Question

anuary 2010, Gigabyte Inc. granted 10,000 "at the money" employee stock options (i.E the exercise price was equal to the stock price on the grant date.) to align the compensation of the employees with financial performance of the company, the award will vest only if cumulative revenue over the following three year reporting period is greater than $100 million and if they are still employed. as of the date of the grant, management believe it is probable that the company will achieve cumulative revenue in excess of 100 million over the next three year period. Each award has a grand - date fair value of $15. Gigabyte's valuation professionals have indicated that if the revenue target was factored in to the fair value assessment, the grant date fair value would be $10 gigabyte adopted ASC 718. Revenue in each of the next three years was as follows: 2010 : $30 million. 2011: 30 million 2012: 40 million Required: 1. should gigabyte use the $10 grand date fair value or the $15 grand date fair value to measure it's compensation cost? citation from ASC is required to support the conclusion. 2. over how many years should gigabyte recognize compensation cost associated with stock options? and how much, if any, should be recognized in each off those years? the effects of forfeitures and income taxes should be ignored. citation from ASC is required to support the answer. 3. how would the year 2 accounting change if management determined that the performance condition of cumulative revenue in excess of $100 million over the three year period was improbable of achieving on Dec 31, 2011? what would be the cumulative amount of compensation cost recognized? Citation from ASC is required to support your conclusion

Answer 1

Solution Given 07 that granted money employee stock = 10,000. The grant date fair value would be $10. Each award has grand - date fair value $15 :. The sec staff in Section 718-10-599 acknowledge that fair value estimates cannot predict actual future events and provides comfort to companies that, so long as the estimates are made in good faith They will not be subsequently questioned no matter what the actual outcome. The SEC Steeff will not object to a company's Choice provided it meets of option pricing model Topic 718's three pronged requirements that the valuation technique. l. This is consistent with fair value measurement 3. Objective 2. This is based on established principles of financial economic theory. 3. The reflects all substantive characteristics of the award. So long as four value estimated are prepared by a person with requiste expertise. It is not a requirement

out side third party The to companies assist is must hire an the valuation. :. Tolal compensation expense 10,000 XID - $ 100,000 This is charge equally over 3 years. = $100,000 1. = 33333.33 .. compensation expenesed $ 33,333 per year. Df the management determined that the performance Condition of cumulative revenue in excess = $100 millon cvor 3 years : The Cumulative amount of compensation remains = 33,333 compensation cost should not be reversed. And no compensation Cost should be recognized in Second year. Aş per above information) 718-10-35-3,

The compensation Cost recognized be reversed before December until the award 2011, would not is for feited. :. The company would be required to assess at the date of the modification whether the performance or service Conditions of the Original awald are expected to be satisfied.