4. Add paragraph 718-20-35-2A and amend paragraphs 718-20-35-3, 718-20-35-5 through 35-6, and 718-20-35-8, with a link to transition paragraph 718-20-65-1, as follows:
Compensation—Stock Compensation—Awards Classified as Equity
Subsequent Measurement
> Modification of an Award
718-20-35-2A An entity shall account for the effects of a modification as described in paragraphs 718-20-35-3 through 35-9, unless all the following are met:
a. 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.
b. 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.
c. 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 disclosure requirements in paragraphs 718-10-50-1 through 50-2A and 718-10-50-4 apply regardless of whether an entity is required to apply modification accounting.
718-20-35-3 Except as described in paragraph 718-20-35-2A, aA
{remove glossary link}modification{remove glossary link} of the terms or conditions of an equity award shall be treated as an exchange of the original award for a new award. In substance, the entity repurchases the original instrument by issuing a new instrument of equal or greater value, incurring additional compensation cost for any incremental value. The effects of a modification shall be measured as follows:
a. Incremental compensation cost shall be measured as the excess, if any, of the fair value of the modified award determined in accordance with the provisions of this Topic over the fair value of the original award immediately before its terms are modified, measured based on the share price and other pertinent factors at that date. As indicated in paragraph 718-10-30-20, references to fair value throughout this Topic shall be read also to encompass {remove glossary link}calculated value{remove glossary link}. The effect of the modification on the number of instruments expected to vest also shall be reflected in determining incremental compensation cost. The estimate at the modification date of the portion of the award expected to vest shall be subsequently adjusted, if necessary, in accordance with paragraph 718-10-35-3 and other guidance in Examples 14 through 15 (see paragraphs 718-20-55-107 through 55-121).
b. Total recognized compensation cost for an equity award shall at least equal the fair value of the award at the grant date unless at the date of the modification the performance or service conditions of the original award are not expected to be satisfied. Thus, the total compensation cost measured at the date of a modification shall be the sum of the following:
1. The portion of the grant-date fair value of the original award for which the requisite service is expected to be rendered (or has already been rendered) at that date
2. The incremental cost resulting from the modification.
Compensation cost shall be subsequently adjusted, if necessary, in accordance with paragraph 718-10-35-3 and other guidance in Examples 14 through 15 (see paragraphs 718-20-55-107 through 55-121).
c. A change in compensation cost for an equity award measured at intrinsic value in accordance with paragraph 718-20-35-1 shall be measured by comparing the intrinsic value of the modified award, if any, with the intrinsic value of the original award, if any, immediately before the modification.
718-20-35-3A An entity that has an accounting policy to account for forfeitures when they occur in accordance with paragraph 718-10-35-3 shall assess at the date of the modification whether the performance or service conditions of the original award are expected to be satisfied when measuring the effects of the modification in accordance with paragraph 718-20-35-3. However, the entity shall apply its accounting policy to account for forfeitures when they occur when subsequently accounting for the modified award.
718-20-35-4 Examples 12 through 16 (see paragraphs 718-20-55-93 through 55-144) provide additional guidance on, and illustrate the accounting for, modifications of both vested and nonvested awards, including a modification that changes the classification of the related financial instruments from equity to liability or vice versa, and modifications of vesting conditions. Paragraphs 718-10-35-9 through 35-14 provide additional guidance on accounting for modifications of certain freestanding financial instruments that initially were subject to this Topic but subsequently became subject to other applicable generally accepted accounting principles (GAAP).
> > Short-Term Inducements
718-20-35-5 Except as described in paragraph 718-20-35-2A, aA
short-term inducement shall be accounted for as a modification of the terms of only the awards of employees who accept the
inducement. Other
inducement, and other inducements
are
shall be accounted for as modifications of the terms of all awards subject to them
and shall be accounted for as such.
