Share-Based Payment

Date recorded:


The discussions continued from the previous day and centred on the following areas:

  • Vesting conditions.
  • Whether grant date measurement was appropriate.
  • Whether the grant date measurement should be subsequently adjusted (e.g. via a true-up payment, which is where the numbers are adjusted to show what has subsequently proved to be the correct figures).


Most of the conversation centred on the following example:

There are 500 employees, each of whom have 100 options. At grant date it is estimated that 80% of these options will vest, and that the options are worth $15. The options vest after 3 years working with the company. It is estimated that 80% of employees will work for 3 years (and thus their options will vest) and 20% will leave within the 3 year period. For the purposes of the example, it is assumed that those who leave within 3 years will do so evenly over the period.


There was a debate about whether the share options should be valued at $15 and only 80% of the options should be valued, or if all of the options should be valued at $12. As both give the same results, after much discussion, it was decided that it did not matter.

Proposed Accounting - Method 1

At grant date there are 500 employees, each with 100 options valued at $15 (market price), and it is estimated that 80% of these will vest. This gives a valuation of:

500 * 100 * 15 * 0.8 = $600,000

At grant date it is expected that 80% of employees will give 3 years service, and 20% will leave evenly over the 3 year period. Thus the 20% will each on average work for 1.5 years. This gives the total estimated number of hours worked as:

(0.8 * 500 * 3) + (0.2 * 500 * 1.5) = 1,350 years of service

Therefore the cost per year of service (per employee) to be charged to the income statement is:

$600,000/1,350 years = $444.44 per year per employee

If employees leave as estimated, then the actual charge to the income statement will be $600,000. If, for example, fewer people leave than is expected, then the amount of services received from employees will be higher. This will increase the charge to the income statement, as the amount charged is still $444.44 per year per employee, regardless of the fact that the actual figures for service hours are different from those estimated.

Proposed Accounting - Method 2

Method 2 involves taking the $600,000 charge as calculated above and spreading this over the 3 years. No adjustments are made. This is an approach that was recommended by experts that the advisory committee consulted, but was rejected by the Board.

Proposed Accounting - Method 3

This method involves adjusting either of the above methods by a 'true-up' amount. This is the difference between what has actually been charged, and what should have been based on actual results. This is also an approach recommended by experts, and of the two methods that options analysts recommended, this was the preferred.

Valuation - Revisited

After working through the example, there was more discussion on how the $12 and $15 should be arrived at. It was decided that, where possible, a model (e.g. the Black Scholl's model) should be used. This is likely to be the case where the vesting conditions are market-based conditions (e.g. the share price getting above a certain level). This price should then be adjusted for other vesting conditions that could not be entered into the valuation model (e.g. employment conditions). Hence the $12 surrogate price is arrived at by adjusting the market price ($15) for expectations of how many employees with share options will remain in service for the next 3 years. Had there been other vesting conditions, then these would also need to be factored in.

It was noted that the same criterion is used to determine the number of options expected to vest and the price of those options. This caused concern, but seemed to be inevitable under Method 1 above, which was the method the Board advocated.

There was much discussion on whether true-ups should be used. They are used in the US. However, it was pointed out that when they are used, then the measurement date starts to move towards a service or vesting date, rather than grant date. Since the Board decided that grant date should be used, having a true-up adjustment was inconsistent. The same is true of adjusting the price of the options.

Additionally, share options are considered to be part of equity, and therefore movements in the price of the options should not go through the income statement. This is consistent with setting a measurement of cost per year per employee at grant date and then applying this to the actual number of employees.

Potential Pitfalls

The project manager pointed out that if Method 1 is used, there is potential for abuse. By adjusting the forfeiture expectations at grant date, the expense can be manipulated. However, the Board felt that regardless of what method is chosen, there is always room for abuse by manipulating expectations.

Tentative Conclusion and Going Forward

The Board tentatively concluded that Method 1 should be used, and that there should be no true-up or option price adjustments. However, the project manager was asked to again consult experts and the advisory board and present them with this proposal.

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