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Other forms of compensation arrangements may be provided to the employees of the acquiree in conjunction with a business combination. Two common arrangements are “last-man-standing” arrangements and “dual trigger” arrangements.

3.6.1 “Last-man-standing” arrangements (business combinations)

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?
Analysis
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?
Analysis
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.

3.6.2 “Dual trigger” arrangements (business combinations)

Preexisting employment agreements often include clauses that accelerate vesting of awards upon a change of control and termination of employment within a defined period of time from the acquisition date, often referred to as “dual trigger” arrangements. In such cases, if employment is terminated in conjunction with the acquisition (or soon thereafter), the arrangement should be assessed to determine whether acceleration of vesting is primarily for the economic benefit of the acquirer by considering the following factors:
•  The reasons for the transaction
•  Who initiated the transaction
•  The timing of the transaction
If it is determined the clause or transaction that accelerates vesting is primarily for the economic benefit of the acquirer, the acceleration of vesting of unvested awards should be accounted for separately from the business combination and will be recognized as compensation cost to the acquirer in accordance with ASC 805-10-25-20 through ASC 805-10-25-22.
The dual trigger clause effectively places the decision to retain the acquiree’s employees in the control of the acquirer, and thus a decision to terminate (or not offer employment in conjunction with the acquisition) would be made primarily for the acquirer’s economic benefit (e.g., reduce cost). Therefore, since the acquirer makes the decision to terminate the employees, the acquirer should recognize the compensation cost in the postcombination period for the acceleration of the unvested portion of the awards (measured as of the acquisition date using the methodology described in ASC 805-30-30-12 through ASC 805-30-30-13 and ASC 805-30-55-10).
An acquiree may put in place a new, or alter an existing, compensation arrangement at the direction of the acquirer. In these instances, it may be necessary to record compensation cost in both the acquirer’s postcombination financial statements and the acquiree’s precombination financial statements. These scenarios typically arise when the acquiree legally incurred the related obligation, and other accounting standards (such as ASC 718) require the acquiree to recognize the related cost even though the cost was incurred for the benefit of the acquirer.
Example BCG 3-15 illustrates the accounting for a dual trigger arrangement.
EXAMPLE BCG 3-15
Accelerated vesting conditioned upon a dual trigger consisting of a change in control and termination
Company A acquires Company B in a business combination, and Company A is obligated to grant replacement awards as part of the business combination in accordance with ASC 805-30-30-9.
Company B has an existing employment agreement in place with one of its key employees that states that all of the key employee’s unvested awards will fully vest upon a change in control and termination of employment within 12 months following the acquisition date. The employment agreement was in place before Company A and Company B began negotiations for the acquisition of Company B. The vesting of the awards only accelerates if the employee is subsequently terminated without cause or leaves for good reason as defined in the employment contract (generally as a result of demotion or similar reduction of responsibilities or salary). Prior to the acquisition date, Company A had determined it would not offer employment to the key employee of Company B, effectively terminating employment on the acquisition date. This resulted in the acceleration of all the key employee’s unvested awards upon closing of the acquisition.
How should Company A account for the accelerated vesting of the awards?
Analysis
The accelerated vesting is conditioned upon both a change in control of the acquiree and the termination of employment of the key employee. At the acquisition date, both conditions were triggered. The decision not to employ the key employee was in the control of Company A and effectively made for its primary economic benefit (e.g., reduce cost) and, therefore, should be recorded separate from the business combination in accordance with ASC 805-10-25-20 through ASC 805-10-25-22. Accordingly, the portion attributed to precombination service and included in consideration for the acquired business would be based on the original service period of the award in accordance with ASC 805-30-55-8. Company A should immediately recognize compensation cost related to the accelerated vesting of the awards for the portion of the award that is attributed to postcombination service (measured as of the closing of the acquisition using the methodology described in ASC 805-30-30-12 through ASC 805-30-30-13 and ASC 805-30-55-10) in its postcombination period.

Question BCG 3-6 illustrates how an acquirer should account for the acceleration of unvested share-based payment awards that is triggered when the acquirer does not issue equivalent replacement awards as part of a business combination.
Question BCG 3-6
How should an acquirer account for the acceleration of unvested share-based payment awards that is triggered when the acquirer does not issue equivalent replacement awards as part of a business combination?
PwC response
If the provision that accelerates vesting is primarily for the benefit of the acquirer, the acceleration of vesting of unvested awards should be accounted for separate from the business combination and be recognized as compensation cost in the acquirer’s postcombination financial statements in accordance with ASC 805-10-25-20 through ASC 805-10-25-22. The acquirer’s decision not to issue replacement awards is in the control of the acquirer. Therefore, the acquirer should immediately recognize compensation cost in the postcombination period for the acceleration of the unvested portion of the awards. The accounting would be the same if the acquirer issued fully vested replacement awards.
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