Financial Reporting

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:

• Reduction of exercise price

• 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.