Acceleration of Vesting of ISO = Modification?

I am trying to reconcile the rule under 424(h)(3)(C) with the accounting rules for share-based compensation. 424(h)(1) provides that if an ISO is modified, then it is a new grant. 424(h)(3)(C) provides that "the term “modification” means any change in the terms of the option which gives the employee additional benefits under the option, but such term shall not include a change in the terms of the option in the case of an option not immediately exercisable in full, to accelerate the time at which the option may be exercised." So far so good.

But the accounting rules say that acceleration of vesting is a modification that leads to a new grant. Are both things true in that one refers to status as an ISO and the other refers to accounting treatment? 

Any thoughts appreciated. TIA. 

20 hours ago, chibenefits said:

Are both things true in that one refers to status as an ISO and the other refers to accounting treatment? 

chibenefits, I think that probably is true, but I cannot vouch for the accounting part, since not a CPA. Acceleration of an ISO's vesting, in and of itself, is not considered a modification for tax purposes. If the accounting rule is different, then they are both right, but have little to do with each other.

I agree with Luke and I'm not a CPA either.  However, the NASPP newsletter (Barbara Baska) has a good example of how accounting works if a partially vested option upon termination of employment is accelerated and becomes fully vested.  It's not treated a a new grant  as to the portion of the award that has already vested.  It is a new grant as to the newly vested portion.  Here's her example:

"Sa that an employee terminates while holding an award to purchase 10,000 shares that is 75% vested, and the company modifies the terms of the award to accelerate vesting on the remaining 2,500 unvested shares. Further assume that the fair value of the award at grant was $10 per share, and the fair value at the time the modification occurs is $16 per share.

The fair value of the vested portion of the option is $75,000 ($10 per share multiplied by 7,500 shares); this expense has already been recorded and is not reversed. 

The original fair value of the unvested/accelerated portion of the option was $25,000 ($10 per share multiplied by 2,500 shares).  Let’s say that the termination occurs after one-fifth of the last vesting period has elapsed, so that the company has already recognized $5,000 of expense for this tranche (assuming straight-line accrual and that the company accounts for forfeitures as they occur). The $5,000 of expense that has already been recognized is reversed and the remaining $20,000 of expense is never recognized.

The fair value of the unvested/accelerated portion of the option after the acceleration is $40,000 ($16 per share multiplied by 2,500 shares); this amount is recorded as expense in the period in which the acceleration occurs.

Linda, the example makes sense. They're trying to match the expense to the period over which the services are (or in this case, are not) performed.