Proposal to Clarify Stock Compensation Modification Accounting Requirements
On November 17, 2016, the Financial Accounting Standards Board issued a proposed Accounting Standards Update (ASU) clarifying modification guidelines under Topic 718, Compensation—Stock Compensation. The proposed amendments designate what changes to a share-based payment award’s terms or conditions require an entity to apply modification accounting. Topic 718 currently does not provide guidance about what changes are substantive or purely administrative—two benchmarks commonly used to evaluate whether the nature and effect of the change result in a plan modification.
The proposal would affect any entity that changes a share-based payment award’s terms or conditions, including changes made as a result of newly effective amendments to the codification or laws or regulations. Comments are due January 6, 2017.
Under the proposal, an entity would account for a modification’s effects unless the award’s fair value (or calculated or intrinsic value), vesting conditions and classification as an equity or a liability instrument are all the same immediately before and after the modification. If these three criteria are not met, modification accounting applies.
Examples of changes to awards the board believes generally would require modification accounting include:
- Repricing of options that results in a change in value of those options
- Changes in a service condition
- Changes in a performance condition or market condition
- Changes in an award resulting in the award’s reclassification (equity to liability or vice versa)
- Adding a change-in-control provision whereby awards immediately are vested upon the event’s occurrence
Examples of changes to awards the board believes generally would not require modification accounting include changes that are administrative in nature, e.g., change to the company name, company address or plan name, and changes in an award’s net settlement provisions related to tax withholdings that do not affect the award’s classification.
In certain circumstances, the financial reporting outcome—share-based payment disclosure or expense recognition—would change depending on whether modification accounting is applied. Under modification accounting in Topic 718, changes to terms or conditions for some awards result in a new measurement date from the grant date to the modification date, which typically would result in a different value for the award. The new measurement date would affect disclosures about share-based payment awards, and in some circumstances, affect expense recognition. Refer to BKD’s article, “Share-Based Payment Accounting Simplifications.”
The board decided the proposal would be an improvement to generally accepted accounting principles because it would clarify when an entity is required to even consider whether the application of modification accounting would have a financial reporting effect.
The recurring disclosure requirements in Topic 718 will apply regardless of whether an entity is required to apply modification accounting under the proposal. An entity’s description of significant modifications for each year an income statement is presented includes the modification terms, number of employees affected and total incremental compensation cost resulting from the modifications. The board does not anticipate disclosure practices for modifications would significantly change as a result of the amendments.
Transition & Effective Date
Entities would prospectively apply the amendments to awards modified on or after the effective date, which will be determined after the board considers stakeholder feedback.
Contact your BKD advisor for additional information.