Employee Stock Options and Fair Value Calculation

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Questions and Answers

What does 'vesting' refer to in the context of employee stock option schemes?

The duration after which an employee can no longer apply for shares

The time period between grant date and the date on which options are exercised

The process of employees receiving the right to apply for shares (correct)

The price at which employees can purchase shares

Which of the following best defines 'exercise price' in an employee stock option scheme?

The price at which shares are granted to employees

The predetermined price at which options are vested

The price payable by the employee to exercise the option granted (correct)

The market price of the share when options are exercised

What is the purpose of a 'vesting period' in an employee stock option scheme?

To establish the minimum price at which shares can be sold

To set the duration for how long employees can hold the options

To define the maximum time allowed for the options to be granted

To provide a timeframe within which vesting conditions must be satisfied (correct)

Which term describes the financial advantage of a stock option's market price exceeding its exercise price?

Intrinsic value Signup and view all the answers

In the context of employee stock options, what happens if an employee does not exercise their vested options within the exercise period?

The options expire and cannot be exercised Signup and view all the answers

What is 'fair value' in the context of stock options?

The amount for which a stock option could be exchanged between willing parties Signup and view all the answers

What does the term 'lapsed options' refer to in employee stock options?

Options that have expired due to non-exercise Signup and view all the answers

What is required for a stock option to become vested?

All specified vesting conditions must be satisfied within the vesting period Signup and view all the answers

What is the cumulative expense charged for the year 2019-20 based on the options exercised?

4,50,000 Signup and view all the answers

How many total stock options were initially granted to the employees of Choice Ltd.?

100,000 Signup and view all the answers

What is the fair value of each stock option granted to the employees of Choice Ltd.?

$20 Signup and view all the answers

What factors influence the vesting of options for Choice Ltd.?

Company earnings performance Signup and view all the answers

What is the expense charged for unvested options that lapsed on 31.3.2019?

60,000 Signup and view all the answers

With a vesting condition based on earnings, when would the options vest if the average earning over the first two years is 15%?

At the end of year 2 Signup and view all the answers

What happens to the expense associated with lapsed vested options?

Transferred to a general reserve Signup and view all the answers

How many options lapsed on 31.3.2018?

5,000 Signup and view all the answers

What is a characteristic of equity-settled share-based payment plans?

Employees receive shares of the company. Signup and view all the answers

Which method is used to account for Employee Share Based Payments that reflects the fair value of options granted?

Fair value method Signup and view all the answers

Which of the following is an example of performance conditions in share-based payments?

Achieving specified growth in profit Signup and view all the answers

What happens to a stock option if it lapses due to the employee leaving the company before vesting?

The option rights are permanently forfeited. Signup and view all the answers

How is the compensation expense typically calculated for cash-settled share-based payment plans?

Based on current market price of shares Signup and view all the answers

Which condition must an employee typically satisfy to receive a grant of shares in a share-based payment plan?

Remain employed for a specific period Signup and view all the answers

What is a tax implication of equity-settled share-based payments for the employer?

Tax deductions apply when shares are exercised Signup and view all the answers

What is primarily reflected in the intrinsic value method of accounting for employee share-based payments?

The difference between market price and exercise price Signup and view all the answers

Study Notes

Vesting Period and Options

Vesting period lasts for 3 years; options not yet vested are subject to this timeframe.
3,000 unvested options lapsed on December 1, 2018.
4,000 options were exercised on September 30, 2020.
1,000 vested options lapsed at the end of the exercise period on March 31, 2021.

Fair Value Calculation

Fair value per option calculated as: (170 - 80 = 90).
Yearly expense and cumulative expense breakdown:
- For 2017-18: 8,000 options x 90 x 1/3 = 240,000; cumulative expense: 240,000.
- For 2018-19: 5,000 options x 90 x 2/3 = 300,000; cumulative expense: 300,000.
- For 2019-20: 5,000 options x 90 x 3/3 = 150,000; cumulative expense: 450,000.
Total expenses from lapsed vested options transferred to general reserve in FY 20-21: 1,000 x 90 = 90,000.

Choice Ltd. Employee Stock Options

Choice Ltd. granted 100 stock options to each of its 1,000 employees on April 1, 2017.
Options vest based on specific earnings milestones:
- End of year 1 at 16% earnings.
- End of year 2 at an average of 13% over two years.
- End of year 3 at an average of 10% over three years.
5,000 unvested options lapsed on March 31, 2018; 4,000 on March 31, 2019; 3,500 on March 31, 2020.
Employee compensation expense transferred to profit and loss account in 2021 totaled 855,000.

Key Terms in Employee Stock Options

Grant: Issuance of options to employees under the Employee Stock Option Scheme (ESOS).
Vesting: Process granting employees the right to apply for company shares based on options.
Vesting Period: Duration from grant date to when vesting conditions are satisfied.
Option: Right without obligation to purchase company shares at a predetermined price.
Exercise Period: Time post-vesting during which employees can apply for shares.
Exercise Price: Price paid by employees to exercise their options.
Intrinsic Value: Difference between market price of shares and the exercise price.
Fair Value: Value at which stock options or shares could be exchanged in an arm’s length transaction.

Two primary accounting methods:
- Intrinsic Value Method
- Fair Value Method

Equity-Settled: Employees receive shares.
Cash-Settled: Employees receive cash based on share price or value.
Plans with Cash Alternatives: Choice between cash or shares for settlement.

Vesting Conditions

Typically conditional on employee retention for a specified time.
May include performance conditions based on profit growth or increase in share price.

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Description

This quiz focuses on the vesting period and fair value calculations related to employee stock options at Choice Ltd. Participants will explore the impact of unvested options, lapsed options, and cumulative expenses within the context of stock option grants. Test your understanding of these financial concepts using real-world examples.