USA Stock Option under SFAS 123R

[Accounting_girl]

Hello,

I have questions on the treatments of stock option. Our company's year end is Dec 31. Our stock program are for 5 years. Employees vested after 12 months of services for 20%, then earns 1/48 per month afterward. We have employees joined and left the company within the same year. For example, a employee joined the company in April 1st 2009 and left in Sep of the same year. He was granted 600 shares in June 1st 2009. Vested date began on April 1st. Fully vested date is March 31st 2014. We had forfeiture rate of 10% in year 2009. Price per share is US$1. Therefore the entire option expenses is US$540, From April to Sep, we booked 6 months option expenses of US$54 vs APIC. This is the only entry I have for this transaction.

My questions are:

1) After the employee left the company, do we immediately stop amortize the expenses?
2) We had booked US$54 for the option expenses, do I need to reverse the US$54 since the employee had not vested yet?
3) Do I have to do anything with the rest of the US$486?
4) Do I have to do anything on the fully vested date (March 31st 2014? The compound forfeiture rate is 30% for year 2014.

Please explain to me how I need to do in detail as this is the first time I do this.

Thanks.

 

[Counterofbeans]

Interesting vesting schedule you have there. What's the logic to that? I'm curious. It cliff vests for 20% after one year, then it goes to 1/48 per month after that? Strange...

This isn't an easy question to answer here, as stock-based compensation rules are very long and sometimes complex and you have a few potential hiccups from what I can see. Can make for a very long post.

Okay, first step: the Company must make a policy decision about whether to recognize compensation cost for an award with only service conditions that has a graded vesting schedule in one of two ways, but I'll skip the explanation, save you the pain and say make this your policy: "We will record compensation cost on a straight-line basis over the requisite service period for the entire award (for awards that only have a service condition)." Assuming this is your policy, simply stated, you can just straight-line the related expense, which is what you want.

ASC 718 requires companies to estimate forfeitures when recognizing compensation cost here. These estimates should be adjusted throughout the requisite service period based on the extent to which actual forfeitures differ (or expected to) from their previous estimates. So, the question here is whether the departures impact the estimate of your forfeiture rate.

For example, assume a company estimates that 10 out of 100 (10%) employees will forfeit nonvested share-based payment awards. Further assume one employee terminates employment and forfeits nonvested share-based payment awards. The compensation cost for the forfeited awards is reversed at the employee’s termination date. The company should estimate how many of the remaining 99 employees will forfeit their awards. If this employee’s forfeiture was expected (part of the original estimate of 10), and the company does not believe that any additional forfeitures will occur beyond the original estimate of 10 employees, then the company should revise its forfeiture estimate to reflect 9% expected forfeitures (9 out of the remaining 99 employees). Alternatively, if this employee’s forfeiture was not originally expected, and the company continues to believe that no additional forfeitures will occur beyond the original estimate of 10 employees, then the company would continue to reflect 10% expected forfeitures (10 out of the remaining 99 employees). Changes in estimated forfeitures are recognized through a cumulative catch-up adjustment. Let me know if you need help with the JEs here or not.

So, to answer your questions:

1. While you can do this a few ways, I'd simply reverse the expense related to this one ex-employee, then I'd re-evaluate the estimated forfeiture rate. Just squeeze the difference through the current period via Dr. Compensation Expense, Cr. APIC (or vice-versa, if needed)

2. While I'm not 100% sure what it means, " Our stock program are for 5 years," I think you are referring to how the awards actually vest. This is the period that the expense should be recorded over (note: in this situation, you move forward from the grant date, not the " Vested date began on April 1st." The requisite service period can only precede the grant date in certain circumstances and you don't meet it here (a service condition is required, which is known at the grant date)

 

[Counterofbeans]

3. You didn't say how many employees are included in this grant, nor can I figure out how you get to a total compensation expense to be recognized of $540 when one individual was granted 600 shares (options?) and the FMV at the grant date was $1. When you ask what to do with the remaining $486, as stated above, you simply need to re-evaluate your estimated forfeiture %, recalculate the corresponding compensation expense, compare it to what was already recorded and make an adjusting JE in the current period.

4. No, nothing really happens on the fully vested date from an accounting perspective.

Let me know if that helps