American Mall Management (AMM or the Company) is a leading real estate management firm that owns and manages over 100 shopping malls across the United States. The Company went public in 2011 and experienced a continued increase in stock price through 2013. With the sustained growth of the business and rising stock price, AMM developed a practice of granting annual stock option awards to its executives at the beginning of each year.

On January 1, 2014, AMM granted 1,500 employee share options that cliff vest after a four-year service period, with an exercise price of $24 per share. Using the Black-Scholes pricing model, the Company determined the grant-date fair-value-based measure of the awards was $12. On the grant date, the Companys stock was trading at $24 per share.

On January 1, 2016, to provide additional retention incentive to its employees for the third and fourth years of service of the 2014 annual grant, AMM will change the terms of the award by modifying the exercise price to $16 per share. Using the Black-Scholes pricing model, management determined that the fair-value based measure of the awards was $10 after the modification and $7 before the terms of the award were modified. The modification did not affect any of the other terms or conditions of the awards.

Note that no forfeitures are assumed for the purposes of this case.

2). Summarize (in your own words, with references) how compensation expense related to employee stock options subsequent to a modification should be calculated under US GAAP and calculate the annual compensation expense related to the stock options in the case for the last two years of the service period (after the modification). Be sure to explain the calculations that you did to arrive at the annual compensation expense.