FASB Proposes Accounting Standards Update on the Scope of Modification Accounting Under Topic 718

The Financial Accounting Standards Board (FASB) on November 17, 2016 released a proposed Accounting Standards Update (ASU) that narrows the scope of modification accounting under FASB Accounting Standards Codification (ASC) Topic 718 (Topic 718). Topic 718 currently defines a modification as “a change to any of the terms or conditions of a share-based payment award.” Modification accounting requires companies to recognize additional compensation cost for any incremental fair value resulting from the modification unless the award is considered not probable of vesting at the time of the modification, in which case companies are required to recognize a new measurement date. The rationale for this treatment is that the company in substance is repurchasing the original award by issuing a new award of equal or greater value, incurring additional compensation cost for the incremental value.

The proposed ASU would amend the definition of modification by deleting “any of” in the definition above and qualifying that modification accounting does not apply to changes to outstanding share-based payment awards that do not affect the total fair value, vesting requirements, or equity/liability classification of the awards. Nonpublic companies are permitted to substitute calculated value or intrinsic value for fair value in the preceding sentence if such an alternative measurement method is used.