FASB Releases Update on Accounting for Stock Compensation

By:
Chris Gaetano
Published Date:
May 11, 2017
ChangesAheadSquare

Current Generally Accepted Accounting Principles (GAAP) allow entities to modify the terms or conditions of share-based payment awards for many different reasons. However, the Financial Accounting Standards Board (FASB) said that there has been a great diversity of practice in how exactly this would be accounted for, due to ambiguities over what exactly is meant in the literature by "modify." In order to address this ambiguity and harmonize practice, the FASB released a new Accounting Standards Update that aims to clarify exactly when and how entities account for modifications in share-based payment awards. 

The FASB's Master Glossary currently defines the term modification as "a change in any of the terms or conditions of a share-based payment award." This wording, though, has led to some confusion over how modification accounting would be applied.

"Some entities evaluate whether a change to the terms or conditions of an award is substantive. When those entities conclude that a change is substantive, they apply modification accounting in Topic 718. When those entities conclude that a change is not substantive, theydo not apply modification accounting. Topic 718 does not contain guidance about what changes are substantive. Other entities apply modification accounting for any change to an award, except for a change they deem to be purely administrative in nature. However, Topic 718 does not provide guidance about what changes are purely administrative. Still, other entities apply modification accounting when a change to an award changes the fair value, the vesting, or the classification of the award. In those cases, it appears that an evaluation of a change in fair value, vesting, or classification may be used in practice to evaluate whether a change is substantive." 

The update says that an entity should account for the effects of a modification, unless all of the following three conditions are met: 

1. 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 (or calculated value or intrinsic value, if such an alternative
measurement method is used) 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 that the entity uses to value the
award, the entity is not required to estimate the value immediately before
and after the modification.

2. 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.

3. 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 FASB added that the current disclosure requirements in Topic 718 apply regardless of whether an entity is required to apply modification accounting under the amendments in the update. 

The amendments are effective for all entities for annual periods, and interim periods within those annual periods, beginning after Dec. 15, 2017. Early adoption is permitted for public entities for reporting periods for which financial statements have not yet been issued, and all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments should be applied prospectively to an award modified on or after the adoption date. 

Click here to see more of the latest news from the NYSSCPA.