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Accounting for post-acquisition changes in estimates relating to replacement awards

Entity A grants an award of 1,000 shares to each of two employees. The award will vest after three years provided the employees remain in service. At the end of year 2, Entity A is acquired by Entity B which replaces the award with one over its own shares but otherwise on the same terms. The fair value of each share at the date of acquisition is €1. At this date, Entity B estimates that one of the two employees will leave employment before the end of the remaining one year service period.

At the date of acquisition, Entity B recognises €667 (1 employee × 1,000 shares × €1 × 2/3) as part of the consideration for the business combination and expects to recognise a further €333 as an expense through post-acquisition profit or loss (1 × 1,000 × €1 × 1/3).

However, if the estimates made as at the date of the acquisition prove to be inaccurate and either both employees leave employment during year 3, or both remain in employment until the vesting date, there are three alternative approaches to the accounting as explained above:

• Approach 1 – all changes in estimates are reflected in post-acquisition profit or loss (drawing on paragraph B60 of IFRS 3);
• Approach 2 – changes to the estimates that affect the amount recognised as part of the purchase consideration are not adjusted for and changes affecting the post-acquisition assumptions are adjusted through post-acquisition profit or loss (drawing on paragraph B63(d) of IFRS 3); or
• Approach 3 – the amount attributable to pre-combination service, and treated as part of the business combination, is fixed and cannot be reversed. However, any changes in assumptions that give rise to an additional cumulative expense are reflected through post-acquisition profit or loss (drawing on paragraph B59 of IFRS 3).

Using the fact pattern above, and assuming that both employees leave employment in the post-acquisition period, the three alternative approaches would give rise to the following entries in accounting for the forfeitures:

• Approach 1 – a credit of €667 to post-acquisition profit or loss to reflect the reversal of the amount charged to the business combination. In addition to this, any additional expense that had been recognised in the post-acquisition period would be reversed.
• Approaches 2 and 3 – the reversal through post-acquisition profit or loss of any additional expense that had been recognised in the post-acquisition period.

If, instead, both employees remained in employment in the post-acquisition period and both awards vested, the three alternative approaches would give rise to the following entries:

• Approach 1 – an expense of €1,333 through post-acquisition profit or loss to reflect the remaining €333 fair value of the award to the employee who was expected to remain in service plus €1,000 for the award to the employee who was not expected to remain in service.
• Approach 2 – an expense of €666 (2 × €333) through post-acquisition profit or loss for the remaining 1/3 of the acquisition date fair value of the two awards. There is no adjustment to the business combination or to post-acquisition profit or loss for the €667 pre-acquisition element of the award that, as at the acquisition date, was not expected to vest.
• Approach 3 – an expense of €1,333 through post-acquisition profit or loss to reflect the remaining €333 fair value of the award to the employee who was expected to remain in service plus €1,000 for the award to the employee who was not expected to remain in service.