9.6 Nonemployee Awards Exchanged in a Business Combination
ASC 805-30
55-9A The portion of a nonemployee
replacement award attributable to precombination vesting is
based on the fair-value-based measure of the acquiree award
multiplied by the percentage that would have been recognized
had the grantor paid cash for the goods or services instead
of paying with a nonemployee award. For this calculation,
the percentage that would have been recognized is the lower
of:
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The percentage that would have been recognized calculated on the basis of the original vesting requirements of the nonemployee award
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The percentage that would have been recognized calculated on the basis of the effective vesting requirements. Effective vesting requirements are equal to the services or goods provided before the acquisition date plus any additional postcombination services or goods required by the replacement award.
55-10 The portion of a nonvested
replacement award (for employee and nonemployee)
attributable to postcombination vesting, and therefore
recognized as compensation cost in the postcombination
financial statements, equals the total fair-value-based
measure of the replacement award less the amount attributed
to precombination vesting. Therefore, the acquirer
attributes any excess of the fair-value-based measure of the
replacement award over the fair value of the acquiree award
to postcombination vesting and recognizes that excess as
compensation cost in the postcombination financial
statements.
55-11 Regardless of the accounting
policy elected in accordance with paragraph 718-10-35-1D or
718-10-35-3, the portion of a nonvested replacement award
included in consideration transferred shall reflect the
acquirer’s estimate of the number of replacement awards for
which the service is expected to be rendered or the goods
are expected to be delivered (that is, an acquirer that has
elected an accounting policy to recognize forfeitures as
they occur in accordance with paragraph 718-10-35-1D or
718-10-35-3 should estimate the number of replacement awards
for which the service is expected to be rendered or the
goods are expected to be delivered when determining the
portion of a nonvested replacement award included in
consideration transferred). For example, if the
fair-value-based measure of the portion of a replacement
award attributed to precombination vesting is $100 and the
acquirer expects that the service will be rendered for only
95 percent of the instruments awarded, the amount included
in consideration transferred in the business combination is
$95. Changes in the number of replacement awards for which
the service is expected to be rendered or the goods are
expected to be delivered are reflected in compensation cost
for the periods in which the changes or forfeitures occur —
not as adjustments to the consideration transferred in the
business combination. If an acquirer’s accounting policy is
to account for forfeitures as they occur, the amount
excluded from consideration transferred (because the service
is not expected to be rendered or the goods are not expected
to be delivered) should be attributed to the postcombination
vesting and recognized in compensation cost over the
employee’s requisite service period or the nonemployee’s
vesting period. Recognition of compensation cost for
nonemployees should consider the recognition guidance
provided in paragraph 718-10-25-2C. That is, recognition of
the fair value of the nonemployee share-based payment award
should be recognized in the same manner as if the grantor
had paid cash for the goods or services instead of paying
with or using the share-based payment awards.
When nonemployee awards are exchanged in a business combination, it is important for an entity
to determine what portion of the replacement awards is attributed to “precombination vesting” (and
therefore included in the consideration transferred) and what portion is attributed to “postcombination
vesting” (and therefore recognized in the postcombination period). Unlike the computation of ratably
recognized employee awards, the computation of the portion of the replacement awards attributed to
the consideration transferred and the portion attributed to the postcombination period is based on the
percentage of the cost of the awards that would have been recognized in each period if the grantor had
paid cash. Below are examples from ASC 805 illustrating how an acquirer that has provided replacement
awards to nonemployees of an acquiree would attribute such replacement awards to precombination
vesting and postcombination vesting.
ASC 805-30
Example 3: Acquirer
Replacement of Nonemployee Awards
55-25 The following Cases
illustrate the guidance referred to in paragraph 805-30-55-6
for replacement awards that the acquirer was obligated to
issue and the attribution guidance for a nonemployee
replacement award to precombination and postcombination
vesting referenced in paragraph 805-30-55-9A.
55-26 In these Cases, the acquiring
entity is referred to as Acquirer and the acquiree is
referred to as Target:
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Awards that require no postcombination vesting that are exchanged for acquiree awards for which grantees:
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Have met the vesting condition as of the acquisition date (Case A)
-
Have not met the vesting condition as of the acquisition date (Case D).
-
-
Awards that require postcombination vesting that are exchanged for acquiree awards for which grantees:
-
Have met the vesting condition as of the acquisition date (Case B)
-
Have not met the vesting condition as of the acquisition date (Case C).
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55-27 The Cases assume the
following:
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All awards are classified as equity.
-
The only vesting condition included in the awards, if any, involves the delivery of engines.
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Target and Acquirer typically pay cash as each engine is delivered to their suppliers.
Case A: No Required Postcombination Vesting
and the Vesting Condition for Acquiree Awards Has Been Met
as of Acquisition Date
55-28 Acquirer issues replacement
awards of $110 (fair-value-based measure) at the acquisition
date for Target awards of $100 (fair-value-based measure) at
the acquisition date. No postcombination vesting is required
for the replacement awards, and Target’s grantee has
delivered all the engines necessary for the acquiree awards
as of the acquisition date.
55-29 The amount attributable to
precombination vesting is the fair-value-based measure of
Target’s awards ($100) at the acquisition date; that amount
is included in the consideration transferred in the business
combination. The amount attributable to postcombination
vesting is $10, which is the difference between the total
value of the replacement awards ($110) and the portion
attributable to precombination vesting ($100). Because no
postcombination vesting is required for the replacement
awards, Acquirer immediately recognizes $10 as compensation
cost in its postcombination financial statements.
