FASB Issues New Guidance on Modification of Equity Awards

On June 8, the staff of the Financial Accounting Standards Board (FASB) issued clarifications on the accounting treatment of the modification of an equity instrument in conjunction with a financial restructuring. At issue is what happens to an equity award if it is changed after the employee to whom it was granted ceases to be an employee. In August 2005, FASB ruled that if there are modifications, they would be subject to the rules under FAS 123(R). In this new staff position (FAS 123(R)-e), the staff said that if the modification is in conjunction with a financial restructuring and (1) does not result in a change in the value of the award to the recipient (such as a stock split) and (2) applies equally to all holders of that class of equity, then no modification will be considered to have taken place.