Example 14: Modifications of Awards With Performance and Service Vesting Conditions
55-107 Paragraphs 718-10-55-60 through 55-63 note that awards may vest based on service conditions, performance conditions, or a combination of the two. Modifications of market conditions that affect exercisability or the ability to retain the award are not addressed by this Example. A modification of vesting conditions is accounted for based on the principles in paragraph 718-20-35-3; that is, total recognized compensation cost for an equity award that is modified shall at least equal the fair value of the award at the grant date unless, at the date of the modification, the performance or service conditions of the original award are not expected to be satisfied. If awards are expected to vest under the original vesting conditions at the date of the modification, an entity shall recognize compensation cost if either of the following criteria is met:
- The awards ultimately vest under the modified vesting conditions
- The awards ultimately would have vested under the original vesting conditions.
55-108 In contrast, if at the date of modification awards are not expected to vest under the original vesting conditions, an entity should recognize compensation cost only if the awards vest under the modified vesting conditions. Said differently, if the entity believes that the original performance or service vesting condition is not probable of achievement at the date of the modification, the cumulative compensation cost related to the modified award, assuming vesting occurs under the modified performance or service vesting condition, is the modified award’s fair value at the date of the modification. The following Cases illustrate the application of those requirements:
- Type I probable to probable modification (Case A)
- Type II probable to improbable modification (Case B)
- Type III improbable to probable modification (Case C)
- Type IV improbable to improbable modification (Case D).
ASC 718 requires an entity to record compensation cost if either the original performance condition or the modified performance condition is met. In this case, since the modified performance target is lower than the original performance target, the attainment of the modified target would be sufficient to trigger recognition of compensation cost.
An entity that modifies a group of awards granted to a number of grantees may instead choose to consider each grantee’s awards as the unit of account when determining whether the awards are expected to vest and the type of modification accounting to apply. When applying this approach, the entity may conclude that each individual’s awards were expected to vest before the modification and are accounted for as a probable-to-probable modification. That is, even if a few grantees were expected to forfeit the original awards as a result of normal turnover, the entity may account for the entire modification as a probable-to-probable modification. However, if an entity’s policy is to estimate forfeitures when recognizing compensation cost, and the percentage of all modified awards that are expected to vest increases (i.e., the entity’s forfeiture rate is reduced), additional compensation cost will be recognized for those awards on the basis of their original grant-date fair-value-based measure.
Calculated as [($6 × 1,000 options) ÷ by 3 years].