6.6 Business Combination

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.

An acquiring entity may issue share-based payment awards (referred to in ASC 805 as “replacement awards”) to the acquiree’s employees or vendors to replace their existing share-based payment awards. Exchanges of share-based payment awards in a business combination are considered modifications under ASC 718-20-35-6. An acquirer often issues replacement awards to ensure that the acquiree’s employees or vendors are in a similar economic position immediately before and after the consummation of the business combination. The replacement awards may represent consideration transferred in the business combination (i.e., they may be related to past goods or services that the grantees provided to the acquiree before the acquisition date), compensation for future goods or services (i.e., postcombination goods or services) by the grantees, or both. For more information, see Section 6.2.3 of Deloitte’s Roadmap Business Combinations.

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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.