Question

Entities that grant stock options, in many cases, decide to make modifications to the vesting terms for a variety of reasons, such as to maintain high employee morale or reward outstanding employees. This is especially true when it is improbable that the vesting conditions will be met and the entity wants to provide compensation to an employee. Read the relevant BCs in SFAS No. 123(R), paragraphs B181 through B193. Question: Answer: 1. Why does US GAAP allow a reduction in the costs of a share-based award when there is a modification of terms? 2. Do you agree with this reasoning?

Answer 1

Answer: 1. US GAAP allow a reduction in the costs of a share-based award when there is a modifications of terms  because it takes into cosideration things like fair value of awards changes and  modification of terms can change whether or not when someone meet their obligations to acquire their award by making the obligations harder or easier to fit . Whether a modification increases or decreares the fair value of an award is determined as modification date. If an entity modifies a vested option, it recognises any additional fair value given on the modification date.So, it does impact costs, if an employee earning a reward versus not earning a reward.

2. YES, I agree with this reasoning because share- based awards should be given at their fair value. Modification of terms can result if an employee earning a reward or not earning a reward and it would also reduces remuneration costs if the obligations performance are easier to achieve or depend upon less work. If someone does not work as harder as they used to, they must be paid less.