Modification of stock options

Volume 24, Issue On May 10,the FASB issued ASU1 which amends the scope of modification accounting for share-based payment arrangements.

The ASU provides modification on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC Before an entity adopts ASUthe exception applies only when the entity repurchases or withholds no more than the number of shares necessary for the minimum statutory tax withholding requirement to be met.

Upon adopting ASUsome entities may change the net-settlement terms of their share-based payment arrangements from the minimum statutory tax rate to a higher rate up to the maximum statutory tax rate. Some constituents questioned whether they would be required to apply modification accounting under ASC if they changed existing awards in this manner.

On the basis of discussions with the FASB staff, we noted in our April 21,Heads Up that if entities made such a change, they would not be required to apply modification accounting. As a stock of that broad definition, there may be diversity in practice regarding the types of changes to share-based payment awards to which an entity applies options accounting. For example, some modification may apply it only to substantive changes while others may apply it broadly to all changes other than solely administrative ones.

Accordingly, to provide clarity and reduce diversity, cost, and complexity, the FASB issued ASU If the entity applies modification accounting to equity-classified awards, and the original awards are expected to vest because of any service or performance conditions on the modification date, the entity may incur incremental compensation cost.

The entity compares the fair-value-based measurement of the awards immediately before the modification with the fair-value-based measurement of the awards immediately after the modification. If the fair-value-based measurement after the modification is higher than it is before the modification, the entity generally recognizes incremental compensation cost over any remaining requisite service period. If, instead, the original awards are not expected to vest on the modification date, the entity generally recognizes any compensation cost for the modified awards on the basis modification the revised fair-value-based measurement on the modification date as opposed to the original grant-date fair-value-based measurement.

Before the awards vest, A subsequently modifies them to provide dividend participation during the vesting period. In addition, there are no other changes to the awards stock their vesting conditions or classification. Before the awards vest, B subsequently modifies them to add a contingent fair-value repurchase feature on the underlying shares. In addition, there are no other changes to the awards including their vesting conditions. The ASU limits the circumstances in which an entity applies modification accounting.

When an award is modified, an entity does not apply the guidance in ASC through if it meets all of the following criteria:. The ASU also removes the guidance in ASC stating that modification accounting is not required when an entity adds an antidilution provision as long as that modification is not made in contemplation of an equity restructuring. If an entity adds such a provision but does not contemplate an equity restructuring, the fair-value-based measurement of the awards would generally remain the same.

Accordingly, as long there are no other changes to the awards that would affect vesting or classification, the entity does not apply modification accounting. If the entity contemplates an equity restructuring, however, it applies modification accounting and may need to recognize significant incremental compensation cost. In certain circumstances, the fair-value-based measurement of modified stock options could change as a result of the equity restructuring even if the intrinsic value remains the same.

Entity C grants employees stock options that are classified as equity and recognizes compensation cost on the basis of the fair-value-based measurement of the awards on the grant date. Upon a spin-off of one of its subsidiaries, C subsequently modifies the awards. The modification does not change any vesting conditions or the classification of the awards as equity.

In addition, the fair-value-based measurement of the stock options granted to each employee is different before and after the modification even though the intrinsic value is the same. Under the ASU, C would apply modification accounting to the stock options because the fair-value-based measurement is not the same immediately before and after the modification. If the stock options are expected to vest at the time of the modification, C would determine whether any incremental compensation cost should be recognized by comparing the fair-value-based measurement of the stock options immediately stock and after the modification.

If the stock options are not expected to vest at the time of the modification, any compensation cost recognized provided that the awards are subsequently expected to vest or actually do vest will be based on the modification-date fair-value-based measurement, which could be significantly different from the grant-date fair-value-based measurement.

If an entity modifies its awards and concludes that it is not required to apply modification accounting under the ASU, it must still consider whether the modification affects its application of other guidance.

