Podcast
Questions and Answers
What does 'vesting' refer to in the context of employee stock option schemes?
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?
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?
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?
Which term describes the financial advantage of a stock option's market price exceeding its exercise price?
In the context of employee stock options, what happens if an employee does not exercise their vested options within the exercise period?
In the context of employee stock options, what happens if an employee does not exercise their vested options within the exercise period?
What is 'fair value' in the context of stock options?
What is 'fair value' in the context of stock options?
What does the term 'lapsed options' refer to in employee stock options?
What does the term 'lapsed options' refer to in employee stock options?
What is required for a stock option to become vested?
What is required for a stock option to become vested?
What is the cumulative expense charged for the year 2019-20 based on the options exercised?
What is the cumulative expense charged for the year 2019-20 based on the options exercised?
How many total stock options were initially granted to the employees of Choice Ltd.?
How many total stock options were initially granted to the employees of Choice Ltd.?
What is the fair value of each stock option granted to the employees of Choice Ltd.?
What is the fair value of each stock option granted to the employees of Choice Ltd.?
What factors influence the vesting of options for Choice Ltd.?
What factors influence the vesting of options for Choice Ltd.?
What is the expense charged for unvested options that lapsed on 31.3.2019?
What is the expense charged for unvested options that lapsed on 31.3.2019?
With a vesting condition based on earnings, when would the options vest if the average earning over the first two years is 15%?
With a vesting condition based on earnings, when would the options vest if the average earning over the first two years is 15%?
What happens to the expense associated with lapsed vested options?
What happens to the expense associated with lapsed vested options?
How many options lapsed on 31.3.2018?
How many options lapsed on 31.3.2018?
What is a characteristic of equity-settled share-based payment plans?
What is a characteristic of equity-settled share-based payment plans?
Which method is used to account for Employee Share Based Payments that reflects the fair value of options granted?
Which method is used to account for Employee Share Based Payments that reflects the fair value of options granted?
Which of the following is an example of performance conditions in share-based payments?
Which of the following is an example of performance conditions in share-based payments?
What happens to a stock option if it lapses due to the employee leaving the company before vesting?
What happens to a stock option if it lapses due to the employee leaving the company before vesting?
How is the compensation expense typically calculated for cash-settled share-based payment plans?
How is the compensation expense typically calculated for cash-settled share-based payment plans?
Which condition must an employee typically satisfy to receive a grant of shares in a share-based payment plan?
Which condition must an employee typically satisfy to receive a grant of shares in a share-based payment plan?
What is a tax implication of equity-settled share-based payments for the employer?
What is a tax implication of equity-settled share-based payments for the employer?
What is primarily reflected in the intrinsic value method of accounting for employee share-based payments?
What is primarily reflected in the intrinsic value method of accounting for employee share-based payments?
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.
Accounting Methods for Employee Share-Based Payments
- Two primary accounting methods:
- Intrinsic Value Method
- Fair Value Method
Categories of Employee Share-Based Payment Plans
- 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.
