At the beginning of year 1, an entity grants 200 shares of each to 500 employees. The grant is conditional upon the employees remaining in the entity's employ until the performance condition described below is satisfied: Performance Condition The shares will vest at the end of: Year 1 - if the entity's earnings increase by 15%. Year 2 - if the entity's earnings increase by more than an average of 11% per year over the two-year period. Year 3 - if the entity's earnings increase by more than an average of 8% per year over the three-year period. The shares have a fair value of P15 at the beginning of year 1, which equals the share price at grant date. The entity does not expect to pay dividends over the three-year period. The following events occurred: Year 1 30 employees have left during year 1 and the entity expects, on the basis of a weighted average probability, that a further 40 will leave during year 2. The entity's earnings have increased by 14% by the end of year 1 and the entity expects that the earnings will continue to increase at a similar rate in year 2. Therefore, the entity expects that the shares will vest at the end of year 2. Year 2 35 employees have resigned by the end of year 2 and the entity expects that a further 30 will leave during year 3. Earnings have increased by only 7% during year 2. Hence, the shares do not vest at the end of year 2 as expected by the end of year 1. The entity expects that by the end of year 3, its earnings will increase by at least 5%, thereby achieving the average of 8% per year. Year 3 28 employees have resigned by the end of year 3. The entity's earnings have increased by 6% during year 3. This results in an average increase of 9% per year over the three-year vesting period. 1 Cumulative compensation expense at the end of year 2 2.Cumulative compensation expense at the end of year 3 3.. The year in which the share options vested to the entity’s employees

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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At the beginning of year 1, an entity grants 200 shares of each to 500 employees. The grant is conditional upon the employees remaining in the entity's employ until the performance condition described below is satisfied:

Performance Condition

The shares will vest at the end of:

Year 1 - if the entity's earnings increase by 15%.
Year 2 - if the entity's earnings increase by more than an average of 11% per year over the two-year period.
Year 3 - if the entity's earnings increase by more than an average of 8% per year over the three-year period.

The shares have a fair value of P15 at the beginning of year 1, which equals the share price at grant date. The entity does not expect to pay dividends over the three-year period.

The following events occurred:

Year 1

30 employees have left during year 1 and the entity expects, on the basis of a weighted average probability, that a further 40 will leave during year 2.
The entity's earnings have increased by 14% by the end of year 1 and the entity expects that the earnings will continue to increase at a similar rate in year 2. Therefore, the entity expects that the shares will vest at the end of year 2.

Year 2

35 employees have resigned by the end of year 2 and the entity expects that a further 30 will leave during year 3.
Earnings have increased by only 7% during year 2. Hence, the shares do not vest at the end of year 2 as expected by the end of year 1. The entity expects that by the end of year 3, its earnings will increase by at least 5%, thereby achieving the average of 8% per year.

Year 3

28 employees have resigned by the end of year 3.
The entity's earnings have increased by 6% during year 3. This results in an average increase of 9% per year over the three-year vesting period.

1 Cumulative compensation expense at the end of year 2

2.Cumulative compensation expense at the end of year 3

3.. The year in which the share options vested to the entity’s employees

Share options outstanding at the end of year 2

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