The NASPP Blog

July 21, 2009

Accounting for Modifications of Equity Awards

One outcome of the depressed stock market is that award modifications have become much more common, shining a light on the guidance relating to these transactions in 123(R). Repricings, cash-outs, extensions of option terms, options tendered for no consideration, and acceleration of vesting on underwater options–we’ve seen it all over the past year and now we know a lot more about how to account for it.

A few random things I’ve learned about accounting for award modifications:

  • Calculating the fair value of new options granted in an option exchange program may require a Monte Carlo simulation or other more sophisticated pricing model.
  • Expense for the original options cancelled in an exchange is recognized if the original vesting conditions are achieved, even if the new awards have new vesting requirements and those requirements are not met (but the incremental expense for the exchange would not be recognized if the new awards are forfeited).
  • It’s very hard to achieve a true value-for-value exchange.
  • Acceleration of vesting of underwater options may not have any impact at all on the expense recognized for them, or may even extend the period over which that expense is recognized (rather than accelerating it). This is another area where a Monte Carlo simulation may be necessary.
  • Cashing out an award is akin to acceleration of vesting–all remaining unamortized expense is recognized immediately.
  • Allowing executives to tender underwater options for no consideration doesn’t change the amount of expense the company recognizes for the options.

Learn More with a Free Webcast

For more information on the accounting treatment of award modifications, check out the webcast we recently posted on FAS 123R & SAB 107: Understanding Stock-Based Compensation Accounting. The webcast features Shan Nemeth of Deloitte & Touche and Alison Spivey of Ernst & Young giving an update on recent developments relating to 123(R). They cover accounting for modifications, valuation considerations, and performance-based awards. They also cover two recent FASB pronouncements applicable to stock compensation: FSP EITF 03-6-1, which relates to the presentation of EPS if you pay dividends on awards, and FASB Statement No. 141(R) on business combinations (skip to the end for this discussion). I am also a panelist in the webcast; I ramble on about trends in plan design in the aftermath of 123(R) but my part is boring, you can skip it. Registration for the webcast would normally cost $299, but because I participated in the panel, we’re able to allow NASPP members to listen to the webcast archive at no cost.

Submit Your Questions for Our “Ask the Experts” Summer Edition Webcast

If, after listening to the above webcast, you have additional questions on accounting for award modifications, send them to experts@naspp.com and we’ll answer them in our August 27 “Ask the Experts” webcast on award modifications.

NASPP Conference Workshop of the Week
This week’s featured workshop is “Option Valuations in Light of Economic Instability.” From expected life calculations, to increased volatility, to forfeiture expectations, the current period of economic instability is likely to have a lasting impact on your option valuation process. This panel will address the challenges that underwater options, wildly fluctuating stock prices, reductions-in-force, and stagnant dividend yields present for option valuations–and will suggest creative solutions to overcome these obstacles.

NASPP “To Do” List
We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog. 

– Barbara