The Financial Accounting Standards Board has issued an Accounting Standards Update (ASU 2017-09; Topic 718) to clarify the accounting for modifications to outstanding share-based payment awards such as stock options and restricted stock.
Currently there is diversity in practice for accounting for modifications to equity awards. For instance, some entities apply modification accounting for modifications which are “substantive” and other entities apply modification accounting for any modification that is not administrative.
If modification accounting is required, it can be significant. Generally the entity must determine the incremental value of the award. For vested awards, the incremental value if often recognized as an expense at the time of modification. For unvested awards, the incremental value and any unrecognized compensation expense from the original award are recognized prospectively.
Under the principles announced by FASB, an entity should 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 ASU is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017.
Hat tip to Broc Romanek of CompensationStandards.com for pointing this out here.