In June 2018, the FASB issued ASU 2018-07
, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting
to expand the scope of ASC 718
to include share-based payment transactions with nonemployees. As a result of the amendments in the ASU, the requirements of ASC 718
applicable to employee awards are applied to nonemployee awards, except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period).
is effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, but cannot precede adoption of ASC 606
The guidance in this chapter reflects the adoption of ASU 2018-07
, which expanded 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.
Compensation 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 are accounted for separate from the business combination and are recognized as compensation cost in the postcombination period. 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.
The basic principle outlined in ASC 805-10-25-20
is broadly applicable to transactions other than arrangements with employees. This principle is discussed in more detail in BCG 2
This chapter also addresses the accounting for other compensation arrangements, such as “stay bonuses” and “golden parachute” agreements with employees of the acquiree.
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