Final answer:
When a performance target will not be met, previously recognized compensation expense must be adjusted or reversed.
Step-by-step explanation:
When it becomes probable that a performance target will not be met, previously recognized compensation expense must be adjusted or reversed.
For example, let's say a company sets a performance target for its employees to achieve a certain level of sales by the end of the year. If it becomes clear that the target will not be met, the company may need to adjust or reverse the compensation expense that was previously recognized for the expected achievement of the target.
This adjustment or reversal ensures that the financial statements accurately reflect the performance of the company and the associated expenses.