What happens when a company modifies outstanding stock options?

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AcadiFi · Accepted Answer

Under ASC 718 / IFRS 2, a modification to a share-based award requires incremental fair value analysis. Compare fair value of the modified award immediately after modification to fair value of the original award immediately before — the incremental amount is additional comp expense recognized over the remaining vesting period (or immediately if already vested). Example: Cascade Software has 2M options with $60 strike, 3 years remaining vesting, original grant-date fair value $15. Stock now trades at $42 (underwater). Company reprices to $45 strike. Pre-mod fair value (using current assumptions) = $4.20/option = $8.4M. Post-mod fair value at $45 strike = $9.80/option = $19.6M. Incremental fair value = $11.2M, amortized over 3-year remaining vesting = $3.73M/year additional expense on top of the original unamortized $10M ($15 × 2M × 1/3 remaining). Key points: (1) you never reduce previously recognized expense even if fair value drops; (2) Type I (probable-to-probable) modifications are the most common; (3) cancellation-and-replacement is treated as a modification if economically linked.

What happens when a company modifies outstanding stock options?

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