The acquiree (as opposed to the acquirer) may cash-settle outstanding awards prior to the acquisition. However, these transactions, including their timing, should be assessed to determine whether the cash settlement, or a portion thereof, was arranged primarily for the economic benefit of the acquirer (or the combined entity). Even though the form of the transaction may indicate that the acquiree initiated the cash settlement, it may be determined that, in substance, the acquirer reimbursed the acquiree for the cash settlement (either directly or as part of the consideration transferred for the acquiree). This assessment should include an analysis of the factors listed in BCG 3.2
If the acquiree cash-settles its awards and it is determined that the transaction was for the economic benefit of the acquiree, the settlement should be recorded in the acquiree’s financial statements prior to the business combination in accordance with ASC 718-20-35-7
. If it is determined that the acquirer reimbursed the acquiree for the cash settlement (either directly or as part of the transaction price paid for the acquiree), the accounting by the acquirer should generally be the same as if the acquirer had settled the awards directly (in which case the accounting described in BCG 3.5.1
should be followed).
Example BCG 3-12 illustrates an example of cash settlement of awards by the acquiree.
EXAMPLE BCG 3-12
Example of cash settlement of awards by the acquiree
Company D (the acquiree) cash-settles the outstanding unvested awards held by its grantees immediately prior to being acquired by Company C (the acquirer). The amount of cash paid by Company D is $100 million, which is equal to the current fair value of the awards. At the time of settlement, the grantees had completed 75% of the service required to vest in the awards (and 25% of the service period remained).
How should Company C account for the cash settlement of the outstanding unvested awards?
Company C should determine whether a portion of the consideration transferred for Company D is attributable to the settlement of unvested awards held by Company D’s grantees. The settlement of the portion of the unvested awards not attributable to precombination vesting may be a transaction arranged primarily for the economic benefit of Company C. Factors to consider in this analysis (as discussed in ASC 805-10-55-18
• The reasons for the transaction: Why did Company D elect to cash-settle the outstanding awards?
• Who initiated the transaction: Did Company C direct Company D to settle the awards? Was the settlement a condition of the acquisition?
• The timing of the transaction: Was the settlement in contemplation of the business combination?
If Company D was requested by Company C to cash-settle the awards, the settlement of the unvested awards would be deemed a transaction arranged primarily for the economic benefit of Company C. Therefore, a portion of the total consideration transferred should be attributed to the cash settlement of the awards and excluded from the consideration transferred to acquire Company D. In this example, the fair value of the unvested awards that is not attributable to precombination vesting, or $25 million (the fair value of the awards of $100 million multiplied by the remaining service period of 25%), is the amount that would be excluded from consideration transferred and recognized as expense in Company C’s postcombination financial statements. The $25 million should be recognized immediately because no postcombination vesting is required.