Pastner Brands is a calendar-year firm with operations in several countries. As
ID: 2522858 • Letter: P
Question
Pastner Brands is a calendar-year firm with operations in several countries. As part of its executive compensation plan, at January 1, 2018, the company issued 480,000 executive stock options permitting executives to buy 480,000 shares of Pastner stock for $43 per share. One-fourth of the options vest in each of the next four years beginning at December 31, 2018 (graded vesting). Pastner elects to separate the total award into four groups (or tranches) according to the year in which they vest and measures the compensation cost for each vesting date as a separate award. The fair value of each tranche is estimated at January 1, 2018, as follows:
Required:
1. Determine the compensation expense related to the options to be recorded each year 2018–2021, assuming Pastner allocates the compensation cost for each of the four groups (tranches) separately.
2. Determine the compensation expense related to the options to be recorded each year 2018–2021, assuming Pastner uses the straight-line method to allocate the total compensation cost.
Date Amount
Vesting Fair Value
per Option Dec. 31, 2018 25 % $ 4.40 Dec. 31, 2019 25 % $ 4.80 Dec. 31, 2020 25 % $ 5.40 Dec. 31, 2021 25 % $ 6.40
Explanation / Answer
Answer 1. We treat each individual vesting date as a separate award: Vesting Date Number of Shares - Vesting Fair Value - Per Option Compensation Cost 31-Dec-18 120,000 4.40 528,000.00 31-Dec-19 120,000 4.80 576,000.00 31-Dec-20 120,000 5.40 648,000.00 31-Dec-21 120,000 6.40 768,000.00 Total 2,520,000.00 Shares Vesting at Compensation Expenses Recorded in 2018 2019 2020 2021 31-Dec-18 528,000.00 31-Dec-19 288,000.00 288,000.00 31-Dec-20 216,000.00 216,000.00 216,000.00 31-Dec-21 192,000.00 192,000.00 192,000.00 192,000.00 Total 2,520,000.00 Answer 2. 2018 2019 2020 2021 Total Compensation Expense 630,000.00 630,000.00 630,000.00 630,000.00 2,520,000.00