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ASC 718 defines a modification as a change in the terms or conditions of a stock-based compensation award. Examples of a modification include a repricing, an extension of the vesting period, changes in the settlement terms, and changes in the terms of a performance condition. In addition, a change in circumstances that results in a change in the classification of the award (e.g., equity to liability), even if there is not a legal modification, may result in a modification. For example, a company may cash settle awards, which it concludes causes the remaining awards to become in substance liabilities and, therefore, causes the awards to be modified from equity awards to liability awards.
ASC 718-20-35-2A clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Modification accounting is required only if (1) the fair value, (2) the vesting conditions, or (3) the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. Regardless of whether the change to the terms or conditions of the award requires modification accounting, the existing disclosure requirements and other aspects of GAAP associated with modifications continue to apply. For example, the earnings per share guidance requires treating a modification as if there was a cancellation and new issuance of an award in computing diluted EPS as described in FSP 7.5.5.5. Throughout this chapter it is assumed that changes to the award’s terms or conditions meet one of the above three conditions and, therefore, require modification accounting.
As discussed further in this chapter, a company modifying an award under ASC 718 will, generally, (1) calculate the incremental fair value of the modified award and (2) assess the effect of the modification on the number of awards expected to vest, including a reassessment of the probability of vesting (for awards with service and/or performance conditions).
Under ASC 718, the assumptions that a company uses to determine the original award's fair value immediately before the modification should reflect the current facts and circumstances on the modification date. For example, a company should update its volatility and expected term assumptions to reflect conditions as of the modification date.
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