> > Equity Restructuring or Business Combination
718-20-35-6 Exchanges of share options or other equity instruments or changes to their terms in conjunction with an
equity restructuring or a business combination are modifications for purposes of this Subtopic.
An entity shall apply the guidance in paragraph 718-20-35-2A to those exchanges or changes to determine whether it shall account for the effects of those modifications.Except for a modification to add an antidilution provision that is not made in contemplation of an equity restructuring, accounting for a modification in conjunction with an equity restructuring requires a comparison of the fair value of the modified award with the fair value of the original award immediately before the modification in accordance with paragraph 718-20-35-3. If those amounts are the same, for instance, because the modification is designed to equalize the fair value of an award before and after an equity restructuring, no incremental compensation cost is recognized.
Example 13 (see paragraph 718-20-55-103) provides further guidance on applying the provisions of this paragraph. See paragraph 718-10-35-10 for an
additional
exception.
> > Repurchase or Cancellation
718-20-35-7 The amount of cash or other assets transferred (or liabilities incurred) to repurchase an equity award shall be charged to equity, to the extent that the amount paid does not exceed the fair value of the equity instruments repurchased at the repurchase date. Any excess of the repurchase price over the fair value of the instruments repurchased shall be recognized as additional compensation cost. An entity that repurchases an award for which the requisite service has not been rendered has, in effect, modified the requisite service period to the period for which service already has been rendered, and thus the amount of compensation cost measured at the grant date but not yet recognized shall be recognized at the repurchase date.
> > Cancellation and Replacement
718-20-35-8 Except as described in paragraph 718-20-35-2A, cancellationCancellation
of an award accompanied by the concurrent grant of (or offer to grant) a
replacement award or other valuable consideration shall be accounted for as a modification of the terms of the cancelled award. (The phrase
offer to grant is intended to cover situations in which the
service inception date precedes the grant date.) Therefore, incremental compensation cost shall be measured as the excess of the fair value of the replacement award or other valuable consideration over the fair value of the cancelled award at the cancellation date in accordance with paragraph 718-20-35-3. Thus, the total compensation cost measured at the date of a cancellation and replacement shall be the portion of the grant-date fair value of the original award for which the requisite service is expected to be rendered (or has already been rendered) at that date plus the incremental cost resulting from the cancellation and replacement.
718-20-35-9 A cancellation of an award that is not accompanied by the concurrent grant of (or offer to grant) a replacement award or other valuable consideration shall be accounted for as a repurchase for no consideration. Accordingly, any previously unrecognized compensation cost shall be recognized at the cancellation date.
5. Amend paragraphs 718-20-55-2 through 55-3, 718-20-55-104 through 55-105, 718-20-55-122 and its related heading, 718-20-55-134, and 718-20-55-144, with a link to transition paragraph 718-20-65-1, as follows:
Implementation Guidance and Illustrations
> Implementation Guidance
> > Equity Restructuring
718-20-55-2 In accordance with paragraph 718-20-35-6,
an entity shall apply the guidance in paragraph 718-20-35-2A to exchanges of share options or other equity instruments or changes to their terms in conjunction with an equity restructuring to determine whether it shall account for the effects of those modifications as described in paragraphs 718-20-35-3 through 35-9.accounting for a modification in conjunction with an equity restructuring requires a comparison of the fair value of the modified award with the fair value of the original award immediately before the modification, except as follows. If an award is modified to add an antidilution provision (that is, a provision designed to equalize an award’s value before and after an equity restructuring) and that modification is not made in contemplation of an equity restructuring, a comparison of the fair value of the modified award and the fair value of the original award immediately before the modification is not required.
Example 13 (see paragraph 718-20-55-103) provides additional guidance on accounting for modifications of
{add glossary link}awards
{add glossary link} in the context of equity restructurings.
> Illustrations
718-20-55-3 The following Examples are included in this Subtopic because they assume equity classification. However, these Examples would also apply to awards classified as liabilities except that the amounts in the Examples would likely change due to the requirement under Subtopic 718-30 to remeasure share-based liability awards at {add glossary link}fair value{add glossary link} each reporting period until settlement.
