October 6, 2016 — FASB Decides to Amend the Scope of Modification Accounting for Share-Based Payment Arrangements

Editor’s Note: This conclusion was confirmed on the basis of discussions with the FASB staff. However, this accounting treatment applies only in these narrow circumstances (i.e., solely to change the net settlement provisions from the minimum statutory tax rate to a higher rate up to the maximum statutory tax rate for statutory tax withholding purposes) and should not be analogized to other situations. After the aforementioned discussions, the FASB staff performed research on whether the Board should change the scope of the modification guidance in ASC 718, since a modification is defined broadly in ASC 718-20-20 as a “change in any of the terms or conditions of a share-based payment award” (emphasis added).

When an entity is applying modification accounting, if the original awards are expected to vest (on the basis of any service or performance conditions) on the modification date, a modification may result in incremental compensation cost. If the fair-value-based measurement of the awards does not change, the vesting requirements remain the same, and the classification of the awards is not changed, there is no accounting consequence to the modification for equity-classified awards. If, instead, the original equity-classified awards are not expected to vest on the modification date, an entity recognizes any compensation cost for the modified awards on the basis of the revised fair-value-based measurement on the modification date (as opposed to the original grant-date fair-value-based measurement) if the entity is applying modification accounting.

For example, consider a share-based payment award that is classified as equity and has a fair-value-based measure of $10 on the grant date. An entity modifies the award to add a contingent repurchase feature for which the repurchase price is based on the fair-value-based measure of the award on the repurchase date. In this example, assume the addition of the contingent repurchase feature does not change the fair-value-based measurement of the award, the vesting requirements, or the classification of the award, and the fair-value-based measure on the modification date is $15 (both immediately before and after the modification). If the award is expected to vest before the modification, there is no accounting consequence associated with the modification and any compensation cost will continue to be based on the grant-date fair-value-based measure of $10. However, if the award is not expected to vest before the modification, any compensation cost to be recognized (if the award is expected to vest later or actually vests) will be based on the modification-date fair-value-based measure of $15.

Under this project, the Board would consider whether this type of change to the terms of an award, as well as other similar types of changes, would be accounted for as a modification under ASC 718-20-35-3.

Editor’s Note: Under all the alternatives proposed by the FASB staff, entities would not apply modification accounting under certain circumstances if the change would not result in a change in total current fair value (or total calculated value or total intrinsic value, if such an alternative measurement is used), vesting requirements, or classification of the awards.

Under Alternatives B and C, a newly effective amendment to the Codification or newly effective regulation is not required. However, under Alternative B, entities would also not apply modification accounting if the change to the awards is made solely to preserve the value of the awards after an equity restructuring. Under this alternative, an entity that adds an antidilution provision associated with an equity restructuring would not be required to apply modification accounting even if the change is made in contemplation of an equity restructuring. Under current GAAP, such a change made in contemplation of an equity restructuring would require an entity to apply modification accounting, which could result in significant additional compensation cost.

Editor’s Note: There was not much discussion during the meeting on Alternative A as the Board agreed with the FASB staff that such alternative would result in operational challenges (i.e., it may be difficult to determine whether changes to awards are made as a result of newly effective amendments to the Codification or newly effective regulations). Accordingly, the debate by the Board focused on Alternatives B and C. Ultimately, the majority of the Board tentatively decided on Alternative C as they had concerns about not applying modification accounting to circumstances in which an antidilution provision is added to the terms of awards in contemplation of an equity restructuring.

Editor’s Note: The Board’s tentative decision to amend the scope of modification accounting would still require entities to disclose any significant changes to the terms or conditions of share-based payment awards that meet the definition of a modification under ASC 718-20-20. For example, if an entity changes the settlement terms of its share-based payment awards but such change does not result in a change in fair value, vesting condition, or classification, under the Board’s tentative decision, modification accounting would not be applied. However, that entity may still be required to disclose the change in settlement terms if it is a significant modification.