A modification is a change in any term of an award that is not included in your original equity compensation plan such as a change in number of shares, exercise price, transferability features, settlement provisions, or vesting conditions. Modifications to awards can result in additional compensation expense for the company.
Below are a few examples of common events that trigger modification accounting, as well as those that do not.
In order to ensure compliance with the latest FASB standards, it is a best practice to keep close track of all modifications. Be sure to keep track of the following:
- Identify the reason for each modification
- List the details of the modification
- Document the approval of the modification
- Determine the associated impact on accounting
Make sure to pay special attention if your company is active in merger and acquisition activity, as these corporate actions are likely to result in modifications. Some of the areas of potential complications that should be taken into account during the transition period include:
- Establishing areas of noncompliance (such as employment agreements, change in control agreements, etc.)
- Consolidation of respective equity plans
- Tax and legal ramifications for settlement/conversion program
- Impact on acquired, tax-preferred non‑U.S. plans
- New areas of compliance post acquisition (e.g., due to an increased number of employees)
Another recent equity compensation trend that can result in modification accounting is making a shift in your equity strategy from stock options to performance-based awards. This adjustment can be accomplished through both the granting of new awards or the modification of existing awards—both of which can have significant accounting ramifications.
Stock plan administrators must be aware of the accounting implications of implementing changes in equity awards and should work closely with finance departments to decrease your company’s risk of non-compliance. But modifications aren’t the only equity accounting pitfall. Download Top Six Accounting Hazards in Equity Compensation to read about five more.