> >Example 13: Modifications Due to an Equity Restructuring
> > > Case A: Original Award Contains Antidilution Provisions
718-20-55-104 In this Case, assume an award contains antidilution provisions. On May 1 there is an announcement of a future equity restructuring. On October 12 the equity restructuring occurs and the terms of the award are modified in accordance with the antidilution provisions. In this Case, the modification occurs on October 12 when the terms of the award are changed. The fair value of the award is compared pre- and postmodification on October 12. The calculation of fair value is necessary to determine
whetherif
there is any incremental value transferred as a result of the modification, and if so, that incremental value would be recognized as additional compensation cost. If there is no
change inincremental
fair value,
vesting conditions, or the classification of the award, the entity would not account for the effect of the modification (see paragraph 718-20-35-2A)no additional compensation cost would be recognized
> > > Case B: Original Award Does Not Contain Antidilution Provisions
718-20-55-105 In this Case, the original award does not contain antidilution provisions. On May 1 there is an announcement of a future equity restructuring. On July 26 the terms of an award are modified to add antidilution provisions in contemplation of an equity restructuring. On September 30 the equity restructuring occurs. In this Case, there are two modifications to account for. The first modification occurs on July 26, when the terms of the award are changed to add antidilution provisions.
Because the modification to add antidilution provisions on July 26 is done in contemplation of an equity restructuring, there
There must be a comparison of the fair value of the award pre- and postmodification on July 26
in accordance with paragraph 718-20-35-2A to determine whether the entity should account for the effects of the modifications as described in paragraphs 718-20-35-3 through 35-9. The premodification fair value
on July 26 is based on the award without antidilution provisions taking into account the effect of the contemplated restructuring on its value. The postmodification fair value is based on an award with antidilution provisions, taking into account the effect of the contemplated restructuring on its value. Any incremental value transferred would be recognized as additional compensation cost. Once the equity restructuring occurs, there is a second modification event on September 30 when the terms of the award are changed in accordance with the antidilution provisions. A second comparison of pre- and postmodification fair values is then required to determine whether
the fair value of the award has changedany incremental value is transferred
as a result of the modification.
If there is no change in fair value, vesting conditions, or the classification of the award, the entity would not account for the effect of the modification on September 30 (see paragraph 718-20-35-2A). Changes to the terms of an award in accordance with its antidilution provisions
typicallygenerally
would not result in additional compensation cost if the antidilution provisions were properly structured.
If there is a change in fair value, vesting conditions, or the classification of the award, theThe
incremental value transferred, if any, would be recognized as additional compensation cost.
> > Example 16: Modifications Regarding That Change
an Award’s Classification
718-20-55-122 A modification may affect the classification of an award (for example, change the award from an equity instrument to a liability instrument). If an entity modifies an award in that manner, the Compensation—Stock Compensation Topic requires that the entity account for that modification in accordance with paragraph 718-20-35-3. The following Cases illustrate modifications
regarding an award’sthat change the
classification
of the award
:
a. Equity to liability modification (share-settled share options to cash-settled share options) (Case A)
b. Equity to equity modification (share options to shares) (Case B)
c. Liability to equity modification (cash-settled to share-settled stock appreciation rights) (Case C)
d. Liability to liability modification (cash-settled to cash-settled stock appreciation rights) (Case D)
e. Equity to liability modification (share options to fixed cash payment) (Case E).
