Valuation of Options Assumed in a Business Combination

With corporate merger and acquisition (M&A) activity on the rise, the accounting for share-based payment instruments assumed in an acquisition has become a topic of intense focus. This Equity Compensation Issue Brief (ECIB) focuses on the valuation considerations involved any time an acquirer assumes awards in a corporate transaction. Whereas ASC 805 provides the general accounting framework related to business combinations, it points to ASC 718 with regard to specific fair value measurement principles. In general, while most companies have successfully adopted the Black-Scholes-Merton formula as their option-pricing method of choice, different measurement approaches should be applied when valuing assumed awards in a business combination. The issues discussed herein have implications for corporate issuers, external auditors, and regulators.

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