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A modification is viewed as the exchange of the original award for a new award. When measuring the compensation cost of a modification of an equity-classified award with a performance or service condition, a company should perform the following steps at the modification date:
  1. Calculate any incremental fair value based on the difference between the fair value of the modified award and the fair value of the original award immediately before it was modified. To accomplish this, a company would review the stock price and other pertinent factors (e.g., assumptions used in its option-pricing model) as of the modification date, and revise its assumptions to reflect circumstances on the modification date. As part of this step, the company should also determine whether the modification changes the estimate of the number of awards that are expected to vest. See SC 4.3.1.
  2. Immediately recognize the incremental value as compensation cost for vested awards. For awards with graded-vesting features, the incremental compensation cost related to tranches that are legally vested should be recognized immediately regardless of whether the company is applying the graded-vesting or straight-line attribution method to recognize compensation cost.
  3. Recognize, on a prospective basis over the remaining requisite service period, the sum of the incremental compensation cost and any remaining unrecognized compensation cost for the original award on the modification date.

Typically, total compensation cost that is recognized for a modified equity-classified award should, at a minimum, equal the grant-date fair value of the original award. If, on the modification date, management does not expect the original performance or service condition to be achieved, the compensation cost that the company recognizes might be lower than the award's grant-date fair value. If management expects that the original award would not vest and, after the modification, believes that the modified award also will not vest, the company should not recognize any compensation cost until it becomes probable that the modified award will vest. For further details, see SC 4.3.1.

4.2.1 Modifications of liability-classified awards

The general principle of exchanging the original award for a new award also applies to a modification of a liability-classified award. Unlike an equity-classified award, however, a liability-classified award is remeasured at fair value at the end of each reporting period. Therefore, a company simply recognizes the fair value of the modified award by using the modified terms at the modification date. There is no “floor” or requirement to recognize at least as much as the grant date fair value of a liability classified award; the total compensation expense will equal the fair value on the settlement date.

4.2.2 Measurement date for modifications of awards

Although there is limited guidance on determining the modification date, we believe it is generally appropriate to apply the concepts used for determining the grant date of an award. In other words, the modification date is typically the date that the modified award is approved and there is a mutual understanding of the modified terms and conditions. A company should account for the modification, and measure the incremental fair value of the modified award, on the modification date. Refer to SC 2.6.1 for further discussion of determining the grant date.
In some situations, a modification may result in two measurement dates: (1) the date the terms of the award are modified in anticipation of a future event and (2) the date the event occurs that triggers modification of the award. An example of a modification with two measurement dates is included in Example 13 of ASC 718-20-55-103 through ASC 718-20-55-106. In this example, an award that does not originally contain antidilution provisions is modified on July 26 to add antidilution provisions in contemplation of an equity restructuring. On September 30, the equity restructuring occurs. As a result, the company effectively modified the award on both July 26 and September 30. The company should compare the fair value of the award immediately before and after the modifications on both July 26 and September 30. See SC 4.5.3 for additional information.

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