The Financial Accounting Standards Board has released an accounting standards update containing guidance on which changes to the terms or conditions of a share-based payment award require companies to apply modification accounting.
The new standards update aims to give accountants more clarity on the guidance FASB provided in an earlier stock compensation accounting standard, known as Topic 718. FASB wants to reduce the differences in practice in applying the standard, along with the cost and complexity of applying it, to a change to the terms or conditions of a share-based payment award.
Companies can change the terms or conditions of a share-based payment award for a variety of different reasons, and the nature and effect of the change can vary significantly. FASB currently defines the term “modification” as “a change in any of the terms or conditions of a share-based payment award,” but some of its constituents have pointed out that the definition of the term modification is broad and its interpretation results in diversity in practice. Some companies evaluate whether a change to the terms or conditions of an award is substantive. When they decide the change is substantive, they apply modification accounting in Topic 718. But when they conclude a change isn’t substantive, they don’t apply modification accounting. Topic 718 doesn’t include guidance about what changes are considered “substantive.”
Other businesses apply modification accounting for any change to an award, except for a change they consider to purely administrative in nature. However, Topic 718 doesn’t include guidance on what changes are considered to be purely administrative. Still, other businesses apply modification accounting when a change to an award changes the fair value, the vesting or the classification of the award. In those cases, an evaluation of a change in fair value, vesting or classification may be used in practice to evaluate whether a change is considered to be substantive.
The standards update takes effect for all entities for annual periods, and interim periods within those annual periods, beginning after Dec. 15, 2017. FASB is allowing early adoption, including adoption in any interim period. FASB said the standards update should be applied prospectively to an award modified on or after the adoption date.
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