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Modification Accounting - Repricings

By Calvin Cheng posted 05-30-2023 00:59


When there is a decline to a company’s stock price, outstanding stock options with a high strike price may become ‘underwater’ and worthless.   Since stock options are intended to serve as compensation, some companies may choose to reduce the strike price of underwater stock options.

Lowering the strike price of an option is a Type I modification and is viewed as a cancellation of the original option with the original strike price and a grant of a replacement option with a new strike price.

In most cases, lowering the strike price will result in an increase of compensation expense.

The following accounting principles apply when reducing the strike price:

  • The expense related to the canceled award with the original strike price continues to be recognized.

    • Any previously recognized expense related to what has vested does not reverse.

    • Unamortized expense for unvested options continues to be recognized throughout the vesting period.

  • Additional incremental expense is recognized if on the modification date, the fair value after the modification exceeds the fair value prior to the modification.


How is this expense reflected in Carta’s reports:

  • The fair value for the canceled option remains the same and continues to expense.

  • On the date of modification, the fair value of the option is measured before the modification (at the original strike price) and measured after the modification (at the lower strike price).

    • If the fair value after the modification is higher, the difference becomes the ‘incremental fair value’.

    • If the fair value after the modification is lower, the ‘incremental fair value’ is $0.00.

  • The incremental fair value is assigned to the new option.

  • The original fair value and the incremental fair value together are expensed throughout the remaining service period.

  • Expense for vested options will be recognized immediately.

  • Expense for unvested options will be recognized throughout the remaining service period.


Stock option ES-1 granted on January 1, 2022 vests annually over three years and a total fair value of $15,000 ($1/option  *  15,000 options).



As of December 31, 2022, 5,000  options have vested and the company recognized $5,000 in compensation expense.


Throughout 2022, the company’s stock price has been at a steady decline and the option is  underwater.  On January 1, 2023, the board approved lowering the strike price from $2 to $1.

At the time of modification, the option at a $2 strike price has a fair value of $0.35.

At the time of modification, the option at a $1 strike price has a fair value of

The value created by lowering the strike price of the option is estimated to be the difference between these two fair values, $0.53 - $0.35 = $0.17.  This additional  incremental expense will be recognized alongside the original expense as the award continues to vest.

As of January 1/1/2023, ⅓ of the options has vested and the company has recognized $5,000 out of the total $15,000.  Incremental expense for repricing the vested options is recognized immediately.

The remaining unamortized expense will be recognized throughout the remainder of the service period.

The total expense to recognize is the fair value of the original award and the incremental fair value from lowering the strike price.


How is this expense reflected in Carta’s reports:

Carta's support team will first model out the repricing in a sandbox testing environment.  We recommend companies to also leverage this testing environment to generate a stock compensation expense report to understand the financial impact related to the modification.

A stock compensation report that includes the repricing/modification date will have an additional sheet labeled ‘modifications’.  This sheet delineates the  incremental expense by calculating the fair value pre-modification and post-modification.  Also included is the total quantity of options that were repriced and the total incremental expense related to the repricing.

Often, companies may want to understand the 'catch up' incremental expense that needs to be recognized immediately in relation to repricing options that have already vested.

The 'tranches' sheet shows compensation expense associated to each vesting event.  Expense within the period is shown in the column period expense.  By filtering this sheet to show only  repriced awards (valuation type: amendment) and vest dates prior to the modification date, the total of the period expense column would represent the 'catch up' expense.

Please reach out to us at for additional support related to a repricing modification.