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.
A. Read the relevant BCs in SFAS No. 123(R), paragraphs B181 through B193.
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?
B. Read the relevant BCs in IFRS 2, paragraphs BC222 through BC237B.
3. Why does IFRS not allow a reduction in costs of a share-based award when there is a modification of terms?
4. Do you agree with this reasoning?
C. Assume that management of a company wanted to modify a share-based award because of non-achievement due to deteriorating business conditions, and also because they believed that a cost reduction in the original share-based award was reasonable.
5. How might they achieve these objectives under IFRS?
6. In order to achieve the same objective under US GAAP, would management have to structure the transaction in the same was as they would under IFRS?