7.4 Modifications
ASC 718-30
Modification of an Award
35-5 A modification of a
liability award is accounted for as the exchange of the
original award for a new award. However, because liability
awards are remeasured at their fair value (or intrinsic
value for a nonpublic entity that elects that method) at
each reporting date, no special guidance is necessary in
accounting for a modification of a liability award that
remains a liability after the modification (see Example 15,
Case C [paragraph 718-20-55-135] for what happens when the
modification causes the award to no longer be a
liability).
As discussed in Chapter
6, a modification is considered an exchange of an original award for
a new award. This principle also applies to liability-classified awards that are
modified. Since liability-classified awards are remeasured at the end of each
reporting period until settlement, an entity accounts for a modification by
measuring the modified award at its fair-value-based amount (or intrinsic value for
a nonpublic entity that has elected that method for awards issued in exchange for
goods or services) on the modification date. If the award is unvested, the entity
determines the cumulative compensation cost to be recorded by calculating the
award’s fair-value-based measure (or intrinsic value) and multiplying this amount by
the percentage of the requisite service that has been rendered for an employee award
or the percentage that would have been recognized had the grantor paid cash for the
goods or services instead of paying with a share-based payment award on the
modification date. The entity then compares (1) the cumulative compensation cost to
be recorded for the modified award and (2) the cumulative compensation cost
recognized for the original award and records the difference as either an increase
or decrease in compensation cost. The implementation example in ASC 718-20 below
illustrates the accounting for the modification of a liability-classified award that
remains a liability after the modification and is based on the facts as described in
ASC 718-30-55-1 through 55-11 (see Section 7.2.1).1
ASC 718-20
Example 16: Modifications Regarding an Award’s
Classification
Case D: Liability to Liability Modification (Cash-Settled to Cash-Settled Stock Appreciation Rights)
55-139 This Case is based on the facts given in Example 1 (see paragraph 718-30-55-1). Entity T grants stock appreciation rights to its employees. The fair value of the award on January 1, 20X5, is $12,066,454 (821,406 × $14.69).
55-140 On December 31, 20X5, the fair value of each stock appreciation right is assumed to be $5; therefore, the fair value of the award is $4,107,030 (821,406 × $5). The share-based compensation liability at December 31, 20X5, is $1,369,010 ($4,107,030 ÷ 3), which reflects the portion of the award related to the requisite service provided in 20X5 (1 year of the 3-year requisite service period). For convenience, this Case assumes that journal entries to account for the award are performed at year-end. The journal entries to recognize compensation cost for 20X5 are as follows.
55-141 On January 1, 20X6, Entity T reprices the stock appreciation rights, giving each holder the right to receive an amount in cash equal to the increase in value of 1 share of Entity T stock over $10. The modification affects no other terms or conditions of the stock appreciation rights and does not change the number of stock appreciation rights expected to vest. The fair value of each stock appreciation right based on its modified terms is $12. The incremental compensation cost is calculated per the method in Example 12 (see paragraph 718-20-55-93).
55-142 Entity T also could determine the incremental value of the modified stock appreciation right award by multiplying the fair value of the modified stock appreciation right award by the portion of the award that is earned and subtracting the cumulative recognized compensation cost [($9,856,872 ÷ 3) – $1,369,010 = $1,916,614]. As a result, Entity T would record the following journal entries at the date of the modification.
55-143 Entity T would continue to remeasure the liability award at each reporting date until the award’s settlement.
Footnotes
1
See ASC 718-20-55-122A through 55-122C for considerations
related to the application of Example 16 to nonemployee awards.