FASB aims for consistency in modification accounting

Financial statement preparers would receive specific guidance on when to apply modification accounting under a proposal FASB issued Thursday.

Proposed Accounting Standards Update, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, would clarify which changes to the terms or conditions of a share-based payment award require application of modification accounting.

Diversity in practice exists, according to FASB, because some preparers apply modification accounting only when changes to the terms of awards are substantive, while others apply modification accounting to any change that is not purely administrative in nature. A third group of preparers applies modification accounting when a change to an award changes the fair value, vesting, or classification of the award.

Under the proposal, an entity would account for the effects of a modification unless all of the following are the same immediately before and after the modification:

• The fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the award.
• The vesting conditions of the award.
• The classification of the award as an equity instrument or liability instrument.

Regardless of whether a preparer is required to apply modification accounting under the proposal, the current disclosure requirements in FASB Accounting Standards Codification Topic 718 would apply.

Comments can be made through FASB’s website by Jan. 6.

—Ken Tysiac (ktysiac@aicpa.org) is a JofA editorial director.