On 10 May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718) — Scope of Modification Accounting. The FASB issued this ASU to provide clarity, eliminate diversity in practice and reduce cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, to a change to the terms or conditions of a share-based payment award.

What’s new?

The amendments in this ASU affect any entity that changes the terms or conditions of a share-based payment award. This ASU will eliminate diversity in practice due to some entities applying modification accounting under Topic 718 for modifications to terms and conditions that they consider substantive, yet not when they conclude that particular modifications are not substantive. Additionally, some entities apply modification accounting for any change to an award, not considered administrative. Other entities apply modification accounting when a change to an award changes the fair value, the vesting, or the classification of the award.

The amendments in ASU 2017-09 include guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718.

This ASU requires entities to account for the effects of a modification unless all of the following conditions are met:

  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.

The current disclosure requirements in Topic 718 apply regardless of whether an entity is required to apply modification accounting under the amendments in this ASU.

Effective dates and transition requirements

The amendments in this ASU are effective for all entities for annual periods, and interim periods within those annual periods, beginning after 15 December 2017.

Early adoption is permitted, including adoption in any interim period, for (1) public business entities for reporting periods for which financial statements have not yet been issued and (2) all other entities for reporting periods for which financial statements have not yet been made available for issuance.

The amendments in this ASU should be applied prospectively to an award modified on or after the adoption date.

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