FASB Announces Changes to Accounting for Modification of Share-Based Payments

The Financial Standards Accounting Board (FASB) recently issued Accounting Standards Update (ASU) No. 2017-09, Compensation – Stock Compensation (Topic 718) – Scope of Modification Accounting.  This pronouncement applies to changes in the terms or conditions of share-based payments.

Although FASB defines a modification as "a change in any of the terms or conditions of a share-based payment award", some entities interpret this to mean that only substantial changes require modification accounting while other entities apply modification only if the fair value, vesting or classification of the award is changed.  ASU 2017-09 is intended to clarify which changes to the terms and conditions of an award require application of modification accounting.

The guidance now provides that an entity account for the effects of a modification unless all of the following conditions are met:

  • The fair value of the modified award is the same as the original award immediately before modification.  Similarly, the calculated value or intrinsic value is the same as the original award immediately before modification if such an alternative method is used.  However, if the modification does not affect any valuation inputs, comparison of before and after values is not required.
  • The vesting conditions before and after modification are the same.
  • The classification of the award as either an equity award or as a liability does not change after modification.

It now appears that mere administrative changes or changes that do not affect value or vesting are now allowed without the necessity for modification accounting.  The ASU is effective for all entities for periods beginning after December 15, 2017, with early adoption permitted.