In conjunction with accounting for a business combination, an acquirer must assess whether the items exchanged include amounts that are separate from the business combination. As noted in ASC 805-10-25-20
, the acquirer should identify any amounts that are not part of what the acquirer and the acquiree (or its former owners) exchanged in the business combination. Separate transactions are accounted for in accordance with other relevant GAAP. See BCG 2.7
for additional information.
A transaction arranged primarily for the economic benefit of the acquirer (or combined entity) is not deemed to be part of the consideration transferred for the acquiree and should be accounted for separate from the business combination in accordance with ASC 805-10-25-21
through ASC 805-10-25-22
. Factors identified in ASC 805-10-55-18
to consider in this analysis include:
- the reasons for the transaction,
- who initiated the transaction, and
- the timing of the transaction.
The basic principle outlined in ASC 805
and the three factors listed above are discussed in more detail in BCG 2
. This chapter focuses on compensation arrangements, which require consideration of the basic principle and an assessment of the three factors.
In some cases, instruments issued by the acquirer may have elements of both consideration transferred and compensation. For example, the acquirer may agree to exchange share-based payment awards held by grantees of the acquiree for replacement share-based payment awards of the acquirer. The awards held by the grantees of the acquiree and the replacement awards are measured using the fair-value-based measurement principles of ASC 718
on the acquisition date (share-based payment transactions are excluded from the scope of ASC 820
) under ASC 805-30-30-11
and ASC 805-30-55-7
. Throughout this chapter, references to fair value of share-based payment awards mean the “fair-value-based measure” that is determined in accordance with ASC 718
. The acquirer should then attribute the fair value of the awards to precombination vesting and postcombination vesting. The fair value of the awards attributed to precombination vesting is included as part of the consideration transferred for the acquiree. The fair value of the awards attributed to postcombination vesting is recorded as compensation cost in the postcombination financial statements of the combined entity in accordance with ASC 805-30-55-8
through ASC 805-30-55-10
. See further discussion in BCG 3.4
. Note that as further described in BCG 3.4.1
, the proportions attributed to consideration transferred and compensation cost are based on the portion of the requisite service/vesting period of the original award completed as of the acquisition date, not what portion of the award is legally vested as of that date. Although ASC 805
focuses on the fair value method, it also applies to situations when ASC 718
permits the use of the calculated value method or the intrinsic value method for both the acquiree awards and the replacement awards (refer to ASC 805-30-55-7
). See SC 18.104.22.168
and SC 22.214.171.124
for additional information on the use of the calculated value method and the intrinsic value method, respectively.
Consideration transferred in a business combination may be in the form of assets (e.g., cash) or equity interests. Example BCG 3-1 illustrates consideration transferred in the form of both cash and equity interests.
EXAMPLE BCG 3-1
Consideration transferred: Cash and rollover equity
PE, a private equity fund, acquires Company A in a business combination for $100 million in total consideration. In order to facilitate the acquisition of Company A, PE creates a new wholly-owned subsidiary (“NewCo”). NewCo negotiates with lenders and raises debt to fund the acquisition of Company A (i.e., NewCo has substantive precombination activities). NewCo survives the acquisition and is controlled by PE postcombination. For the purpose of this example, assume NewCo is the accounting acquirer.
The CEO of Company A, who is also a shareholder, will be employed by NewCo after the acquisition. As part of the business combination, NewCo enters into a rollover equity agreement with the CEO of Company A, which provides the CEO with equity interests in NewCo in lieu of receiving cash consideration (i.e., the CEO of Company A will exchange her shares in Company A for shares of NewCo, whereas the other shareholders will receive cash consideration). The fair value of the equity interests in NewCo that the CEO of Company A will receive for her 8% ownership interest in Company A ($8 million) is commensurate with the fair value of the cash consideration received ($92 million) by the other shareholders of Company A on a per share basis. The rollover equity agreement does not require the CEO to have any continuing involvement with NewCo to retain her shares.
How should NewCo account for the rollover equity arrangement with the CEO of Company A?
As the CEO of Company A is not required to be employed by NewCo after the business combination in order to retain her shares, and is exchanging ownership of her shares in Company A (8%) for shares of NewCo (fair value of $8 million) that is equal to the cash consideration per share received by other shareholders of Company A, the rollover equity agreement is not considered a compensation arrangement. Therefore, NewCo should include the fair value of the rollover equity issued by NewCo as part of the consideration transferred for the business combination.