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FASB Aims to Clarify Modification Accounting Rules

Nov 21st 2016
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The Financial Accounting Standards Board (FASB) released a proposal on Nov. 18 that clarifies the scope of modification accounting for share-based payment awards.

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 have said that definition is too broad and results in diversity in practice.

Some entities evaluate whether a change to the terms or conditions of an award is substantive, and modification accounting is then applied, but others conclude that a change is not substantive, so they do not apply modification accounting.

The problem is, Topic 718, Compensation—Stock Compensation, does not contain specific guidance about what changes are substantive, the FASB says.

Another problem: Entities sometimes apply modification accounting to any change that is not purely administrative in nature, while others apply modification accounting when a change to an award changes the fair value, vesting, or the classification of the award.

So, the proposed Accounting Standards Update (ASU) provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting under Topic 718.

Under the proposal, an entity would account for the effects of a modification unless all of the following are the same immediately before and after the modification:

  • The fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the award.
  • The vesting conditions of the award.
  • The classification of the award as an equity instrument or a liability instrument.

“The current disclosure requirements in Topic 718 would apply regardless of whether an entity is required to apply modification accounting under the amendments in this proposed update,” the proposed ASU states.

Comments on the proposed ASU are due by Jan. 6, 2017. Instructions on how to submit comments to the FASB can be found in the exposure draft.


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