June 2, 2015
Stock Award Modifications: What to Consider
Posted by Niki Rahimi
Managing a stock plan can be complicated and difficult. Once you’ve completed confirming all the grants, exercises and forfeitures, what else is there to check out? One of the most overlooked and ignored aspects stock based compensation maintenance is adjusting stock award modifications to existing awards. When do we consider a change to be a modification that impacts expense? I won’t get into the nuts and bolts of how modification accounting works but rather want to make you aware of what to watch for so you can begin to consider the accounting implications.
One of the most typical cases of award modification is the situation where a terminated employee is allowed accelerated vesting at termination. Most of us would immediately see an impact on amortization due to the acceleration of vesting, but what if this person is also granted an extended time period to exercise from the original agreed upon terms? We tend to overlook that this latter adjustment may also impact total fair value and amortization. It’s good to never assume that a change in terms won’t affect fair value. Whenever there is a change in terms, it’s best to further investigate the impact on expense.
Another often presented situation is one in which a modification is missed simply because new staff is unaware of the original terms of an award agreement. The amended terms are assumed to be the original terms. If no adjustments were made at the time of modification and amortization does not reflect the proper adjustments, expense will be off. These are scenarios that are often uncovered during data reconciliations where historical information is uncovered after the fact. This is a scenario that can be quite impactful if it affects a large enough pool of grants and can cause quite a bit of headache in trying to book expense in later periods.
Overall, make sure you generally understand what changes in terms are impactful to stock based compensation. Any time you see a change in terms, investigate. It may or may not impact your bottom line. Terms that change minor things like payment options, don’t necessarily mean there is a true modification but at least you checked.
A good rule of thumb is that changes which affect the standard terms of a fair value model like Black Scholes, will most likely impact expense. Similarly, terms that change significant portions of the agreement that result in some benefit to the awardee are often a good sign of modification. Diligence in this aspect of stock plan management will save you a lot of grief and keep you well informed in the future.
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Niki is a top Equity Management professional at Armanino. She has experience with financial analysis and reporting alongside a deep technical knowledge of the intricacies of equity accounting.