Awards granted to a group of employees and reallocated equally among the remaining employees if any of the employees terminate employment prior to completion of the service period are often described as ‘last-man-standing’ arrangements. Because each employee has a service requirement, each individual grant of awards should be accounted for separately. Generally, the accounting for a reallocation under a “last man standing” arrangement is effectively treated as a forfeiture of an award by one employee and regrant of awards to the other employees. Therefore, if and when an employee terminates his or her employment and awards are reallocated to the other employees, the reallocated awards should be treated as a forfeiture of the terminated employee’s awards and a new grant to the other employees. The same concepts apply to contingent consideration arrangements that are paid to a group of selling shareholders who remain as employees but reallocated amongst the participants if any of the employees terminate employment prior to the payout of the contingent arrangement. This would still be viewed to be dependent on future services and compensatory under ASC 805-10-55-25(a), even though the entire amount will still be paid out if the other terms of the contingent payment arrangement are otherwise met.
Example BCG 3-13 illustrates a “last-man-standing” arrangement involving share-based payment awards. Example BCG 3-14 illustrates a “last-man-standing” arrangement involving cash-settled awards
EXAMPLE BCG 3-13
“Last-man-standing” arrangement involving share-based payment awards
On January 1, 20X1, Company M (the acquirer) acquires Company G (the acquiree) and, as part of the acquisition agreement, grants 100 awards to each of five former executives of Company G. Each set of awards has a fair value of $300 on the acquisition date. The awards cliff vest upon two years of continued employment with the combined company. However, if the employment of any one of the executives is terminated prior to January 1, 20X3, any awards forfeited by that executive are reallocated equally among the remaining executives who continue employment. The reallocated awards will continue to cliff vest on January 1, 20X3. On January 1, 20X2, one of the five executives terminates employment with the combined company. The 100 unvested awards (100 awards × 1 executive) are forfeited and redistributed equally to the other four executives. At the time of the forfeiture, the fair value of each set of awards is $360.
How should Company M account for the “last-man-standing” arrangement?
The fair value of all awards granted to the executives on the acquisition date is $1,500 ($300 × 5 sets of awards), which should be recognized over the two-year service period in the postcombination financial statements, as long as each employee continues employment with the combined company.
The accounting for a reallocation under a “last-man-standing” arrangement is effectively a forfeiture of the original awards and a grant of new awards. That is, if an employee terminates employment and the awards are reallocated to the other employees, the reallocation of the forfeited awards should be treated as (1) a forfeiture of the terminated employee’s awards and (2) a new award granted to the remaining employees. In this example, 100 unvested awards (100 awards × 1 executive) were forfeited and regranted to the remaining four employees (25 awards each). Company M would reverse $150 ($300 × 1 terminated executive × 1/2 of the service period completed) of previously recognized compensation for the terminated employee’s forfeited awards. Company M would then recognize an additional $90 ($360 / 4 executives) for each of the four remaining executives over the new service period of one year.
EXAMPLE BCG 3-14
“Last-man-standing” arrangement involving cash consideration
Company B (the acquirer) acquires Company A (the acquiree) for cash consideration of $250. The selling shareholders of Company A were all key employees of Company A prior to the acquisition date and will continue as employees of the combined business following the acquisition by Company B. Company B will pay the selling shareholders additional consideration in the event Company A achieves pre-determined sales targets for the 3 years following the acquisition. This additional consideration will be paid to the previous shareholders in proportion to their relative previous ownership interests. Any shareholders who resign their employment with Company A during the 3-year period forfeit their portion of the additional payments. Amounts forfeited are redistributed among the previous shareholders who remain as employees for the 3-year period. If none of the previous shareholders remain employed at the end of the 3-year period, but the relevant sales targets are still achieved, all of the previous shareholders will receive the additional payment in proportion to their previous ownership interests. The selling shareholders will have the ability to influence sales volumes if they continue as employees.
How should Company B account for the “last-man-standing” arrangement?
The contingent payments in the aggregate are not automatically forfeited if all the selling shareholders cease employment. However, each of the selling shareholders controls their ability to earn their portion of the additional payment by continuing employment. The selling shareholders have the ability to influence sales volumes if they continue as employees. The commercial substance of the agreement incentivizes the selling shareholders to continue as employees. Further, the scenario where all selling shareholders cease employment is unlikely because the last selling shareholder remaining in employment would not likely voluntarily leave employment and forfeit the entire amount of additional payment. Therefore, substantively, each employee’s ability to retain their portion of the contingent payment is dependent on their continued employment. As a result, the entire additional payment, given this combination of factors, would be accounted for as compensation cost in the postcombination period.