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If a company chooses to cancel an existing equity-classified award along with a concurrent grant of a replacement award, the transaction should be accounted for as a modification as described in ASC 718-20-35-8 (see SC 4.2). However, the transaction should only be accounted for as a modification if the two events occur concurrently. If an award is cancelled without the concurrent grant of a replacement award, the cancellation should be treated as a settlement for no consideration and all remaining unrecognized compensation cost should be accelerated. When assessing whether the cancellation and replacement of awards is a modification, a company should consider the transaction from the viewpoint of the employee (i.e., whether the employee would view the new award as a replacement of the cancelled award).
The replacement awards associated with these cancellations may take a number of forms. For example, a company may choose to cancel an existing equity classified stock option and replace the award with cash, vested stock or re-priced options. In cases where the replacement award is vested stock, the total compensation cost to be recognized by the company is equal to the original grant date fair value plus any incremental fair value calculated as the excess of the fair value of the stock over the fair value of the original award on the cancellation date.
In cases in which the company cancels an award and replaces it with an award that includes cash, there are additional complexities that the company must consider before concluding on the appropriate accounting for the cancellation and replacement. For example, the replacement of an unvested equity award for an unvested equity award and vested cash would likely result in the acceleration of some compensation expense as the cash payment is effectively a settlement for a portion of the unvested award.
The incremental compensation cost in the examples above should be recognized prospectively over the remaining service period in addition to the remaining unrecognized grant date fair value.
Example SC 4-8 illustrates the accounting for the cancellation of an equity award that is not probable of vesting.
EXAMPLE SC 4-9
Cancellation of an equity award that is not probable of vesting
SC Corporation grants equity-classified stock options on January 1, 20X1 to employees that vest based on achieving a performance target. As of December 31, 20X1, SC Corporation concludes that it is not probable the performance target will be achieved and therefore, does not record any compensation cost. In January 20X2, the board of directors decides to cancel the stock options without a concurrent grant of a replacement award. The stock options are not probable of vesting on the date of cancellation.
How should SC Corporation account for the cancellation?
Analysis
Because the award was cancelled without the concurrent grant of a replacement award, SC Corporation would recognize any remaining unrecognized compensation cost; however, in this example, the award effectively has no value because it is not probable of vesting. Therefore, we believe the cancellation of the award has no accounting implications. That is, SC Corporation is not required to recognize any compensation cost upon cancellation.
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