6.7 Short-Term Inducements
ASC 718-20 — Glossary
Short-Term Inducement
An offer by the entity that would result in modification of an award to which an award holder may subscribe for a limited period of time.
ASC 718-20
Short-Term Inducements
35-5 Except as described in paragraph 718-20-35-2A, a short-term inducement shall be accounted for as a modification of the terms of only the awards of grantees who accept the inducement, and other inducements shall be accounted for as modifications of the terms of all awards subject to them.
The ASC master glossary defines a short-term inducement as an “offer by the
entity that would result in modification of an award to which an award holder may
subscribe for a limited period of time.” Modification accounting applies only to the
awards for which holders accept the offer. While entities must use judgment in
determining what constitutes a limited period, we would generally expect it to be
less than a few months. If an inducement is not “for a limited period of time,” it
is considered a long-term inducement and is accounted for as a modification of all
awards subject to the inducement, even if the inducement is not accepted by the
holder.
The modification date for a short-term inducement is typically the date on which an
award holder accepts the offer (i.e., “opts in”). If award holders opt in on
different dates, the entity would have multiple modification dates. However, if
award holders have the ability to withdraw their acceptance (i.e., “opt out”) before
the end of the offer period, the modification date would be the date on which the
withdrawal right expires. By contrast, the modification date of a long-term
inducement is the date on which the inducement is offered, regardless of how many
award holders accept the offer or when they accept it.
See Section 6.10.2 for a
discussion of short-term offers to settle an equity award for cash or other assets.
Example 6-23
On January 1, 20X1, Entity A grants 1,000 at-the-money employee stock options to each of its 100 employees. The options have a grant-date fair-value-based measure of $3 and an exercise price of $10, and they vest at the end of the third year of service (cliff vesting).
On December 31, 20X1, A offers to all 100 employees the ability to reduce the
exercise price of the stock options to $8 if the employees
are willing to extend the vesting period for an additional
year. The offer is valid for the remaining original service
period of two years. Because the inducement is not
short-term (i.e., it is not offered for a limited period), A
should account for the inducement as a modification of all
100,000 stock options on December 31, 20X1 (i.e., the
modification date), regardless of how many employees accept
the offer.
Example 6-24
Assume the same facts as in the example above, except that the employees have
only one month to accept the offer, and those who opt in do
not have the ability to opt out once they have accepted the
offer. During that one-month period, 60 employees accept the
offer. Entity A would apply modification accounting to only
the 60,000 stock options awarded to employees who accepted
the offer because it has determined that the offer is a
short-term inducement. In addition, the modification date
for each opt-in is the date on which each employee accepts
the offer.