Clarifying Modifications of Share-Based Payments

September 13, 2017

In May 2017, the Financial Accounting Standards Board (FASB) issued ASU 2017-09: Compensation-Stock Compensation, Scope of Modification Accounting, changing the way entities account for modifications to share-based payment awards. The FASB determined that these changes were necessary to make the standard clearer and to reduce diversity in practice.

When a share-based payment is modified, an entity must record additional compensation expense equal to the fair value of the modified award on the day of modification, minus the fair value of the original award on the day before the modification was made. This calculation can be quite complex. ASU 2017-09 aims to reduce this burden on entities by narrowing the scope of what qualifies as a modification.

The term “modification” is currently defined to include any change to the arrangement. ASU 2017-09 limits the scope of what is considered a modification. Changes to share-based payments that meet the following criteria do not have to be accounted for as a modification:

  1. The fair value of the modified award does not change. Generally, an entity can conclude that the fair value does not change if none of the inputs that were used to calculate the fair value were changed by the modification.
  2. There are no changes to the vesting conditions of the award.
  3. The classification of the award as an equity instrument or a liability instrument is not impacted by the change.

ASU 2017-09 does not impact the required disclosures for modifications to share-based payments. Even if a change to a share-based payment does not require modification accounting under the updated rules, it still must be disclosed. Examples of certain changes to share-based payments that may not require modification accounting include:

  • Administrative changes, such as changes to the entity’s name, address, or plan name.
  • Changes to the net settlement provisions related to tax withholdings which do not impact the classification of the award.

Early adoption is permitted, but entities must adopt this update for annual periods beginning after December 15, 2017. The update should be applied prospectively so only modifications to share-based payment awards in the year of adoption or thereafter would be considered. The FASB recognized that prospective treatment could cause a lack of comparability. Since the intention of the update was to simplify accounting for share-based payment modifications, the FASB determined that the cost of having to calculate the retrospective impact was greater than the benefit of comparability.

For any questions on share-based payment awards, please contact Aronson’s Technology Industry Services Group professionals at 301.231.6200 .