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Share-Based Payments Receive Some Accounting Clarity

June 2, 2017

A recent accounting standards update addresses an age-old question related to share-based payments: When does a change in terms and conditions require modification accounting in ASC Topic 718, Stock Compensation?

Guidance for accounting for the effects of a modification to the terms and conditions left some room for interpretation. By the Financial Accounting Standards Board (FASB)'s definition, modification means a change in the terms and conditions of a share-based payment award. There has been diversity in practice as it relates to whether or not a change to the terms or conditions of a share-based award is in fact a "modification." Some entities evaluate whether a change in the terms and conditions is substantive. Others applied modification accounting for any change to an award, other than one that was purely administrative in nature.

To clarify the modification guidance in ASC Topic 718, the FASB released accounting standards update (ASU) 2017-09. The update clarifies which changes to terms and conditions would require an entity to account for the change under the modification guidance in ASC Topic 718.

Under this amendment, entities will now apply modification guidance unless the change meets all of the following criteria:

  1. The fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification.
  2. The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified.
  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 immediately before the original award is modified.

Disclosure guidance will not be affected by ASU 2017-09. Current disclosure requirements will apply regardless of whether an entity is required to apply modification accounting under the amendments in this Update.

Effective Date

All entities will adopt the accounting standards update for annual periods, and interim periods within those annual periods, beginning after Dec. 15, 2017. Early adoption is permitted for public business entities for reporting periods in which financial statements have not yet been issued and all other entities for which financial statements have not be made available for issuance.

Changes to how entities apply the modification guidance should be applied prospectively to an award modified on or after the adoption date.

For More Information

If you have specific comments, questions or concerns about the changes to share-based payments, please contact Christine McAlarney of MHM's Professional Standards Group. Christine can be reached at 727.572.1400 or cmcalarney@cbiz.com.

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