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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 separately from the business combination and are costs in the postcombination period. The cost of an arrangement that includes precombination and postcombination vesting is attributed between the consideration transferred for the acquiree and the postcombination vesting. This assessment may require significant judgment.
An 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. 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).
An acquirer may enter into a contingent consideration arrangement with the selling shareholders of the acquiree, or the acquiree may enter into a transaction for the benefit of the acquirer or the combined entity. These arrangements need to be analyzed to determine if they should be included in the consideration transferred for the acquiree, accounted for as a separate transaction apart from the business combination, or a combination of both.
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 separately from the business combination in accordance with ASC 805-10-25-20 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
•  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. Throughout this chapter, the analysis of compensation arrangements requires consideration of the basic principle and an assessment of the three factors. See BCG 3.3 for information on the indicators to be considered when analyzing contingent consideration arrangements.
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