Pastner Brands is a calendar-year firm with operations in several countries. As
ID: 2591950 • 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, 2016, the company issued 440,000 executive stock options permitting executives to buy 440,000 shares of Pastner stock for $36 per share. One-fourth of the options vest in each of the next four years beginning at December 31, 2016 (graded vesting). Pastner elects to measure the fair value of all options on January 1, 2016, to be $4.80 per option (tranche) using a single weighted-average expected life of the options assumption.
Determine the compensation expense related to the options to be recorded each year 2016–2019, assuming Pastner allocates the compensation cost for each of the four groups (tranches) separately.
Determine the compensation expense related to the options to be recorded each year 2016–2019, assuming Pastner uses the straight-line method to allocate the total compensation cost.
Pastner Brands is a calendar-year firm with operations in several countries. As part of its executive compensation plan, at January 1, 2016, the company issued 440,000 executive stock options permitting executives to buy 440,000 shares of Pastner stock for $36 per share. One-fourth of the options vest in each of the next four years beginning at December 31, 2016 (graded vesting). Pastner elects to measure the fair value of all options on January 1, 2016, to be $4.80 per option (tranche) using a single weighted-average expected life of the options assumption.
Explanation / Answer
Company grants 440,000 options each with a fair value of $4.80
4 year Annual Vesting
Under IFRS 2, companies are required to treat each installment as a separate share option grant because each installment has a different vesting period
Total Compensation Cost:
Award
2016
2017
2018
2019
Tranche 1 ((2,112,000/4)*1/1)
$528,000
Tranche 2 ((2,112,000/4)*1/2)
$264,000
$264,000
Tranche 3 ((2,112,000/4)*1/3)
$176,000
$176,000
$176,000
Tranche 4 ((2,112,000/4)*1/4)
$132,000
$132,000
$132,000
$132,000
Total Expense
$1,100,000
$572,000
$308,000
$132,000
Total Compensation Cost: Straight-line Method
Award
2016
2017
2018
2019
Total Expense
$528,000
$528,000
$528,000
$528,000
Award
2016
2017
2018
2019
Tranche 1 ((2,112,000/4)*1/1)
$528,000
Tranche 2 ((2,112,000/4)*1/2)
$264,000
$264,000
Tranche 3 ((2,112,000/4)*1/3)
$176,000
$176,000
$176,000
Tranche 4 ((2,112,000/4)*1/4)
$132,000
$132,000
$132,000
$132,000
Total Expense
$1,100,000
$572,000
$308,000
$132,000