Share-based payment awards assumed in a business combination can be particularly risky as timelines are compressed, communication can be limited, and handoffs from corporate development can be fumbled. The guidance in ASC 805 points to the valuation framework of ASC 718, but this can be deceiving. The fair value measurement principles in ASC 718 apply, but not your regular valuation techniques and procedures.
Generally, it’s not appropriate to extrapolate the expected term estimation method used for new option grants to options that are partway through their life and not at-the-money. To correctly develop exercise behavior assumptions for options midway in their life and not at-the-money (i.e., all the options being assumed), lattice models should be used instead of the Black-Scholes formula.
Equity Methods has helped companies with assumed awards from large and small acquisitions. We can help you in the following areas:
- Develop and deploy a lattice model to appropriately value options assumed in a business combination, especially in cases where the Black-Scholes formula is not compliant
- Perform detailed, grant-level valuations of assumed awards, enabling a robust bifurcation between consideration transferred and post-combination expense
- Meet with your auditors before the conversion to discuss our approach and afterward to provide detailed backup, minimizing audit headaches even in a complex and time-compressed transaction
- Assist with bifurcation between amounts allocated to goodwill and go-forward expense, create expense waterfalls or forecasts for estimating future impact, or even handle the unique ongoing reporting for assumed awards via our financial reporting practice
Get a complex situation under control without taking on simplifying assumptions or other audit risks.