Ashleigh. a public limited company,has granted share options to its employees with a fair value of S6 million.The options vest in three years’ time The Monte-Carlo model was used to value the options,and these estimates had been made: Grant date (January 1.restimate of employees leaving the entity during the vesting period $.5% $ January 1. 20X5 revision of estimate of employees leaving to $6% $ before vesting date December 3120X6: actual employees lea ing $5% $
The Correct Answer and Explanation is:
To provide the correct answer, we will need to understand how the change in the estimated employee turnover affects the accounting for share-based payments, specifically the stock options granted to Ashleigh’s employees. In this case, we need to adjust the calculation of the expense based on the changes in the estimated employee turnover during the vesting period.
Background:
Ashleigh has granted share options to employees with a fair value of $6 million. These options vest in three years (i.e., by the end of 20X6), and the vesting is contingent on the employees staying with the company. The company used the Monte Carlo model to value the options and has made the following changes in the estimated employee turnover:
- Grant Date (January 1, 20X4): Initial estimate of employees leaving during the vesting period was 5%.
- Revision (January 1, 20X5): The estimated employee turnover was revised to 6%.
- Actual Employee Turnover (December 31, 20X6): The actual employee turnover was 5%.
The key point here is that share-based payment expense is calculated based on the number of options expected to vest, and changes in employee turnover will directly impact this.
Step-by-Step Calculation:
- Initial Estimate (January 1, 20X4):
The initial fair value of the share options is $6 million. Based on the initial estimate of 5% employee turnover, we expect 95% of the options to vest. Therefore, the expected value of the options that will vest is: 6,000,000×95%=5,700,0006,000,000 \times 95\% = 5,700,000 The expense for the year will be spread over the vesting period of three years, so the annual expense will be: 5,700,0003=1,900,000\frac{5,700,000}{3} = 1,900,000 - Revision (January 1, 20X5):
The company revises its turnover estimate to 6%. This means we now expect 94% of the options to vest, resulting in a new expected value of the options that will vest: 6,000,000×94%=5,640,0006,000,000 \times 94\% = 5,640,000 The revised annual expense will be: 5,640,0003=1,880,000\frac{5,640,000}{3} = 1,880,000 The company will adjust the expense for 20X5 and 20X6 to reflect this revision. - Actual Employee Turnover (December 31, 20X6):
The actual turnover for 20X6 was 5%, which means 95% of the options will vest. The actual expense for 20X6 will reflect the final vesting estimate: 6,000,000×95%=5,700,0006,000,000 \times 95\% = 5,700,000 The final annual expense is: 5,700,0003=1,900,000\frac{5,700,000}{3} = 1,900,000
Adjustments to Expense:
Since the company is revising its estimate of employee turnover, it will adjust the expense recognized for the years 20X4 and 20X5. The final expense will be based on the actual turnover rate of 5%, so the total expense will be based on 5,700,000 worth of options vesting over the three years. Therefore, the expense for the three years combined will be $5.7 million.
The revised expense calculation will be: Adjusted Expense for 20X4 and 20X5=5,700,000/3=1,900,000\text{Adjusted Expense for 20X4 and 20X5} = 5,700,000 / 3 = 1,900,000
Thus, the total recognized expense for each year remains $1,900,000. Since the total fair value of the options granted is fixed at $6 million, and the vesting percentage has been adjusted, the final recognition reflects this total amount.
