In a pair of updates to accounting standards, the Financial Accounting Standards Board is looking to shore up differences in how companies account for stock compensation and service concession arrangements.
Accounting Standards Update No. 2017-07 is meant both to clarify and to reduce the cost and complexity in the accounting for changes in terms and conditions in share-based payment awards under Topic 718 in the Accounting Standards Codification. Companies might make changes to the terms and conditions for any number of reasons, and the changes can have varying effects on the awards. FASB learned companies are taking different approaches to determining when to apply modification accounting to such changes.
FASB’s update says companies should account for the effects of a modification to a share-based payment award unless three specific conditions are met. If the fair value of the award is essentially unaffected, if the vesting conditions are not affected, and if the classification of the award as either an equity or liability is not changed, then the requirements associated with modification accounting need not be applied, FASB says.
Disclosure requirements under Topic 718 will still apply, however, regardless of whether a change prompts modification accounting or not. The new standard takes effect for interim and annual periods beginning after Dec. 15, and early adoption is permitted.
With respect to service concession arrangements, FASB issued ASU 2017-10 to clear up differences in how companies determine who is the customer in such arrangements. Service concession arrangements commonly govern the operation of facilities like airports, roads, bridges, tunnels, prisons, and hospitals, which are often built by and owned by governmental or public sector bodies.
Often the public sector body granting operating rights to the infrastructure retains control over the facility including responsibility for capital-intensive maintenance. The arrangements place them in a curious place between lease accounting requirements and revenue recognition guidance, prompting FASB to issue the clarifying guidance.
The provisions of the new guidance are best illustrated in a short example, FASB says. When a public sector enters into an arrangement with an operating entity for a toll road that will be used by third parties, namely the drivers of vehicles that use the road, then the customer is the government entity, not the drivers, FASB says. The standard takes effect with the new revenue recognition standard.