Research On Accounting Treatment Of Performance Awards In Mergers And Acquisitions Of Corporations

In the M&A transactions,due to the information asymmetry between the both parties,the signing of gambling agreements became more and more common.However,in our country,the signing of one-side gambling agreements is more general.That is,in the gambling agreement,it is only agreed that when the merged company fails to achieve the performance agreed upon by both sides of the merger and acquisition transaction,the acquired party needs to give the merged company some performance compensation.With the popularity of the performance compensation clause signed in the gambling agreement,considering that the valuation of the underlying company at the time of merger and acquisition may be underrated,the performance of the merged party after the acquisition may exceed the performance indicators agreed upon by both parties during the merger and acquisition.In order to motivate the management of the merged party to seek higher benefits,both sides of the M&A transaction began to set some performance award clauses in the gambling agreement.That is,on the basis of the one-side gambling agreement,after the overfull completion of the promised performance by the merged company,the acquiring party grants the relevant personnel of the acquired company a certain amount of cash or equity awards.This is the so-called two-way gambling agreement.In recent years,the scale of corporate mergers and acquisitions has become increasingly large and the forms have become increasingly diverse.In the industry,mergers and acquisitions events occurred frequently.The signing of gambling agreements has become very common.The setting of performance award clauses has also become increasingly popular.However,accounting standards in China have not been accounting for this performance award.Dealing with a unified specification,the practice of enterprises in this treatment is not the same.In particular,when the object to be rewarded is in the dual status of senior management personnel and shareholders,the accounting confirmation of this performance award is more ambiguous and arbitrary.In practice,there are two ways to confirm this as an increase of in merger consideration and employee compensation,and there are also many problems in subsequent measurement.Therefore,it is particularly important to study the accounting treatment of its performance awards.In view of the rapid development of high-tech enterprises in China,mergers and reorganizations in the industry have occurred frequently,and their shareholders are generally senior managers at the same time.Therefore,this paper cards some major asset restructuring events that set a performance award from 2014 to October 2017 occurred in companies those come into the market of SME and GEM in “Internet and related services”,“Computer,communication and other electronic equipment manufacturing”,and “Software and information technology service industries” the three industries,explain the status quo of the accounting treatment of the performance awards in China's M&A,and find that there are strong subjectivities and arbitrariness in the accounting recognition of the performance awards set by the enterprises in practice.In the case of confirming the performance award as contingent consideration,some companies directly value their fair value as zero when they initially confirm,and the accounting items used for the liabilities are inconsistent.In the case that the performance award is recognized as employee compensation,some companies adopt the practice of reckoning the profit and loss of the current period at the end of the performance commitment period for subsequent measurement,which does not meet the basic accounting requirements of the accrual basis.In addition,there are still phenomena in practice where most companies fail to disclose the accounting treatment of their performance awards.This article is based on relevant regulations at home and abroad,and my own professional knowledge,it considers that the acquirer should reasonably confirm the performance award based on the following criteria: whether the rewarded object is forced to stay,performance reward level,the number of shares held by the counterparty prior to the M&A transaction,and the relationship between the payment rules of performance awards and the combined valuation.When the performance award is recognized as contingent consideration,it shall be recognized as a financial liability at fair value through profit or loss.The acquirer shall make appropriate profit forecast for the underlying assets and determine the fair value of the merger consideration based on the corresponding valuation model and comprehensive consideration of all factors.When performance awards are recognized as bonuses paid to employees,the acquiring party shall,with reference to the method of share payment,accrue the performance awards in phases within the performance commitment period.Finally,this paper proposes the following suggestions for accounting treatment of M&A performance awards in practice: using valuation models to properly and reasonably estimate the fair value of performance awards and calculating reasonably the performance bonuses in accordance with the basic accounting requirements of the accrual accounting system during the performance commitment period,etc.,in order to promote the development of China's domestic mergers and acquisitions market more orderly and prosperous.