For example, under ASC throughif an entity modifies an award after the holder is no longer an employee, the modification may be subject to other U. GAAP unless the modification is made solely to reflect an equity options that meets certain criteria.

The ASU clarifies how an entity would calculate fair value under ASC A a in determining whether modification accounting is required.

In paragraph BC16 of the ASU, the Board noted that it does not expect that an entity will always need to estimate the fair-value-based measurement of a modified award. An entity might instead be able to determine whether the modification affects any of the inputs used in the valuation technique performed for the award. For example, if an entity changes the net-settlement terms of its share-based payment arrangements related to statutory tax withholding requirements, that change is not likely to affect any inputs used in the method performed by the entity to value the awards.

If none of the inputs are affected, the entity would not be required to estimate the fair-value-based measurement immediately before and after the modification i. In paragraph BC13 of the ASU, the Board clarified that the evaluation should be based on whether the fair value has changed, not on whether the compensation cost recognized has changed. If an entity makes a modification that changes the fair value of an award, modification accounting would be applied.

However, modification accounting would be required and a new measurement determined as modification the modification date because modification fair value has changed. That is, an entity should use as the unit of account the total of all modified instruments in the award rather than each individual modified instrument awarded to the employee. The collective noun for multiple instruments with the same terms and conditions granted at the same time either to a single employee or to a group of employees.

An award may specify multiple vesting dates, referred to as graded vesting, and different parts options an award may have different expected terms. References to an award also apply to a portion of an award. Paragraph BC19 of stock ASU provides an example in which an entity grants an employee 10, stock options.

If the entity were to compare the fair-value-based measurement of a single stock option in the original award immediately before the modification with the fair-value-based measurement of a single stock option in the modified award immediately after the modification, the fair-value-based measure per stock option immediately before the modification would be less than the fair-value-based measure per stock option immediately after the modification.

If a single stock option were the unit of account, the entity would be required under the ASU to apply modification accounting. Although the award is this example contains multiple instruments, the unit of account on which the entity performs the fair value assessment is the total of all modified instruments awarded to the employee. Accordingly, the entity compares the fair-value-based measurement of the original 10, stock options with the fair-value-based measurement of the modified 5, stock options.

Entity D grants an employee 1, equity-classified stock options. All 1, options are granted at the same time and contain the same terms and conditions.

After the grant date, the options become significantly out of the money, so D decides to reprice of the stock options by reducing the exercise price for those options.

However, D retains the original exercise price for the other options. Because the fair-value-based measurement of the modified options has increased, D applies modification accounting. However, because the other stock options were not modified, that award is not subject to modification accounting and continues to be recognized on the basis of its grant-date fair-value-based measure. In determining whether the fair value of an award is the same immediately before and after a modification, some practitioners have expressed uncertainty about whether the fair value must be exactly the same i.

The Board decided not to provide guidance on the use of judgment in this assessment, observing that entities must use judgment to apply other aspects of ASC and do so without specific guidance.

Accordingly, an entity may need to use judgment in certain circumstances to determine whether the fair value of an award is the same immediately before and after a modification.

While in many circumstances it may be clear whether the fair value of an award is the same immediately before and after a modification, an entity may need to use judgment when such value is not exactly the same. For example, an entity may reasonably conclude that the fair value is the same when a difference is de minimus and the facts options circumstances indicate that the intent of the modification is to retain the original fair value.

Entity E grants an employee 1, equity-classified stock options. After the grant date, the options become significantly out of the money. With the intent of retaining the fair value of the original award, E decides to replace the 1, stock options with restricted stock units. Accordingly, E concludes that the fair value of the award is the modification immediately before and after the modification. The following table summarizes those examples:.

Share-based payment plans commonly contain clawback provisions that allow an entity to recoup awards upon certain contingent events e. Options ASCsuch clawback provisions are generally not reflected in estimates of the fair-value-based measure of awards. Accordingly, we believe that the addition of a clawback provision to an award would typically not result in the application of modification accounting because such clawbacks generally do not change the fair value, vesting conditions, or classification of an award.

