The beneficial modification: the original cost plus the incremental fair value

Learning objectives

• Explain that a beneficial modification adds to the original expense the incremental fair value measured at the modification date.L2
• Calculate the incremental fair value and the additional expense over the remaining period.L2, L3

Normative references

• IFRS 2 §26The entity may modify the terms of a grant (for example by reducing the exercise price, which increases the fair value of the options); the requirements of paras. 27 to 29 are expressed for employees but also apply to transactions with other parties measured by reference to the fair value of the equity instruments, the grant date then being replaced by the date the entity obtains the goods or the counterparty renders the service.
• IFRS 2 §27Irrespective of any modifications, cancellations or settlements, the entity recognises, as a minimum, the services received measured at the grant-date fair value of the original equity instruments, unless they do not vest because of failure to satisfy a non-market vesting condition specified at that date; it also recognises the effects of modifications that increase the total fair value of the arrangement or are otherwise beneficial to the employee (application guidance in Appendix B).

Original summaries of the paragraphs (reference register), never a quotation of the standard.

2 questions

• Verano SA lowers the exercise price of its executives' options, which benefits them, two years before the end of the vesting period. At the modification date, the fair value of all the modified options is {fair_value_modified_total} and that of the original options is {fair_value_original_total} (case data, measured at the same date). Case convention: the difference is recognised evenly over the remaining period, of which {elapsed_share_remaining} has elapsed at the closing date. Compute the incremental fair value, then the cumulative additional expense at the closing date, on top of the original expense.L3
• A trainee writes: "After the cut in the exercise price, which benefits the executives, we keep recognising the expense computed at the grant date and add nothing: the modification has no effect on profit." What is the error?L2