FAS 141R – Consideration Transferred, Contingent Consideration and Share Based Payment Awards
By Linda Cavanaugh, CPA - The second half of FAS 141R provides guidance on 1) how to measure the consideration transferred, 2) what to do with contingent consideration and 3) how to measure share-based awards of the acquiree.
1) Consideration Transferred
The fair value of the consideration transferred is calculated as the sum of
1. the acquisition date fair values of the assets transferred by the acquirer
2. the liabilities incurred by the acquirer to former owners of the acquiree
3. the equity interest issued by the acquirer.
If the consideration transferred by the acquirer has a book value different than the fair value of the consideration then the acquirer must re-measure the consideration at fair value as of the acquisition date and recognize the resulting gain or loss in earnings. However, if the consideration is transferred to the acquiree and not to the former owners and will remain in the control of the acquirer, in that case, the consideration is measured at its book value on the day before the acquisition and no gain or loss is recognized.
Translation: If your company buys a business and the purchase price is paid to that business that the money (or assets) is still in your control and you transfer it at book value.
2) Contingent Consideration
The acquirer must recognize the acquisition date fair value of any contingent consideration. The contingent consideration is classified as a liability or equity in accordance with the applicable GAAP such as FAS 150 or EITF 00-19. A right to the return of previously transferred consideration should be classified as an asset.
Translation: If your company has to pay the former shareholders if the EPS of the purchased company increases by 25%, then that amount needs to be fair-valued and recorded on the balance sheet.
3) Share Based Payment Awards
Exchanges of share options or other share based payment awards are considered a modification under the guidance of FAS 123R. If the acquirer is not obligated to replace the awards, none of the fair-value-based award is part of the consideration transferred and all of the fair-value-based measure of the replacement awards is to be recognized as compensation cost in the post-combination financial statements.
If the acquirer is obligated to replace the acquiree awards, either all or a portion of the fair-value-based measure of the acquirer’s replacement awards is to be included in measuring the consideration transferred. Both the new awards and the old awards are to be re-measured in accordance with FAS 123R and the value of the old award is part of the consideration transferred because it is attributable to pre-combination service. If the employee must render service for the new awards to vest, the remaining fair-value-based measure of the new award is recognized in the post-combination financial statements.
Translation: If part of the contract states that current stock options must be replaced by your company’s stock options, then part of the fair value of the awards are part of the purchase price. If, however, your company issues new stock options out of the goodness of your heart, then these new awards are not considered part of the purchase price.
Stayed tuned to the same Bat channel at the same Bat time for continued interpretation of this issue.
Linda is a CPA living in Southwestern Ohio, working as a research accountant for an investor-owned publicly traded utility company. She specializes in implementing new FASB and SEC requirements and FAS 133 derivative issues. In her role at the utility she has encountered many issues and written many memos, so send in your implementation and derivative issues and Linda will help figure out an answer.