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An acquirer may elect to pay cash to settle outstanding awards held by grantees of the acquiree instead of granting replacement awards. The accounting for the cash settlement of share-based payment awards outside of a business combination is addressed by ASC 718-20-35-7. The accounting for the cash settlement of share-based payment awards within a business combination is not explicitly addressed. However, we believe many of the same principles that apply to the exchange of share-based payment awards should be applied to these transactions. That is, an acquirer should determine the portion of the cash settlement to be attributed to precombination vesting or postcombination vesting using the guidance for the exchange of share-based payment awards and the allocation formula described in Figure BCG 3-2. The following sections discuss cash settlements initiated by the acquirer as well as cash settlements initiated by the acquiree. Determining who initiated the cash settlement may require analysis of the factors listed in BCG 3.2 and BCG 3.3.

3.5.1 Acquirer initiated cash settlement of share-based awards

Cash payments made by the acquirer to settle vested awards should be included in the consideration transferred for the acquiree up to an amount equal to the fair value of the acquiree’s awards measured at the acquisition date. To the extent the cash payment is greater than the fair value of the acquiree’s awards, the excess fair value amount is considered an expense incurred by the acquirer outside of the business combination rather than as consideration transferred for the acquiree. Accordingly, the excess amount of cash paid over the fair value of the acquiree’s awards should be immediately recognized as compensation cost in the postcombination financial statements in accordance with ASC 805-30-55-10.
If cash payments are made by the acquirer to settle unvested awards (assuming no future service is required to receive the cash payment), the acquirer has effectively accelerated the vesting of the awards by eliminating the postcombination vesting requirement and settled the awards for cash. The portion attributable to precombination vesting provided to the acquiree should be included in the consideration transferred for the acquiree. The remaining portion of the cash payment to the acquiree’s grantees, attributable to the postcombination vesting, should be immediately recognized as compensation cost in the postcombination financial statements. This analysis is similar to the illustration in Example BCG 3-9, in which vested replacement share-based payment awards are transferred for unvested acquiree awards in accordance with ASC 805-30-55-10 and ASC 805-30-55-23 through ASC 805-30-55-24.
An acquirer may pay cash in exchange for unvested awards of the acquiree and additional postcombination vesting, with the cash payment made at the completion of the additional service period. In this case, the acquirer will need to determine the portion of the payment attributable to precombination vesting and postcombination vesting. The amount attributable to precombination vesting is determined by multiplying the fair value of the acquiree award by the appropriate ratio of the precombination vesting period completed prior to the acquisition date to the total vesting period, as described in BCG 3.4.1. The amount attributable to postcombination vesting would be recognized in the postcombination financial statements over the remaining vesting period, with a corresponding credit to a liability account for the future payment upon the vesting date.

3.5.2 Acquiree initiated cash settlement of share-based awards

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?
Analysis
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) include:
•  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.
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