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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
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
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
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.
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.