The Financial Accounting Standards Board has released a proposed accounting standards update related to the scope of modification accounting for stock-based compensation.
FASB is issuing the proposed update to provide more clarity and discourage differences in practice when applying the guidance in the standards for stock compensation about a change to the terms or conditions of a share-based payment award.
A business can change the terms or conditions of a share-based payment award for a variety of reasons, FASB pointed out, and the nature and effect of the change can also vary significantly.
FASB’s Accounting Standards Codification defines the term “modification” in its glossary as “a change in any of the terms or conditions of a share-based payment award.” However, some of FASB’s stakeholders have pointed out that the definition of the term is too broad and leads to some diversity in practice.
Some companies evaluate whether a change to the terms or conditions of a share-based payment award is substantive, and if it is, they apply modification accounting. But when they decide it’s not substantive, they don’t apply modification accounting. Topic 718, the section of the codification pertaining to the standards for stock compensation, lacks guidance about which changes are considered to be substantive.
Other entities apply modification accounting for any change to an award except for changes they deem to be purely administrative in nature. However, Topic 718 lacks guidance about what changes are purely administrative.
Other companies 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 can be used to evaluate whether a change is substantive.
The amendments in the proposed standards update would provide guidance about which changes to the terms or conditions of a share-based payment award would require an entity to apply modification accounting. A company would account for the effects of a modification unless all the following are the same immediately before and after the modification:
1. The fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the award;
2. The vesting conditions of the award;
3. The classification of the award as an equity instrument or a liability instrument. The current disclosure requirements in Topic 718 would apply regardless of whether an entity is required to apply modification accounting under the amendments in the proposed update.
FASB is asking for comments on the proposed standards update by Jan. 6, 2017.
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