10.1 Replacement of Acquiree Awards
ASC 718-20
Equity Restructuring or Business Combination
35-6 Exchanges of share options or other equity instruments or changes to their terms in conjunction with an
equity restructuring or a business combination are modifications for purposes of this Subtopic. An entity shall
apply the guidance in paragraph 718-20-35-2A to those exchanges or changes to determine whether it shall
account for the effects of those modifications. Example 13 (see paragraph 718-20-55-103) provides further
guidance on applying the provisions of this paragraph. See paragraph 718-10-35-10 for an exception.
ASC 805-30
Acquirer Share-Based Payment Awards Exchanged for Awards
Held by the Acquiree’s Grantees
30-9 An acquirer may exchange
its share-based payment awards for awards held by grantees
of the acquiree. This Topic refers to such awards as
replacement awards. Exchanges of share options or other
share-based payment awards in conjunction with a business
combination are modifications of share-based payment awards
in accordance with Topic 718. If the acquirer is obligated
to replace the acquiree awards, either all or a portion of
the fair-value-based measure of the acquirer’s replacement
awards shall be included in measuring the consideration
transferred in the business combination. The acquirer is
obligated to replace the acquiree awards if the acquiree or
its grantees have the ability to enforce replacement. For
example, for purposes of applying this requirement, the
acquirer is obligated to replace the acquiree’s awards if
replacement is required by any of the following:
-
The terms of the acquisition agreement
-
The terms of the acquiree’s awards
-
Applicable laws or regulations.
Exchanges of share-based payment awards in a business combination are considered
modifications under ASC 718. An acquirer must assess whether the replacement awards
are part of the consideration transferred, are recognized as compensation cost in
the postcombination financial statements, or are a combination of both in accordance
with ASC 805. Before it can make its determination, the acquirer must assess whether
it is “obligated” to replace the acquiree’s awards. If it is obligated to replace
the awards, the acquirer must include all or a portion of the fair-value-based
measure1 of the replacement awards in its measurement of the consideration transferred
in the business combination. The portion not included in the measurement of
consideration transferred is included in postcombination compensation cost.
ASC 805-30-30-9 notes that the acquirer is obligated to replace the acquiree’s
share-based payment awards “if the acquiree or its grantees have the ability to
enforce replacement.” It further indicates that the acquirer is obligated to replace
the awards if replacement is required by (1) the terms of the acquisition agreement,
(2) the terms of the acquiree’s awards, or (3) applicable laws or regulations.
Accordingly, an entity should consider the original terms of the acquiree’s awards
(as well as applicable laws or regulations) and whether the acquirer was obligated
to issue replacement awards in the event of a change in control. While some awards
may contractually expire upon a change in control (see Section 10.10), it is more common for the terms of the acquiree’s
awards to be silent on the matter or give the acquiree discretion regarding the
awards’ treatment upon a change in control event such as a business combination. In
these circumstances, if the acquiree’s awards are replaced under the terms of the
acquisition agreement, an entity generally accounts for the replacement awards as if
the replacement obligation exists. Acquirers may wish to consult with legal counsel
for assistance in assessing the terms of award agreements and their requirements
under applicable laws and regulations.
See Section 10.2 for additional
information about allocating replacement awards between consideration transferred
and postcombination compensation cost.
In addition, Section 10.9
discusses situations in which the acquiree’s share-based payment awards are not
modified but remain outstanding after the business combination. For guidance that
applies when the acquiree’s share-based payment awards expire as a result of the
business combination, see Section 10.10.
Footnotes
1
While the term “fair-value-based measure” is used in this
chapter, ASC 718 permits the use of a calculated value or an intrinsic value
in specified circumstances. Accordingly, the guidance in this chapter also
applies in situations in which a calculated or an intrinsic value is
used.