Accounting Standards Update 2017-09 Modifications of Shared-Based Compensation

05 Jul 2017


Stock compensation is a way companies can use equity to reward employees without sacrificing cash-on-hand. A stock option is a contract that gives the holder the right, but not the obligation, either to purchase (to call) or to sell (to put) a certain number of shares at a predetermined price for a specified period of time. Most employee stock options are call options, which permit employees the right to purchase shares of the company. Companies must record a portion of compensation expense as options vest (when the employee becomes eligible to call the option), with the offset being to additional paid-in capital. This is a non-cash expense arising from the expected cost of the company if options were exercised by an employee in a given period. Options can also be modified after they are granted.

ASU Summary:

On May 10, 2017, the FASB issued ASU 2017-09, Scope of Modification Accounting, which amends the scope of modification accounting for share-based compensation arrangements. Under the new guidance, modification accounting is required only if the fair value, vesting conditions, or classification of the award (as equity or liability) changes as a result of the change in terms. This ASU is expected to result in fewer instances of an award being treated as a modification.

Modifications of share-based compensation are typically accounted for by recording additional compensation expense for the differences arising from the change. If it is not apparent that an award will vest at the time a change is made (i.e. performance conditions are not going to be met), the ASU clarifies that a new measurement date will not be required if there is no change to the fair value, vesting conditions, and classification.

For example, an entity should not account awards as a modification if all of the following are met:

  1. The new value of the modified award is the same as the fair value of the original. Additionally, the modification of the award cannot affect the method that the entity uses to value the award.
  2. The vesting conditions of the modified award are the same as the vesting conditions of the original award.
  3. The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award.

If one or more of the above conditions have not been met, then the instance is treated as a modification. The effects of the modification will be measured as follows:

  1. Additional compensation cost shall be measured as the excess of the fair value of the modified award over the fair value of the original award. Measurement will be based on the share price and other relevant factors at the time of the modification, such as the vesting period.
  2. Total recognized compensation cost for an award shall at least equal the fair value of the award at the grant date, unless performance/service conditions of the original award are not expected to be satisfied at the modification date. The total compensation cost measured at the date of a modification shall be the sum of the following:

    a) The portion of the grant-date fair value of the original award for which the requisite service is expected to be rendered (or has already been rendered) at that date.

    b) The difference in cost resulting from the modification. Compensation cost shall be subsequently adjusted, if necessary.

  3. A change in compensation cost for an award measured at intrinsic value shall be measured by comparing the calculated value of the modified award with the calculated value of the original award immediately before the modification is made.

All of the above instances must hold true at the time immediately before the original award was modified.

Effective Date:

For all entities, the ASU is effective for annual reporting periods, including interim periods within those annual reporting periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period. The amendments in this update should be applied prospectively to an award modified on or after the adoption date.