition date), future legal fees would be included in the fair value measurement. Page 3
The acquirer should recognize a gain or loss for the effective settlement of a preexisting relationship. Settlement gains and losses from noncontractual relationships should be measured at fair value on the acquisition date in accordance with ASC 805-10-55-21. Settlement gains and losses from contractual relationships should be measured as the lesser of: a. The amount the contract terms are favorable or unfavorable (from the acquirer’s perspective) compared to pricing for current market transactions for the same or similar items. If the contract terms are favorable compared to current market transactions, a settlement gain should be recognized. If the contract terms are unfavorable compared to current market transactions, a settlement loss should be recognized. b. The amount of any stated settlement provisions in the contract available to the counterparty to whom the contract is unfavorable. The amount of any stated settlement provision (e.g., voluntary termination) should be used to determine the settlement gain or loss. Provisions that provide a remedy for events not within the control of the counterparty, such as a change in control, bankruptcy, or liquidation, would generally not be considered a settlement provision in determining settlement gains or losses. If (b) is less than (a), the difference is included as part of the business combination in accordance with ASC 805-10-55-21. If there is no stated settlement provision in the contract, the settlement gain or loss is determined from the acquirer’s perspective based on the favorable or unfavorable element of the contract. If the acquirer has previously recognized an amount in the financial statements related to a preexisting relationship, the settlement gain or loss related to the preexisting relationship should be adjusted (i.e., increasing or decreasing any gain or loss) for the amount previously recognized in accordance with ASC 805-10-55-21. If the preexisting relationship is settled at the amount previously recognized by the acquirer, there is no impact on the acquirer’s income statement (i.e., no gain or loss) as a result of the settlement. Example BCG 2-31 illustrates the accounting for settlement of a noncontractual relationship. Example BCG 2-32 illustrates the accounting for settlement of a contractual relationship that includes a settlement provision. Example BCG 2-33 illustrates the accounting for settlement of a contractual relationship that does not include a settlement provision. Additional examples are provided in ASC 805-10-55-30 through ASC 805-10-55-33. EXAMPLE BCG 2-31 Company A is a defendant in litigation relating to a patent infringement claim brought by Company B. Company A pays $50 million to acquire Company B and effectively settles the lawsuit. The fair value of the settlement of the lawsuit is estimated to be $5 million, and Company A had previously recorded a $3 million litigation liability in its financial statements before the acquisition. The fair value of Company B’s net assets is $45 million, excluding the lawsuit. How should the settlement loss related to a noncontractual relationship be recorded in acquisition accounting? Analysis Company A would record a settlement loss related to the litigation of $2 million, excluding the effect of income taxes. This represents the $5 million fair value of the settlement after adjusting for the $3 million litigation liability previously recorded by Company A. The consideration transferred for the acquisition of Company B and the effective settlement of the litigation are recorded as separate transactions (in millions):
If, however, Company A had previously recorded a liability greater than $5 million, then a settlement gain would be recognized for the difference between the liability previously recorded and the fair value of the settlement. EXAMPLE BCG 2-32 Company C provides services to Company D. Since the inception of the contract, the market price for these services has increased. The terms in the contract are unfavorable compared to current market transactions for Company C in the amount of $10 million. The contract contains a settlement provision that allows Company C to terminate the contract at any time for $6 million. Company C acquires Company D for $100 million. How should the settlement loss related to a contractual relationship be recorded in acquisition accounting? Analysis Company C would recognize a settlement loss of $6 million, excluding the effect of income taxes. A settlement loss of $6 million is recognized because it is the lesser of the fair value of the unfavorable contract terms ($10 million) and the contractual settlement provision ($6 million). The $100 million in cash paid by Company C is attributed as $6 million to settle the services contract and $94 million to acquire Company D. The $4 million difference between the fair value of the unfavorable contract terms and the contractual settlement provision is included as part of consideration transferred for the business combination. The consideration transferred for the acquisition of Company D and the effective settlement of the services contract would be recorded as follows (in millions):
EXAMPLE BCG 2-33 Company E provides services to Company F. Since the inception of the services contract, the market price for these services has increased. The terms in the contract are unfavorable compared to current market transactions for Company E in the amount of $10 million. The services contract is silent on a settlement provision in the event that either party terminates the contract. Company E acquires Company F for $100 million. How should the settlement loss related to a contractual relationship be recorded in acquisition accounting? Analysis Company E would recognize a $10 million settlement loss, excluding the effect of income taxes, for the unfavorable amount of the contract. The $100 million that Company E pays Company F’s shareholders is attributed $10 million to settle the preexisting relationship and $90 million to acquire Company F. The consideration transferred for the acquisition of Company F and the effective settlement of the services contract would be recorded by Company E as follows (in millions):
Page 4
This chapter predominantly focuses on awards issued to employees (for which vesting may be described as providing “service” over a “requisite service period”) although it also applies to nonemployee awards (which may be described as vesting over a “vesting period,” which could reflect delivery of either goods or services). See SC 7 for additional guidance specific to nonemployee awards. The acquirer in a business combination may agree to assume existing compensation arrangements of the acquiree or may establish new arrangements to compensate for postcombination vesting. The arrangements may involve cash payments or the exchange (or settlement) of share-based payment awards. The replacement share-based payment awards may include the same terms and conditions as the original awards to keep the recipients of the acquiree “whole” (i.e., preserve the value of the original awards). The acquirer may, in other situations, change the terms of the share-based payment awards to provide an incentive for recipients to remain with the combined entity. Such arrangements should be analyzed to determine whether they represent consideration for (1) precombination vesting, (2) postcombination vesting, or (3) a combination of precombination and postcombination vesting. Amounts attributable to precombination vesting are accounted for as part of the consideration transferred for the acquiree. Amounts attributable to postcombination vesting do not result in recognition at the acquisition date, but rather are accounted for separate from the business combination and are recognized as compensation cost in the postcombination period. In certain cases, the acquirer may recognize compensation cost immediately upon the acquisition date if incremental value is provided to recipients without a further service requirement or awards are accelerated on a discretionary basis (see, for example, BCG 3.4.7). Compensation cost is typically recorded as expense, unless required or permitted to be capitalized by other standards. Under ASC 805-10-25-20, amounts attributable to a combination of precombination and postcombination vesting are allocated between the consideration transferred for the acquiree and the postcombination vesting. This chapter also addresses the accounting for other compensation arrangements, such as “stay bonuses” and “golden parachute” agreements with employees of the acquiree, as well as assessing contingent consideration arrangements to determine whether they represent additional consideration for the acquired business or compensation for future services. For guidance on accounting for share-based payment awards, refer to PwC’s Stock-based compensation guide. The accounting for pension and other postretirement benefits in a business combination is addressed in BCG 2.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. |
How to calculate bargain purchase option
Related Posts
Copyright © 2024 themosti Inc.
