The FASB Clarifies Award Modification Guidance

On May 10, 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2017-09 to clarify which changes to the terms or conditions of a share-based payment award are required to be accounted for as modifications.

Prior to this update, the FASB received feedback that the definition of the term modification was too broad, resulting in diversity in practice as to when entities applied modification accounting or not. This update provides greater detail on which changes to share-based payment awards are substantive enough to be accounted for as modifications within the scope of FASB Accounting Standards Codification® (ASC) Topic 718. The update doesn’t change the accounting for modifications or the related disclosure requirements.

Key Provisions

Under the revised guidance, an entity is required to apply modification accounting unless all of the following are the same immediately before and after a change to a share-based payment award:

  • Fair value of the award (or calculated value or intrinsic value when an alternative measurement method is applied)
  • Vesting conditions of the award
  • Classification of the award as an equity or liability instrument

This scope exception is generally expected to reduce the number of changes to awards that are required to be accounted for as modifications. ASU 2017-09 provides the following examples that generally won’t require modification accounting:

  • Changes that are administrative in nature—such as a change to the company name, company address, or plan name
  • Changes in an award’s net settlement provisions related to tax withholdings that don’t affect the classification of the award

The update doesn’t change existing disclosure requirements. This means current disclosure requirements prescribed by ASC paragraph 718-10-50-2 are required regardless of whether or not changes to terms or conditions of an award require the application of modification accounting under the new guidance.

Effective Dates and Transition 

ASU 2017-09 is effective for all entities for annual periods beginning after December 15, 2017, including interim periods within those periods. Early adoption is permitted as of the beginning of any annual or interim period.

The amendments must be applied prospectively for any changes to terms or conditions of awards occurring on or after the date of adoption.

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