6.13 Modification When a Holder Is No Longer an Employee

6.13 Modifications When a Holder Is No Longer an Employee, a Nonemployee Is No Longer Providing Goods or Services, or a Grantee Is No Longer a Customer

ASC 718-10

Awards May Become Subject to Other Guidance

35-9 Paragraphs 718-10-35-10 through 35-14 are intended to apply to those instruments issued in share-based payment transactions with employees and nonemployees accounted for under this Topic, and to instruments exchanged in a business combination for share-based payment awards of the acquired business that were originally granted to grantees of the acquired business and are outstanding as of the date of the business combination.

35-9A Paragraph superseded by Accounting Standards Update No. 2020-06.

35-10 A freestanding financial instrument or a convertible security issued to a grantee that is subject to initial recognition and measurement guidance within this Topic shall continue to be subject to the recognition and measurement provisions of this Topic throughout the life of the instrument, unless its terms are modified after any of the following:

Subparagraph superseded by Accounting Standards Update No. 2019-08.
Subparagraph superseded by Accounting Standards Update No. 2019-08.
A grantee vests in the award and is no longer providing goods or services.
A grantee vests in the award and is no longer a customer.
A grantee is no longer an employee.

35-10A Only for purposes of paragraph 718-10-35-10, a modification does not include a change to the terms of an award if that change is made solely to reflect an equity restructuring provided that both of the following conditions are met:

There is no increase in fair value of the award (or the ratio of intrinsic value to the exercise price of the award is preserved, that is, the holder is made whole) or the antidilution provision is not added to the terms of the award in contemplation of an equity restructuring.
All holders of the same class of equity instruments (for example, stock options) are treated in the same manner.

35-11 Other modifications of that instrument that take place after a grantee vests in the award and is no longer providing goods or services, is no longer a customer, or is no longer an employee should be subject to the modification guidance in paragraph 718-10-35-14. Following modification, recognition and measurement of the instrument shall be determined through reference to other applicable GAAP.

35-12 Once the classification of an instrument is determined, the recognition and measurement provisions of this Topic shall be applied until the instrument ceases to be subject to the requirements discussed in paragraph 718-10-35-10. Topic 480 or other applicable GAAP, such as Topic 815, applies to a freestanding financial instrument that was issued under a share-based payment arrangement but that is no longer subject to this Topic. This guidance is not intended to suggest that all freestanding financial instruments shall be accounted for as liabilities pursuant to Topic 480, but rather that freestanding financial instruments issued in share-based payment transactions may become subject to that Topic or other applicable GAAP depending on their substantive characteristics and when certain criteria are met.

35-13 Paragraph superseded by Accounting Standards Update No. 2016-09.

35-14 An entity may modify (including cancel and replace) or settle a fully vested, freestanding financial instrument after it becomes subject to Topic 480 or other applicable GAAP. Such a modification or settlement shall be accounted for under the provisions of this Topic unless it applies equally to all financial instruments of the same class regardless of the holder of the financial instrument. Following the modification, the instrument continues to be accounted for under that Topic or other applicable GAAP. A modification or settlement of a class of financial instrument that is designed exclusively for and held only by grantees (or their beneficiaries) may stem from the employment or vendor relationship depending on the terms of the modification or settlement. Thus, such a modification or settlement may be subject to the requirements of this Topic. See paragraph 718-10-35-10 for a discussion of changes to awards made solely to reflect an equity restructuring.

ASC 718-10-35-10 indicates that a share-based payment award that is subject to ASC 718 does not become subject to other applicable GAAP unless the award is modified when the individual is no longer an employee or, for nonemployee awards, the award is vested and the individual is no longer providing goods or services or, for customers, the award is vested and the grantee is no longer a customer. Modifications made to an award when the holder is no longer an employee should be accounted for under ASC 718-10-35-11, which refers to ASC 718-10-35-14. If the modification or a settlement does not apply equally to all financial instruments of the same class regardless of whether the holder is (or was) an employee, a nonemployee providing goods or services, or a customer, the above sections on modifications and settlements apply, and any incremental fair-value-based measure is recognized as compensation cost. After the modification, the award will become subject to other applicable GAAP (e.g., ASC 815 and ASC 480). Note that once the award becomes subject to other applicable GAAP, ASC 718’s guidance on classification (including the exceptions to liability classification) no longer applies. See Section 5.8 for further discussion of the accounting for awards that become subject to other guidance.

However, in accordance with ASC 718-10-35-10A, if the terms of an award are modified solely to reflect an equity restructuring, the award is not subject to other applicable GAAP as long as both of the following conditions are met:

There is no increase in fair value of the award (or the ratio of intrinsic value to the exercise price of the award is preserved, that is, the holder is made whole) or the antidilution provision is not added to the terms of the award in contemplation of an equity restructuring.
All holders of the same class of equity instruments (for example, stock options) are treated in the same manner.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.