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Question:
On 1 January 20X1, 100 employees were given 50 share options each. These will vest if the employees still work for the entity on 31.12.20X2 and if the share price on that date is more than $5.
On 1 January 20X1, the FV of the options was $1. The share price on 31.12.20X1 was $3 and it was considered unlikely that the share price would rise to $5 by 31 December 20X2.
10 employees left during the year ended 31.12.20X1 and a further ten are expected to leave in the following year.
Required:
How should the above transaction be accounted for in the year ended 31.12.20X1?My answer:
There is a service condition to work for 2 years until 31.12.20X2 as well as a market based performance condition in that the share price should be more than $5 at the 31.12.20X2.The scenario indicated that the increase in share price was unlikely however this has already been factored into the FV of the equity instrument at the grant date. Furthermore, an expense is recognised regardless of whether or not the market conditions have been satisfied.
100 employees- 10 employees * 50 options per employee * FV ($1) * 1/2= $2250
Journal
Dr SOPOL $2250
Cr Other components of equity $2250.However, the Study Text answer was different. They did the following…
(100 employees – 10 employees – 10 employees) * 50 options * $1 * 1/2= $2000Is the expense recognised at year end supposed to be the “best estimate of the # of employees expected to vest”?
I think the employees expected to vest at year end (20X1) would be 100 – 10 “expected” to leave in 20X2= 90.
And in the final year (20X2), it would be 100- 10 employees that “actually” left in 20X1 and deduct any more that “actually” left in 20X2.Confused there…
Thanks!
“Is the expense recognised at year end supposed to be the “best estimate of the # of employees expected to vest”?” – yes
At the end of 20X1 of the original 100, 10 have already left and our best estimate for 20X2 is that another 10 will leave before the shares vest.
Thus we’re only looking at 100 – 10 – 10 = 80
OK?
I have question on the same issue above.
I dont understand the concept of ignoring market based conditions (share price increase above 5dollar) condition when measuring and defining timing of expense.
Why do we then impose condition if we will ignore it? But there are two conditions attached not one. Why dont we then put only one condition of service for 2 years.? Whatsthe point?
How do they take account of market conditions when defining fair value of option at grant date? How come does it become sufficient to ignore that condition subsequently? Plzzzz help
Second question: what will happen if market based condition is not met at all? Thus, if shareprice doesnt go up above 5 dollar? What will be the entry? Reversing the expense and equity? the study book says no adjustment is nereded in tota equity. Why? But apwe should reverse it bcoz its no more our expense and corresponding equity increase should also be reversed??
In answer to your first question …… because that’s the rule! The fair valuation of the equity instrument at the grant date will already take account of the performance conditions
In answer to your second question …. again, it’s the rule!
You say it isn’t an expense but you’re wrong – it is! It’s an expense in exchange for receiving the efforts of those people to whom the options were granted. We have, by the exercise date, received the benefit of these employees’ efforts and the expense therefore has been recognized over that vesting period
Ok?
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