Question

ABC expenses stock options as required by GAAP. On January 1, 2015, ABC granted 50 key executives 100 options each. Each option entitled the option holder to purchase 1 share of ABC common stock at $60 per share. The options will vest on January 1st 2018. On the grant date, January 1st, 2015, the stock was quoted on the stock exchange at $63 per share. The fair value of the options on the grant date was estimated at $15 per option. The amounts of compensation expense ABC should recognize with respect to the options during 2015, 2016, and 2017 are: O 1. 2. O 3. 04. 2015 $ 5,000 $0 $ 25,000 $0 2016 $5,000 $0 $ 25,000 $0 2017 $5,000 $ 15,000 $25,000 $ 75,000

Answer 1

Answer should be 3. $ 25,000/- each year.

As per the International Financial Reporting Standards (IFRS) on Share based Payments, a company should expense its employee stock options as per the fair value of the stock as on Grant date.

Here the calculation should be done as follows:

No. of Options in total * Fair Value of the Stock per option

= (50*100) * $15 = $ 75,000/-

Compensation expense = $75,000/3 = $25,000/- for each year.

Note- Fair value of the options will always be evaluated on grant date. The reasons for recognizing the expenditure in 3 years is that the employee to whom we are providing the option will be working for three years ie. with the above method we will be matching the cost with the benefit employee is providing to the entity. Matching and accrual principle has been taken care of.