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Defining Issues

November 2016, No. 16-38

FASB Proposes Scope


Clarification for Share-based
Payment Modifications
The FASBs proposed Accounting Standards Update (ASU) would
clarify what constitutes a modification of a share-based payment
award. The proposal would specify when companies would need
to apply modification accounting.1

Key Facts
The proposed ASU would require a company to apply modification accounting
unless three characteristics of an award remain the same before and after the
modification.
A company would still be required to:
Apply modification accounting to changes in awards made in response to
new accounting standards, laws, or regulations; and
Disclose significant changes in the terms or conditions of a share-based
payment award, even if it did not apply modification accounting.
Contents
Key Impacts
When to Apply Modification
Accounting .................................. 2 Even though a company may not be required to apply modification accounting
to some award changes, there may still be tax consequences.
Effect of New Accounting A company that modifies award terms or conditions to comply with new
Standards .................................... 3 accounting guidance, laws, or regulations could also affect its compensation
costs.
Tax Implications ............................. 4

Disclosure Requirements ............... 4

1
FASB Proposed Accounting Standards Update, Scope of Modification Accounting, November 17,
2016, available at www.fasb.org.

20012016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of
independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative, a Swiss entity.
Defining Issues November 2016, No. 16-38

When to Apply Modification Accounting


A company would apply modification accounting unless three characteristics of a
share-based payment award are the same immediately before and after the
modification:
Total fair value of the award;
Vesting conditions; and
Classification of the award (e.g., equity or liability).

FASB Proposed ASU Modification Accounting

Does Not Apply Applies


Administrative changes (e.g., Repricing of share options
company or plan name changes) Change in a service,
Changes in statutory tax performance, or market
withholdings that do not affect condition
the classification of the award Change in an award that
changes the classification as
equity or liability
An acceleration of vesting
provision is added to the plan in
contemplation of an event, and
the awards are immediately
vested if the related event
occurs

KPMG Observations
U.S. GAAP broadly defines modification, which means that any change in
the terms or conditions of a share-based payment award would be
considered a modification. In practice, however, companies have applied
the term inconsistently; some apply it to only substantive changes while
others apply it to all changes.
The proposed ASU may not significantly affect a company that historically
applied modification accounting to only substantive changes in terms or
conditions.

20012016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of
independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
2 KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative, a Swiss entity.
Defining Issues November 2016, No. 16-38

Effect of New Accounting Standards


When a company grants share-based payment awards with performance targets
to employees, U.S. GAAP requires the company to recognize compensation cost
associated with those awards only when it is probable that the company will
achieve the performance targets.
Management and
Adopting new accounting standards (e.g., revenue recognition, credit
compensation committees impairment, and leases) may affect a performance target metric so that it no
should consider how longer is probable that a company will achieve the performance targets in a
adopting the accounting plan.2 To address that circumstance, a company might amend its shared-based
standards for revenue payment plan to scope out the effect of adopting a new standard, or might
recognition, credit revise the performance metric to adjust for the effect of the new accounting
standard so that achieving the target remains probable.
impairment, and leases could
affect compensation costs for U.S. GAAP treats this type of change to a share-based payment plan as a
share-based payment plans. modification. However, if a company believes that it is probable before and after
the modification that it will achieve the performance target, and a company
designed the modification so that the award is equal in fair value before and after
the modification, the modification generally would not result in incremental
compensation cost.
To apply the proposed ASU, a modification to a share-based payment plan as a
result of a new accounting standard, law, or regulation would be evaluated the
same as any other modification. Thus, the company would be required to
determine whether there are changes in total fair value, vesting conditions, or
classification of the underlying awards as a result of modifying the plan. Only if
those three characteristics are the same before and after the modification would
the company conclude that it did not have to apply modification accounting.

KPMG Observations
The proposed ASU does not change the scope of a modification to exclude
modifications that are done solely to adjust for the effect of adopting new
accounting standards, laws, or regulations. Under U.S. GAAP and the
proposed ASU, these types of changes are considered modifications. As
under U.S. GAAP, careful consideration of these types of changes is required
to determine the overall effect of a modification.

2
FASB Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers; FASB
Accounting Standards Update No. 2016-13, Measurement of Credit Losses on Financial Instruments;
and FASB Accounting Standards Update No. 2016-13, Leases, all available at www.fasb.org.

20012016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of
independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
3 KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative, a Swiss entity.
Defining Issues November 2016, No. 16-38

Tax Implications
Even though a company would no longer be required to apply modification
accounting in some circumstances, it would still need to consider the tax
implications of the modification. Depending on the terms of the plan and how
the modification is structured, there can be significant tax consequences for the
company and employees.
Even when modifications have no accounting consequence, they can trigger
The FASB will determine the obligations for personal income taxes, excise taxes, and interest to employees
on vesting of awards. Some awards also have provisions for gross up to
effective date after it reviews
employees to reimburse them if these taxes are triggered. Additionally,
comments. modifications can result in tax deductions for a company being disallowed on
exercise of share options and vesting of shares. Management and compensation
A company would apply the committees should consider how the terms of the plan have changed, and
proposed ASU prospectively whether there are tax implications that they need to address.
to awards modified on or
after the effective date.
Disclosure Requirements
The proposed ASU would retain the U.S. GAAP disclosure requirements. A
company would disclose information about significant modifications for each
year in which it presents an income statement including the:
Terms of the modifications;
Total number of employees affected; and
Total incremental compensation cost resulting from the modifications.
For modified awards that do not require modification accounting, the proposed
ASU retains the U.S. GAAP requirement to disclose the terms of the
modification and the total number of employees affected.

Contact us: This is a publication of KPMGs Department of Professional Practice 212-909-5600

Contributing authors: Regina E. Croucher and John D. Brown

Earlier editions are available at: kpmg.com/us/frn


LegalThe descriptive and summary statements in this newsletter are not intended to be a substitute
for the potential requirements of the proposed standard or any other potential or applicable
requirements of the accounting literature or SEC regulations. Companies applying U.S. GAAP or filing
with the SEC should apply the texts of the relevant laws, regulations, and accounting requirements,
consider their particular circumstances, and consult their accounting and legal advisors. Defining
Issues is a registered trademark of KPMG LLP.

20012016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of
independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
4 KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative, a Swiss entity.