6.12 Modifications That Change the Scope of Awards
An entity may modify or settle a liability to a grantee that is not subject to the provisions of ASC 718 by issuing awards that are subject to ASC 718 (e.g., stock options are granted in place of a cash-based profit-sharing arrangement). If a liability that was not initially within the scope of ASC 718 is modified or settled through the issuance of a new instrument that is within the scope of ASC 718, the entity should account for the transaction, as well as the new award, under ASC 718.
Example 6-40
On January 1, 20X1, Entity A entered into a long-term incentive agreement with its CFO. The earliest date on which the CFO would be entitled to receive payment under the agreement is 10 years from the date of the agreement (January 1, 20Y1). Entity A accounts for the plan in accordance with ASC 710-10-25-9 and recognizes the cost of the agreement in a systematic and rational manner over this 10-year period.
On January 1, 20X6, A and the CFO agree to terminate the agreement in exchange for A’s granting the CFO options to purchase A’s common stock. The number of stock options that will be granted is determined on the basis of the value of the long-term incentive agreement on the date of the exchange.
The value of the long-term incentive agreement on January 1, 20X6, was determined to be $2 million. The number of stock options to be issued to the CFO on that date was based on the fair-value-based measure of each stock option, determined by using an appropriate pricing model, and the $2 million value of the agreement. The stock options will vest after the CFO’s fifth year of service (cliff vesting). As of January 1, 20X6, A had recorded cumulative compensation cost and an accrued liability of $1 million associated with the long-term incentive agreement because 50 percent (for 5 of 10 years of services rendered) of the required service period had been rendered.
Although the accounting for the original agreement was not within the scope of ASC 718, such guidance is relevant in the determination of the cost of the share-based payment awards (whether newly granted or as a replacement of a prior compensation arrangement).
Therefore, A should reclassify the $1 million accrued liability as equity (APIC) and should record the difference between the $2 million aggregate fair-value-based measure of the stock options and the $1 million of cumulative compensation cost previously recognized in connection with the long-term incentive agreement ($1 million) as compensation cost over the remaining five-year service period of the stock options. See the journal entries below.