10.1 Replacement of Acquiree Awards

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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. It is not uncommon for the terms of the acquiree’s awards to be silent or give the acquiree discretion regarding the awards’ treatment upon a business combination. If an obligation to replace the acquiree’s awards is based on the terms of the acquisition agreement, acquirers should carefully consider the awards’ preexisting terms to determine the portion of the fair-value-based-measure to include in the consideration transferred and in postcombination compensation cost. In addition, 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.

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

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.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.