Compensation cost associated with share-based payment awards that is recorded in the acquirer’s postcombination financial statements should be accounted for in accordance with ASC 805-30-35-3, which states that replacement share-based payment awards issued by the acquirer that are attributable to employees’ future services should be subsequently measured and accounted for based on the guidance in ASC 718. For example, the determination of whether the acquirer’s replacement awards should be classified as equity or as a liability and the period over which compensation cost is recognized should be based on the guidance in ASC 718.
Modifications of awards after the acquisition date should be accounted for based on the modification guidance in ASC 718. No adjustments are made to the accounting for the business combination as a result of changes in forfeiture estimates (refer to Question BCG 3-2 and Question BCG 3-3) or modifications of replacement awards after the acquisition date in accordance with ASC 805-30-55-11 through ASC 805-30-55-12. This includes fair value adjustments for the remeasurement of liability-classified awards at each balance sheet date until the settlement date under ASC 805-30-55-13.
New share-based payment awards (as opposed to replacement awards) granted by the acquirer to the former employees of the acquiree will be subject to the guidance in ASC 718, and will not affect the accounting for the business combination.
Question BCG 3-7
How should the acquirer account for a modification to an arrangement with contingent payments in a business combination when the modification occurs during the measurement period?
PwC response
A subsequent change to a compensation arrangement does not lead the acquirer to reassess its original conclusion under ASC 805-10-55-25 regarding whether the arrangement is treated as consideration transferred or is accounted for outside of the business combination. Assuming the original conclusion reached as of the acquisition date was not an error, the original treatment should be respected even if the subsequent change was made during the measurement period.

Example BCG 3-16 illustrates an arrangement that includes contingent payments that is modified during the measurement period.
Accounting for modifications during the measurement period to compensation arrangements
Company A acquired Company B in a business combination. Company A wanted to retain the services of the former Company B shareholders to help transition the business. Therefore, Company A agreed to pay a portion of the consideration to the former shareholders of Company B over the length of their new employment contracts (three years) with the combined entity. The former shareholders would forfeit any unearned portion of the contingent payment if employment were voluntarily terminated.
After considering the guidance in ASC 805-10-55-25, Company A determined that it should account for the contingent payment as compensation cost because the contingent payment was linked to the former shareholders’ continued employment. Six months after the business combination, Company A decided it no longer needed the former shareholders for transition purposes and terminated their employment. As part of the termination, Company A agreed to settle the contingent payment arrangement with an additional payment to the former shareholders.
How should Company A account for the modification?
Company A appropriately concluded at the acquisition date that the arrangement should be treated as compensation cost. A subsequent change to that arrangement does not cause Company A to reassess its original conclusion under ASC 805-10-55-25. This would apply even if the subsequent change was made while Company A was in the process of finalizing any measurement period adjustments. Company A should consider the payment to the former shareholders of Company B as being made to settle their employment contracts with Company A (i.e., Company A accelerated the service period) and not as consideration transferred to acquire Company B.
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