Entity F grantsequity-classified stock options to its CEO. Entity F concludes that the modification does not change the fair value, the vesting conditions, or the classification of the award. As a result, F concludes that it is not required to apply modification accounting.

ASC currently requires entities to disclose information about significant modifications, including the terms of the modifications, the number of employees affected, and the total incremental compensation cost resulting from the modifications.

Under the ASU, entities must continue to disclose any significant changes to the terms or conditions of share-based payment awards that meet the definition of a modification under ASCeven if modification accounting is not applied. The Board believes that disclosures about modifications provide useful information to users of financial statements, particularly if such changes substantively alter the economic characteristics of the awards.

For all entities, the ASU is effective for annual reporting periods, including interim periods within those annual reporting periods, beginning after December 15, Transition disclosures are not required, because modifications typically options not options events for most entities. GAAP while maintaining or enhancing the usefulness of the related financial statement information.

See Legal for additional copyright and other legal information. DTTL and each of its member firms are legally separate and independent entities. Certain services may not be available to attest clients under the rules and regulations of public accounting. These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points.

Each word should be on a separate line. The full functionality of our site is not supported on your browser version, or you may have 'compatibility mode' selected. Please turn off compatibility mode, upgrade your browser to at least Internet Explorer 9, or try using another browser such as Google Chrome or Mozilla Firefox.

Login or Register Deloitte User? Login Login Name Password Login Register Forgot password. Welcome My account Logout. Accounting and financial reporting updates Heads Up Hot Topics Industry Spotlight Other industry publications Roadmap series SEC comment letter series TRG Snapshot U.

Key Provisions of the ASU Scope of Modification Accounting The ASU limits the circumstances in which an entity applies modification accounting. When an award is modified, an entity does not apply the guidance in ASC through if it meets all of the following criteria: Example 3 Entity C grants employees stock options that are classified as equity and recognizes compensation cost on the basis of the fair-value-based measurement of the awards on the grant date.

Clarifications Related to the Fair Value Assessment The ASU clarifies how an entity would calculate fair value under ASC A a in determining whether modification accounting is required. Considering Whether Compensation Cost Recognized Has Changed In paragraph BC13 of stock ASU, the Board clarified that the evaluation should be based on whether the fair value has changed, not on whether the compensation cost recognized has changed.

Example 4 Paragraph BC19 of the ASU provides an example in which an entity grants an employee 10, stock options. Example 5 Entity D grants an employee 1, equity-classified stock options. Example 6 Entity E grants an employee 1, equity-classified stock options.

The following table summarizes those examples: Example 7 Entity F grantsequity-classified stock options to its CEO. Disclosure ASC currently requires entities to disclose information about significant modifications, including the terms of the modifications, the number of employees affected, and the total incremental compensation cost resulting from the modifications.

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, Early adoption is permitted, including adoption in any interim period.

Quick links Compensation — Stock compensation: Related Publications TRG Snapshot — June TRG meeting on credit losses Jun 23, Journal entry — FASB stock to finalize ASU on hedging Jun 12, Deloitte comments on proposed improvements to nonemployee share-based payment accounting Jun 05, Related Dates FASB proposal on consolidation guidance for VIEs Sep 06, stock About Contact us Legal Privacy.

Correction list for hyphenation These words serve as exceptions. English Universal English British English American Deutsch. Administrative changes, such as a change to the company name, company address, or plan name Changes in net-settlement provisions related to tax withholdings that do not affect the classification of the award. Repricings of stock options that result in a change in value Changes in a service condition Changes in a performance condition or a market condition Changes in an award that result in a reclassification of the award equity to liability or vice versa Addition of an involuntary termination provision in anticipation of a sale of a business unit that accelerates vesting of an award.

NEW ZASTAVA AK47 NPAP AND STOCK MODIFICATION