AT&T; LTE 7:23 PMM Inbox On January 1, 2017, Company One\'s Board of Directors a
ID: 2402217 • Letter: A
Question
AT&T; LTE 7:23 PMM Inbox On January 1, 2017, Company One's Board of Directors approved granting 5,000 stock options to a select group of senior employees. The requisite service period is five years with 20% of the options vesting each year from 2017 to 2021 The fair value of the option is as below: Jan 1, 2017 $20 Dec 31, 2017 $21 Dec 31, 2018 $22 Dec 31, 2019 $23 Dec 31, 2020 $24 Dec 31, 2021 $25 Instruction: a) Based on the description in question, determine the type of vesting condition (cliff vs. graded) b) What is the total compensation expense needed to be recognized under US GAAP for each year from 2017 to 2021? c) What is the total compensation expense needed to be recognized under IFRS for each year from 2017 to 2021 (round to one decimal point)?Explanation / Answer
Answer
Part a:-
Cliff Vesting and Graded vesting are the two methods used by the employers to vest their employees into a retirement plan. Under Graded vesting, employee receives a certain percentage of vesting after each year of service. Accordingly the amount of vesting increases by a certain percentage every year gradually. At the end of the vesting period, the plan gets 100% vested. While under Cliff Vesting, employees do not receive any partial benefits. As per this method company will set a time limit that must be reached by the employee for becoming fully vested.
In the given situation, since the options are vesting 20% each year, hence the company is using Graded Vesting.
Part b:-
As per US GAAP, entities are allowed to use either the straight line method or accelerated method to recognise the expense over a period of time regardless the type of vesting condition that the entity is using (Cliff or Graded).
Accordingly, Total compensation expense to be recognised during the vesting period will be $125000, i.e. (5000*25). Recognition in the given situation for each year (either using Straight line or accelerated method) would be $25,000 i.e. ($125000/5).
Recognition as per US GAAP would be as under:-
Year End
Calculation
Amount ($) for the year
Cumulative Amount ($)
Dec 2017
125000/5
25000
25,000
Dec 2018
125000/5
25000
50,000
Dec 2019
125000/5
25000
75,000
Dec 2020
125000/5
25000
1,00,000
Dec 2021
125000/5
25000
1,25,000
Part c:-
Recognition of expense as per IFRS each year:
Formula for calculating each year expense:-
(Stock options vested till date*Fair Value) less Amount already recognized
Year End
Calculation
Amount ($) for the year
Cumulative Amount ($)
Dec 2017
5000*20%*21
21,000
21,000
Dec 2018
(5000*40%*22)-21000
23,000
44,000
Dec 2019
(5000*60%*23)- 44000
25,000
69,000
Dec 2020
(5000*80%*24)-69000
27,000
96,000
Dec 2021
(5000*100%*25)-96000
29000
1,25,000
Year End
Calculation
Amount ($) for the year
Cumulative Amount ($)
Dec 2017
125000/5
25000
25,000
Dec 2018
125000/5
25000
50,000
Dec 2019
125000/5
25000
75,000
Dec 2020
125000/5
25000
1,00,000
Dec 2021
125000/5
25000
1,25,000
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