FASB Improves the Accounting for Modification of Share-Based Payment Awards

June 2017

The US Financial Accounting Standards Board (FASB) has issued Accounting Standards Update (ASU) No. 2017-09, Compensation — Stock Compensation (Topic 718) — Scope of Modification Accounting. ASU 2017-09 applies to entities that change the terms or conditions of a share-based payment award.

The FASB adopted ASU 2017-09 to provide clarity and reduce diversity in practice in accounting for modifications of the terms and conditions of a share-based payment award.

The FASB Accounting Standards Codification currently defines the term ‘modification’ as ‘a change in any of the terms or conditions of a share-based payment award’. However, Topic 718 does not contain guidance on what changes are substantive or what changes may be purely administrative. This leads to diversity in practice in determining what is a modification that is sufficient to justify application of modification accounting. The amendments in ASU 2017-09 include guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718.

These amendments require the entity to account for the effects of a modification unless all of the following conditions are met:

  • The fair value (or calculated value or intrinsic value, if used) of the modified award is the same as the fair value (or value using an alternative measurement method) 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 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 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 amendments are effective for all entities for annual periods, and interim periods within those annual periods, beginning after 15 December 2017, with early adoption permitted.

ASU 2017-09 is available on this link.

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