In connection with a business combination, the acquirer may agree to assume existing stock-based compensation arrangements with employees of the acquiree or may establish new stock-based compensation arrangements to compensate those employees for postcombination services. These arrangements may involve cash payments to the employees or the exchange (or settlement) of stock-based awards. These replacement awards, in many cases, include the same terms and conditions as the original awards and are intended to keep the employees of the acquiree "whole" (i.e., preserve the value of the original awards at the acquisition date) after the acquisition. In other situations, the acquirer may change the terms of the stock-based awards, often to provide an incentive to key employees to remain with the combined entity.
Other than providing that the exchange of stock-based compensation awards in a business combination should be accounted for as a modification (ASC 718-20-35-6), ASC 718 does not provide specific guidance on the accounting for awards exchanged in a business combination. However, ASC 805, Business Combinations, does include specific guidance on the accounting for awards exchanged in a business combination; for example, it includes guidance as to whether the fair value of the exchanged awards should be included as part of the purchase price paid and how to account for the tax effects of exchanged awards.
For accounting guidance on the effects that a business combination may have on stock-based compensation arrangement, refer to BCG 3.
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