Question

Peter Swap is an employee covered by the stock compensation plan of the Mizri Corporation, a nonpublic company. Under the plan, Peter can purchase up to 10,000 shares of Mizri common stock over the next five years at a price of $100 per share (the market price per share at the date of grant). As Mizri was unable to estimate the fair value of these options at the date of grant, they have opted to apply the intrinsic value method to account for the compensation plan. Peter has engaged in the following transactions with Mizri’s approval: Exercised 1,000 options at the option price of $100 per share, acquiring 1,000 shares (Peter surrendered 1,000 options and $100,000, receiving 1,000 shares of Mizri common Stock). When the market price of Mizri’s common stock was $110, Peter swapped the previously purchased 1,000 shares of common, tendering another 1,100 options for 1,100 shares of common stock. In other words, Mizri allowed Peter to “trade” the 1,000 shares at the market price ($110 per share) and “acquire” the 1,100 shares at the option exercise price ($100 per share). No cash changed hands; Peter merely tendered another 1,100 options and received 100 incremental shares. Peter immediately swapped his 1,100 shares tendering another 1,210 options for 1,210 shares. Again, no cash changed hands; Peter merely tendered another 1,210 options and received another 110 incremental shares. Is Mizri required to recognize Compensation Expense for this plan?

Answer 1

The compensation expense needs to be recognised when the employees are allowed to purchase shares for more than 5% .discount from the market price

Hence when the market price of the stock was $110 and $120 and still Peter got it at $100 , discount was more than 5% hence the Compensation Expense for the plan would need to be recognised