A new standard issued by the Financial Accounting Standards Board (FASB) on May 10 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718, Compensation—Stock Compensation.
The FASB Accounting Standards Codification defines the term “modification” as “a change in any of the terms or conditions of a share-based payment award,” but some stakeholders said that definition is too broad and leads to diversity in practice.
For example, some entities evaluate whether a change to the terms or conditions of an award is substantive, and modification accounting under Topic 718 is then applied, but others conclude that a change is not substantive, so they do not apply modification accounting.
The issue is that Topic 718 does not contain specific guidance about what changes are substantive.
In addition, some other entities apply modification accounting to any change that is not purely administrative in nature, but Topic 718 does not provide guidance about what changes are deemed administrative. Then there are entities that apply modification accounting when a change to an award changes the fair value, vesting, or the classification of the award. This also could be evaluated as a substantive change.
Accounting Standards Update (ASU) No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, provides clarity and reduces both diversity in practice and cost and complexity when applying the guidance in Topic 718 to a change in the terms or conditions of a share-based payment award.
Under the standard, an entity should account for the effects of a modification unless all of 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 of the original award immediately before the original award is modified.
- 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 Topic 718 apply regardless of whether an entity is required to apply modification accounting under the amendments in this update,” the ASU states.
The new standard takes effect for all entities for annual periods, and interim periods within those annual periods, beginning after Dec. 15, 2017. Early adoption is permitted, including adoption in any interim period.
The ASU should be applied prospectively to an award modified on or after the adoption date.