Often in bankruptcy proceedings the equity interests of a reporting entity are ultimately cancelled by the Court. Until the Court takes action with respect to share-based compensation awards, a reporting entity in bankruptcy should continue to account for its employee and nonemployee equity awards in accordance with ASC 718. In other words, while a reporting entity should not consider the Court’s anticipated actions to modify or cancel the awards, the reporting entity would continue to consider its underlying assumptions, such as probability of achieving a performance target or estimating forfeitures.
In situations where the Court modifies or cancels the awards, a reporting entity should account for such action on the date the modification or cancellation becomes effective in accordance with ASC 718-20-35.
ASC 718-20-35-8 notes that the cancellation of an award that is accompanied by the concurrent grant of (or offer to grant) a replacement award should be accounted for as a modification of the terms of the cancelled award.
Alternatively, as noted in ASC 718-20-35-9, when the cancellation of the equity awards is not accompanied by the concurrent grant of replacement awards approved by the Court, the awards should be accounted for as repurchases for no consideration, with any unrecognized compensation expense related to the cancelled awards recorded in the income statement. However, since the awards were not forfeited, the reporting entity should not reverse any previously recognized compensation expense related to the cancelled awards.
If a successor reporting entity (i.e., a new accounting entity applying fresh start accounting) grants awards to employees or nonemployees post-emergence, the awards are typically not viewed as replacement awards for the previous awards held by the employee or nonemployee, since a new accounting entity is issuing the awards. A successor reporting entity should treat any new awards as new grants post-emergence.
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