Executive Summary
Ventura Associates, Inc. granted non-qualified time-vesting and performance-vesting options on 1 January 2001. Both types of options have a five-year vesting period. The vesting of the performance-based options is contingent upon achievement of certain annual EBITDA targets. In addition, all the outstanding options become vestable if the company undertakes an IPO. This report explains how the options should be accounted for initially and after the company undertakes an IPO based on the provisions of ASC 718.
Facts
Ventura Associates is a manufacturer of exterior building products. On January 1, 2001, the company granted non-qualified stock options to certain employees. The firm can only settle the options by issuing common stock. The fair market value of the company’s stock on January 1, 2001, was $10 per share. Some of the stock options are time-vesting options and others are performance-vesting.
A summary of the terms of the two sets of…show more content… The deferred tax asset and deferred tax benefit balances should also be adjusted for the changes (718-20-55-15).
Example 1:
Assume the following facts about Ventura’s time-vesting and performance vesting stock options:
Share options granted: 500,000
Expected forfeiture per year = 3%
Annual risk-free rate = 2 years
Contractual term of options = 5 years
Expected volatility over contractual term = 40%
Tax rate = 35%
Option value (Black-Scholes) = $3.95
Number of shares expected to vest = 97% × 500,000 = 485,000
Compensation cost to be recognized over the 5-year period = 485,000 × $3.95 = $1,915,750 (Each year $383,150).
The compensation cost to be recognized for the time-vesting options at the end of 2001 would be as follows:
Time-Vesting Options:
At the end of
