The FASB recently issued ASU 2017-09, Scope of Modification Accounting, to clarify which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718, Stock Compensation. The ASU is available here, and becomes effective for all entities for fiscal years beginning after Dec. 15, 2017.
Topic 718 provides an accounting framework applicable to modifications of share-based payments, and currently defines a modification as “a change in any of the terms or conditions of a share-based payment award.” This definition is open to a broad range of interpretation and has resulted in diversity in practice as to whether certain changes in terms or conditions are treated as modifications.
ASU 2017-09 clarifies that an entity must apply modification accounting to changes in the terms or conditions of a share-based payment award unless all of the following criteria are met:
- The fair value of the modified award is the same as the fair value of the original award immediately before the modification. The standard indicates that if the modification does not affect any of the inputs to the valuation technique used 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 modification.
- 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 modification.
The ASU also clarifies that the disclosure requirements in paragraphs 718-10-50-1 through 50-2A and 718-10-50-4 apply regardless of whether an entity is required to apply modification accounting. If applicable, this includes disclosing a lack of incremental compensation cost resulting from a modification.
In addition, the ASU includes examples of common changes to the terms or conditions of an award and indicates whether those changes typically require an entity to apply modification accounting.
Examples of changes to an award that generally do not require modification accounting:
- Changes that are administrative in nature, such as a change to the company name, company address or plan name
- Changes in an award’s net settlement provisions related to tax withholdings that do not affect the classification of the award
Examples of changes to an award that generally require modification accounting include:
- Repricing of share options that results in a change in value of those share options
- Changes in a service condition
- Changes in a performance condition or a market condition
- Changes in an award that result in a reclassification of the award (equity to liability or vice versa)
- Adding an involuntary termination provision in anticipation of a sale of a business unit that accelerates vesting of the award