Antidilution Provisions: The Next FAS 123(R) "Gotcha!"

Article by Mark Bradford, Dan Meehan, Buff Miller,Tom Reicher, David Walsh and Thomas Welk

Recently, many accounting firms have alerted their clients to the application of FAS 123(R) in the context of equity restructurings (e.g., stock splits and stock dividends). These firms have noted that the discretionary adjustment of equity compensation under plans and arrangements that do not provide for automatic adjustments upon an equity restructuring may result in an additional compensation expense.

Under FAS 123(R), companies that modify stock awards are required to recognize as an additional compensation cost the excess, if any, of the fair value of a modified award over the fair value of the original award immediately prior to the modification (the "Incremental Cost").¹ In an equity restructuring, outstanding stock awards typically are adjusted to reflect the event. For example, a company will adjust its outstanding stock awards to reflect a stock dividend by increasing the numbers of