FIN 44: Intrinsic Value

Let’s revisit our worksheet where we are performing purchase price and accounting calculations. You may want to have a look at our discussion of FIN 44 governing the treatment of options before proceeding. In summary, FIN 44 says that the fair value of stock options or awards issued by the acquirer (i.e. “replacement” awards) in exchange for outstanding awards held by the target’s employees are considered part of the purchase price.

 

Create Financial Models 10x Faster with Macabacus

Gain access to 100+ shortcuts, formula auditing visualizations, easy Excel-to-PowerPoint linking and productivity tools to help you accelerate financial modeling and presentations.

Start your Free Trial
 

However, to the extent that continued employee service subsequent to the acquisition date is required for the replacement awards to vest, a portion of the intrinsic value (if any) of the unvested replacement awards is allocated to unearned compensation. Unearned compensation is recorded as an asset on the balance sheet and amortized as compensation expense over the remaining future vesting (service) period for accounting purposes.

We begin our calculation of unearned compensation expense with the calculation of the intrinsic value of TargetCo’s options. Note that intrinsic value is different from the Black-Scholes fair value we have already calculated.

Download Template

FIN 44: Intrinsic Value

Try Macabacus for free to accelerate financial modeling in Excel.

Discover more topics

Build an operating model
In this tutorial, we will walk through how to build a general industry business operating model.
Read more
Build an M&A model
In this section, we demonstrate how to model a merger of two public companies in Excel.
Read more
Build an LBO model
In this tutorial, we will walk you through building an LBO model in Excel.
Read more
Asset and Stock Deals
The first step in purchase price allocation, or PPA, is to determine the purchase price.
Read more