Award Modifications

A modification of an award happens when any of the following happen:

  • The fair value of the award before the modification is different from the fair value after the modification.

  • The conditions for vesting are modified.

  • The accounting treatment changes from equity to liability or from  liability to equity.

Under the IFRS standard, all modifications are treated as a Type I modification.  Under GAAP, there are four types of modifications along with multiple accounting treatments:

Type I (Probable-to-Probable)

  • Vesting is probable before and after the modification.  Common modifications include:

  • Acceleration of vesting that is not in connection with a termination of employment

  • Extension of the post-termination exercise period for stock options

  • Modification Accounting:

  • Previously recognized expense is not reversed

  • Unamortized expense must be recognized (providing original vesting conditions were met)

  • Incremental expense is recognized if the fair value of the modified grant is greater than the canceled grant at the time of the modification

Type II (Probable-to-Improbable)

  • Vesting was probable but is no longer probable after the modification.

  • Modification Accounting:

  • Recognized expense is not reversed

  • Unamortized expense must be recognized (providing original vesting conditions were met)

  • Incremental expense is recognized if the fair value of the modified grant is greater than the canceled grant at the time of the modification

Type III (Improbable-to-Probable)

  • Vesting is not probable but is expected to vest after the modification.  Common modifications include:

  • Acceleration of vesting upon termination of service

  • Modification Accounting:

  • No further expense is recognized upon modification

  • Previously recognized expense related to the vested portion is not reversed

  • Previously recorded expense relating to the unvested portion of the grant may be reversed

  • Additional expense for any portion that is newly expected to vest recognized equal to the fair value on the modification date

Type IV (Improbable-to-Improbable) 

  • The grant is not likely to vest either before or after the modification

  • Modification Accounting:

  • No expense is recognized for the modified grant because vesting was not probable

  • The grant is re-valued on the modification date

  • Expense is recognized only if vesting becomes probable

 

How does Carta handle modifications?

At the moment, the only modification Carta supports is a Type I modification in relation to a reduction of a strike price (commonly referred to as a repricing).

Any other modifications to an award would have to be accounted for outside of Carta reports.