> > > Case B: Equity to Equity Modification (Share Options to Shares)
718-20-55-134 Equity to equity modifications also are addressed in Examples 12 (see paragraph 718-20-55-93) and 14 (see paragraph 718-20-55-107). This Case is based on Example 1, Case A (see paragraph 718-20-55-10), in which Entity T granted its employees 900,000 options with an exercise price of $30 on January 1, 20X5. At January 1, 20X9, after 747,526 share options have vested, the market price of Entity T stock has declined to $8 per share, and Entity T offers to exchange 4 options with an assumed per-share-option fair value of $2 at the date of exchange for 1 share of nonvested stock, with a market price of $8 per share. The nonvested stock will cliff vest after two years of service. All option holders elect to participate, and at the date of exchange, Entity T grants 186,881 (747,526 ÷ 4) nonvested shares of stock.
Entity T considers the guidance in paragraph 718-20-35-2A. Because the change in the terms or conditions of the award changes the vesting conditions of the award, Entity T applies modification accounting. However, becauseBecause
the fair value of the nonvested stock is equal to the fair value of the options, there is no incremental compensation cost. Entity T will not make any additional accounting entries for the shares regardless of whether they vest, other than possibly reclassifying amounts in equity; however, Entity T will need to account for the ultimate income tax effects related to the share-based compensation arrangement.
> > > Case E: Equity to Liability Modification (Share Options to Fixed Cash Payment)
718-20-55-144 Entity T grants the same share options described in Example 1, Case A (see paragraph 718-20-55-10) and records similar journal entries for 20X5 (see paragraphs 718-20-55-12 through 55-16). By January 1, 20X6, Entity T’s share price has fallen, and the fair value per share option is assumed to be $2 at that date. Entity T provides its employees with an election to convert each share option into an award of a fixed amount of cash equal to the fair value of each share option on the election date ($2) accrued over the remaining requisite service period, payable upon vesting. The election does not affect vesting; that is, employees must satisfy the original service condition to vest in the award for a fixed amount of cash. Entity T considers the guidance in paragraph 718-20-35-2A. Because the change in the terms or conditions of the award changes the classification of the award from equity to liability, Entity T applies modification accounting. This transaction is considered a modification instead of a settlement because Entity T continues to have an obligation to its employees that is conditional upon the receipt of future employee services. There is no incremental compensation cost because the fair value of the modified award is the same as that of the original award. At the date of the modification, a liability of $547,604 [(821,406 × $2) × (1 year of requisite service rendered ÷ 3-year requisite service period)], which is equal to the portion of the award attributed to past service multiplied by the modified award’s fair value, is recognized by reclassifying that amount from additional paid-in capital. The total liability of $1,642,812 (821,406 × $2) should be fully accrued by the end of the requisite service period. Because the possible tax deduction of the modified award is capped at $1,642,812, Entity T also must adjust its deferred tax asset at the date of the modification to the amount that corresponds to the recognized liability of $547,604. That amount is $191,661 ($547,604 × .35), and the write-off of the deferred tax asset is $1,216,092 ($1,407,753 – $191,661). That write-off would be recognized as income tax expense in the income statement. Compensation cost of $4,022,151 would be recognized in each of 20X6 and 20X7 for a cumulative total of $12,066,454 (as calculated in Case A); of this, $547,604 would be recognized as an increase to the liability balance, with the remaining $3,474,547 recognized as an increase in additional paid-in capital. A deferred tax benefit would be recognized in the income statement, and a corresponding increase to the deferred tax asset would be recognized for the tax effect of the increased liability of $191,661 ($547,604 × .35). The compensation cost recognized in additional paid-in capital in this situation has no associated income tax effect (additional deferred tax assets are recognized based only on subsequent increases in the amount of the liability).
6. Add paragraph 718-20-65-1 and its related headings as follows:
Transition and Open Effective Date Information
General
> Transition Related to Accounting Standards Update No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting
718-20-65-1 The following represents the transition and effective date information related to Accounting Standards Update No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting:
a. The pending content that links to this paragraph shall be effective for all entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2017.
b. 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.
2. All other entities for reporting periods for which financial statements have not yet been made available for issuance.
c. An entity shall apply the pending content that links to this paragraph prospectively to a modification that occurs on or after the effective date.