United States

Stock compensation: Scope of modification accounting

FINANCIAL REPORTING INSIGHTS  | 

An entity may change the terms or conditions of a share-based payment award for many different reasons, and the nature and effect of the change can vary significantly. Currently the Master Glossary of the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) defines a modification as “a change in any of the terms or conditions of a share-based payment award.” This broad definition has resulted in diversity in practice about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in ASC 718, “Compensation — Stock Compensation.”

To address the diversity in practice when applying the guidance in ASC 718 for a change to the terms or conditions of a share-based payment award, the FASB recently issued Accounting Standards Update (ASU) 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting. This ASU requires an entity to account for the effects of a modification unless all the following are met:

  • The fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification.
  • The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified.
  • The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified.

The current disclosure requirements in ASC 718 apply regardless of whether an entity is required to apply modification accounting under the ASU.

The ASU is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for (a) public business entities for reporting periods for which financial statements have not yet been issued and (b) all other entities for reporting periods for which financial statements have not yet been made available for issuance. The ASU should be applied prospectively to an award modified on or after the adoption date.