The Financial Accounting Standards Board has issued new guidelines, ASU 2017-09, regarding Compensation-Stock Compensation (Topic 718). The goal of the amendment is to clarify the terms and conditions surrounding share-based payment awards and help entities determine when to apply modification accounting.
Entities may alter the terms and conditions of a share-based payment award for a variety of reasons. The previous guidance under Topic 718 lead to diversity in practice due to the unspecific definition of modification. Until now, modification was defined as “a change in any of the terms and conditions of a share-based payment award.” This definition resulted in some entities applying modification accounting only when changes affected fair value, while others applied modification accounting for any change in award with the exception of solely administrative awards.
These differences in application will be reduced with the updated standard, which affects any entity that changes the terms or conditions of a share-based payment award. The amendment, effective December 15, 2017, provides entities with guidance on the changes to the terms or conditions of a share-based payment award that require the application of modification accounting. For example, a change in performance, market, or service condition would trigger use of modification accounting.
The effects of a modification should be accounted for unless all of the following conditions are met:
The fair value (or calculated/intrinsic value of an alternative measurement method is used) of the modified award is unchanged by the modification. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity does not have to estimate the value immediately before and after the modification.
The vesting conditions are unchanged by the modification.
The classification of the modified award as an equity instrument or a liability instrument is unchanged by the modification.
Note that the current disclosure requirements in Topic 718 apply regardless of whether an entity needs to apply modification accounting under the new amendment.
For assistance in implementing this accounting standard update or for additional information, please feel free to contact Kristi Yanover, Audit Partner, at (858) 558-9200, or any member of our Accounting & Assurance Team, as we would be happy to assist you.