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Murray Compensation, Inc. (Murray), which is a public traded company, granted 100,000 "at-the-money" employees share options on Jan 1,20X6. On the grant date, the fair value is $6 per share, and the period of the cliff-vesting is 3 years. However, on Jan 1, 20X8, Murray decreased the exercise price on the stock option to $12. In addition, Murray extended the vest-term into 5 years. The accounting issue here is how to account for the modification of the stock options and what is amount of compensation expense Murray should recognize in the years ended December 31, 2008, 2009, and 2010.

The FASB 123 was revised during 2004. For public entities that are not small business issuers, the effective date of FAS 123(R) is June 15, 2005. FAS 123(R) states that all public entities that used the fair-value-based method for either recognition or disclosure shall adopt this Statement using a modified prospective application. Under the modified prospective application, FAS 123(R) applies to new awards, and awards modified, repurchased or canceled after June 15, 2005. The awards at issue in this case were issued after June 15, 2005 and therefore must be