In module three, we will discuss the components of the consideration transferred in a business combination. Lesson one is about the Share-Based Payment Award. Shares of common stock and Shell options, just like all the other components of the consideration transferred in a business combination, are measured at their acquisition date fair value. For example, Company P transferred $100 thousand in cash and also issued 5,000 shares of it's $10 per value common stock in exchange for all of the Company S's outstanding shares of common stock. The market price of Company P's share on the acquisition date was $40. So, the total consideration transferred in this specific case was $300 thousand which consists of $100 thousand in cash and also 200,000 the fair value of the share transferred. Because we transfer 5,000 shares and the market price per share was $40. Now, we will discuss the accounting for Share–Based Payment evolved that was granted to the employees of the acquiree on the business combination date. For example, they acquirer granted to the employees of the acquiree only business combination date 500,000 share options. Share-Based Payment Award granted to the employees of the acquiree is measured at fair value on the business combination date. The question is, should the Share–Based Payment Award be included in the consideration transferred in the business combination and accounted for under the Accounting Standards Codification 805 or it should be accounted for as a regular stock compensation based on Accounting Standard Codification 718? So, if they acquirer is all obligated to exchange the Share-Based Payment Award held by the employees of the acquiree, either all or the portion of the fair value of the replacement awards is included in the total consideration transferred in the business combination. The acquirer is obligated to replace the acquiree's awards if it is required by: The terms of the acquisition agreement, the terms of the inquiries awards, or by applicable laws or regulations. So, if the acquirer is not obligated to exchange the share-based payment of award held by the employees of the acquiree, the Share-Based Payment award granted is accounted for as a regular stock compensation. Thus, it will be recognized as compensation expense in both business combination consolidated financial statements. It is not included in the consideration transfer in a business combination. Replacement Award is a Share-Based Payment Award issued by the acquirer to replace the Share-Based Payment Award held on the acquisition date by the employees of the acquiree. So, if they acquirer is obligated to replace the Share-Based Payment Award held by the employees of the acquiree, we need to determine the portion of the Replacement Award, so that it's included in the consideration transferred into business combination, and the portion that should be accounted for as a Regular Stock Compensation based on Accounting Standard Codification 718. The portion of the Replacement Award that is attributable to pre-combination service–rendered by the employees–is included in the total fair value of the consideration transferred in a business combination. The portion of the Replacement Award that is attributable to the post-combination service to be rendered by the employees will be recognized as a compensation expense. Compensation costs are recognized in the post-combination consolidated financial statements over the vesting period of the options. For example, over the remaining service period. It can be quite complicated to determine the portion of the Replacement Award that is attributed to the pre-combination employment. We will discuss this accounting in the four credit goals in the Gies College of Business
