This free, guided checker walks your finance team through the key decision points for ASC 718 Share-Based Award Modifications. Answer a few questions to see the likely treatment and the evidence to document.
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This tool is a high-level US GAAP screening aid for general information only and is not accounting, audit or legal advice. Conclusions require entity-specific evidence and judgement - confirm the treatment with your advisor.
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Modification accounting is triggered by a change to the terms or conditions of an award, including an exchange effected by cancelling one award and concurrently granting another. Distinguish a true cancellation from a forfeiture: forfeiture is the holder's failure to satisfy a vesting condition under the original terms, while cancellation is the entity's decision to extinguish the award.
A cancellation without a concurrent replacement is accounted for as a repurchase for no consideration; recognize any remaining unrecognized compensation cost immediately (ASC 718-20-35-9). No terms changed, so modification accounting does not apply; the original grant-date accounting runs to completion (ASC 718-20-35-2A).
Official guidance: FASB Accounting Standards Codification
ASU 2017-09 narrowed which changes require modification accounting: if fair value, vesting conditions, and classification are all the same immediately before and after the change, the entity simply continues the original accounting. The fair value comparison may be qualitative where the amendment plainly does not touch any valuation input, but the basis for that judgement should be documented at the time.
All three attributes are unchanged, so under the scope screen added by ASU 2017-09 the entity does not apply modification accounting (ASC 718-20-35-2A).
Official guidance: FASB Accounting Standards Codification
Classification drives the measurement model: equity awards are fixed at grant-date (or modification-date) fair value, while liability awards are remeasured at fair value each reporting period until settlement. A modification that changes classification therefore changes the measurement model itself, not just the amount, so evaluate it before the probable-versus-improbable vesting analysis.
Account for a modification from equity to liability classification: recognize a liability for the portion attributable to prior service at fair value and remeasure it each period until settlement (ASC 718-30-35-1 through 35-3). Remeasure the liability to fair value at the modification date and reclassify the award to equity; periodic remeasurement then ceases (ASC 718-20-35-3; ASC 718-30-35-1 through 35-3).
Official guidance: FASB Accounting Standards Codification
The probability assessment immediately before the modification controls whether the original grant-date fair value survives as a cost floor. Under ASC 718-20-35-3(b), total recognized cost must at least equal the grant-date fair value unless, at the modification date, the original performance or service vesting conditions were not expected to be satisfied. Market conditions are excluded from this probability assessment; their effect is embedded in fair value instead.
Use the interactive tool above to see how this applies to your situation.
Official guidance: FASB Accounting Standards Codification
Whatever the form of the change, the measurement mechanics are the same: compare the fair value of the modified award with the fair value of the original award immediately before modification, and recognize any excess as incremental compensation cost. A change to vesting conditions also requires re-mapping the recognition pattern to the new requisite service period, and probability of the modified conditions must be reassessed at each reporting date.
Probable-to-improbable: the grant-date measure is retained, but cost is recognized only if the original or the modified vesting conditions are ultimately satisfied, with any incremental fair value attaching only to the modified conditions (ASC 718-20-55-107 through 55-118).
Official guidance: FASB Accounting Standards Codification
Both awards are valued at the modification date: the modified award on its new terms and the original award on its old terms immediately before the change, using consistent valuation inputs. Because vesting of the original award was probable, total compensation cost cannot fall below the amount based on the original grant-date fair value - a modification can add cost but cannot reduce it (ASC 718-20-35-3(b)).
Recognize the incremental fair value as additional compensation cost, on top of the remaining unrecognized grant-date cost of the original award (ASC 718-20-35-3(a)). No incremental cost arises; continue recognizing the original grant-date fair value - a shortfall in the modified award's value is never recognized as a credit (ASC 718-20-35-3).
Official guidance: FASB Accounting Standards Codification
Because the original vesting conditions were not expected to be satisfied at the modification date, the grant-date fair value floor in ASC 718-20-35-3(b) does not apply. The modified award is measured fresh at its modification-date fair value, which is why these modifications can produce total compensation cost well below - or well above - the original grant-date amount.
Improbable-to-probable: the original grant-date fair value is disregarded and compensation cost is measured at the modified award's modification-date fair value, recognized over the remaining requisite service period (ASC 718-20-35-3(b); ASC 718-20-55-107 through 55-118). Improbable-to-improbable: measure the modified award at its modification-date fair value, but recognize cost only if the modified vesting conditions are ultimately satisfied (ASC 718-20-55-107 through 55-118).
Official guidance: FASB Accounting Standards Codification
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