Share-Based Payment Awards: An Update on Modification Accounting

Guidance on accounting for share-based payment awards is clear…unless it isn’t. The Financial Accounting Standards Board (FASB) offered advisement on this very topic in its Accounting Standards Codification (ASC), Compensation—Stock Compensation (Topic 718). Unfortunately, the instruction was somewhat vague. As such, the FASB issued Accounting Standards Update (ASU) No. 2017-09, Scope of Modification Accounting, to provide clarity and reduce both diversity in practice, and the cost and complexity of applying the guidance in ASC 718, to a change in the terms or conditions of share-based payment awards. Specifically, when ASU No. 2017-09 takes effect December 15, 2017, it will determine which changes to these awards will require an entity to perform modification accounting.

According to the FASB Master Glossary, the term “modification” means a change in any of the terms or conditions of a share-based payment award. Examples of modifications can include changing the vesting terms of an award, repricing stock options, reclassifying the award, and extending the exercise term of an award. If a change to an award qualifies for modification accounting, the entity accounts for it effectively as a repurchase of the original award and an issuance of a new award. However, in order to address the relatively broad interpretation of modification and the diversity it causes in practice, stakeholders thought it necessary to specify certain guidelines regarding how to approach the accounting for these changes.

Prior to ASU No. 2017-09, some entities applied modification accounting to substantive changes, while other entities applied it to all changes except for those determined to be purely administrative in nature (a change of company name for example). As ASC 718 did not adequately address how to determine the nature of these changes, ASU No. 2017-09 clarifies this gray area by stating that a change is considered substantive if there is a modification to the fair value, vesting, or classification of an award.

ASU No. 2017-09 does not require an entity to apply modification accounting as long as all of the following are met:

  • The fair value (or intrinsic value) of the modified award is the same as the fair value (or intrinsic value) before the changes to the terms or conditions of the award were made.
  • The vesting conditions of the modified award are the same as the vesting conditions of the original award.
  • The classification of the modified award as an equity or liability instrument is the same as the classification of the original award.

As mentioned earlier, these amendments are effective for all entities for both annual and interim periods beginning after December 15, 2017. However, early adoption is permitted for all entities for which financial statements have not yet been issued. These amendments should be applied prospectively to an award modified on or after the date of adoption.

If you have questions about the application of modification accounting, or would like to request a speaker on this topic for your organization or event, contact one of our PYA executives below at (800) 270-9629.


Mike Shamblin

Mike Shamblin

Managing Principal of Audit & Assurance Services

Matt Neilson

Matt Neilson


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