Replacement award requiring post-combination service replacing vested acquiree award
Entity A acquires Entity B and issues replacement awards with a fair value at the acquisition date of €1.0 million for awards of Entity B also with a fair value at the acquisition date of €1.0 million. The replacement awards require one year of post-combination service. The awards of Entity B being replaced had a vesting period of four years. As of the acquisition date, employees of Entity B holding unexercised vested awards had rendered a total of seven years of service since the grant date.
Even though the Entity B employees have already rendered all of the service for their original awards, Entity A attributes a portion of the replacement award to post-combination remuneration cost, because the replacement awards require one year of post-combination service. The total vesting period is five years – the vesting period for the original Entity B award completed before the acquisition date (four years) plus the vesting period for the replacement award (one year). The fact that the employees have rendered seven years of service in total in the pre-combination period is not relevant to the calculation because only four years of that service were necessary in order to earn the original award.
The portion attributable to pre-combination services equals the fair value of the award of Entity B being replaced (€1 million) multiplied by the ratio of the pre-combination vesting period (four years) to the total vesting period (five years). Thus, €0.8 million (€1.0 million × 4/5 years) is attributed to the pre-combination vesting period and therefore included in the consideration transferred in the business combination. The remaining €0.2 million is attributed to the post-combination vesting period and is recognised as remuneration cost in Entity A’s post-combination financial statements in accordance with IFRS 2, over the remaining one year vesting period.