Case B: Postcombination Vesting Required and
the Vesting Condition for Acquiree Awards Has Been Met as of
Acquisition Date
55-30 Acquirer exchanges
replacement awards that require the delivery of another 10
engines postcombination for share-based payment awards of
Target for which the grantee had met the necessary vesting
condition to deliver 40 engines before the business
combination. The fair-value-based measure of both awards is
$100 at the acquisition date. Even though the grantee
already had met the vesting condition for the acquiree’s
award, Acquirer attributes a portion of the replacement
award to postcombination compensation cost in accordance
with paragraphs 805-30-30-12 through 30-13 because the
replacement awards require the delivery of an additional 10
engines.
55-31 The portion attributable to
precombination vesting equals the fair-value-based measure
of the acquiree award ($100) multiplied by the percentage
that would have been recognized for the award. The
percentage that would have been recognized is the lower of
the calculation on the basis of the original vesting
requirements and the percentage that would have been
recognized on the basis of the effective vesting
requirements as described in paragraph 805-30-55-9A. The
percentage that would have been recognized on the basis of
the original vesting requirements equals 100 percent, which
is calculated as 40 engines delivered divided by 40 engines
required to be delivered. The percentage that would have
been recognized on the basis of the effective vesting
requirements equals 80 percent, which is calculated as 40
engines delivered divided by 50 engines (the sum of 40
engines delivered plus 10 engines required postcombination).
Thus, $80 ($100 × 80%) is attributed to the precombination
vesting period and therefore is included in the
consideration transferred in the business combination. The
remaining $20 is attributed to the postcombination vesting
period and therefore is recognized as compensation cost in
Acquirer’s postcombination financial statements in
accordance with Topic 718.
Case C: Postcombination Vesting Required and
the Vesting Condition for Acquiree Awards Has Not Been Met
as of Acquisition Date
55-32 Acquirer exchanges
replacement awards that require the delivery of 10 engines
postcombination for share-based payment awards of Target for
which the grantee had not met the necessary vesting
condition to deliver 40 engines before the business
combination. The fair-value-based measure of both awards is
$100 at the acquisition date. As of the acquisition date,
Target grantee has delivered 20 engines, and Target grantee
would have been required to deliver an additional 20 engines
after the acquisition date for its awards to vest.
Accordingly, only a portion of Target’s awards is
attributable to precombination vesting.
55-33 The portion attributable to
precombination vesting equals the fair-value-based measure
of the acquiree award ($100) multiplied by the percentage
that would have been recognized on the award. The percentage
that would have been recognized is the lower of the
percentage that would have been recognized on the basis of
the original vesting requirements and the percentage that
would have been recognized on the basis of the effective
vesting requirements as described in paragraph 805-30-55-9A.
The percentage that would have been recognized on the basis
of the original vesting requirements equals 50 percent,
which is calculated as 20 engines delivered divided by 40
engines required to be delivered. The percentage that would
have been recognized on the basis of the effective vesting
requirements equals 66.67 percent, which is calculated as 20
engines delivered divided by 30 engines (the sum of 20
engines delivered plus 10 engines required postcombination).
Thus, $50 ($100 × 50%) is attributed to precombination
vesting and therefore is included in the consideration
transferred in the business combination. The remaining $50
is attributed to the postcombination vesting and therefore
is recognized as compensation cost in Acquirer’s
postcombination financial statements in accordance with
Topic 718.
Case D: No Postcombination Vesting Required
and the Vesting Condition for Acquiree Awards Has Not Been
Met as of Acquisition Date
55-34 Assume the same facts as in
Case C, except that Acquirer exchanges replacement awards
that require no postcombination vesting for share-based
payment awards of Target for which the grantee had not met
the necessary vesting condition to deliver 40 engines before
the business combination. The terms of the replaced Target
awards did not eliminate the vesting condition upon a change
in control. (If the Target awards had included a provision
that eliminated the vesting condition upon a change in
control, the guidance in Case A [see paragraph 805-30-55-28]
would apply.) The fair-value-based measure of both awards is
$100.
55-35 The portion attributable to
precombination vesting equals the fair-value-based measure
of the acquiree award ($100) multiplied by the percentage
that would have been recognized on the award. The percentage
that would have been recognized is the lower of the
percentage that would have been recognized on the basis of
the original vesting requirements and the percentage that
would have been recognized on the basis of the effective
vesting requirements as described in paragraph 805-30-55-9A.
The percentage that would have been recognized on the basis
of the original vesting requirements equals 50 percent,
which is calculated as 20 engines delivered divided by 40
engines required to be delivered. The percentage that would
have been recognized on the basis of the effective vesting
requirements equals 100 percent, which is calculated as 20
engines delivered divided by 20 engines (the sum of 20
engines delivered plus zero engines required
postcombination). Thus, $50 ($100 × 50%) is attributed to
the precombination vesting and is therefore included in the
consideration transferred in the business combination. The
remaining $50 is attributed to the postcombination vesting.
Because no postcombination vesting is required to vest in
the replacement award, Acquirer recognizes the entire $50
immediately as compensation cost in the postcombination
financial statements.