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The guidance in this chapter reflects the adoption of ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which expanded the scope of ASC 718 to include share-based payment transactions with nonemployees as well as the definition of the term “vest” to include an employee’s “requisite service period” and a nonemployee’s “vesting period” (which could reflect delivery of goods or services). This chapter predominantly focuses on awards issued to employees although upon adoption of the new guidance it also applies to nonemployee awards. 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 compensation 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.

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