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Under ASC 718-10-35-10, an award originally granted as employee compensation will remain subject to the provisions of ASC 718 throughout the life of the award, unless the award's terms are modified when the holder is no longer an employee. At that time, an award may become subject to other applicable GAAP. Such a modification is accounted for under ASC 718; however, following the modification, the award would cease to be accounted for under ASC 718 and would become subject to the recognition and measurement requirements of other applicable GAAP (e.g., ASC 480 or ASC 815). ASC 718 and other GAAP provide differing guidance for determining whether a freestanding financial instrument should be classified as a liability or as equity and in some cases, differing fair value measurement guidance (e.g., use of contractual term as opposed to expected term). Therefore, the accounting for the instrument may change once it becomes subject to other GAAP.
Pursuant to ASC 718-10-35-10A, changes to the terms of an award to reflect an equity restructuring (see SC 4.5) would not cause the award to become subject to other applicable GAAP if the following conditions are met:
  • There is no increase in the fair value of the award or the ratio of intrinsic value to the exercise price remains the same (the holders are made "whole"); and
  • The equity restructuring affects all of the holders of the same class of awards in the same manner.

We believe that a modification to accelerate vesting or extend the contractual term of an award on a discretionary basis concurrent with an employee's termination would generally be a modification made in consideration of past employment and therefore, the award would generally continue to be accounted for under ASC 718. Modifications that take place when the holder is no longer an employee (other than as described in ASC 718-10-35-10A) may result in the award becoming subject to other applicable GAAP. For example, the repricing of the exercise price or extension of the contractual term of a vested award held by a former employee would result in the award becoming subject to other GAAP. As noted in SC 4.3.3, judgment may be required to determine whether a modification is concurrent with an employee’s termination.
Similar guidance applies to awards granted to nonemployees and customers. That is, nonemployee awards are subject to the guidance in ASC 718 throughout the life of the award unless the terms are modified after the nonemployee earns the award and is no longer providing goods or services to the company or the grantee earns the award and is no longer a customer of the company.
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