fas123r question

Is it necessary to “true-up” compensation expense at the end of the vesting period for service-based opt-ion awards and performance-based option awards if the options are not exercised? Service-based award Performance-based award A. Yes Yes B. Yes No C. No Yes D. No No Does it mean in the money, but not exercised? or simply out of the money? still I think it needs to consider true up if some awards didn’t vest for service based/perfomance based(non-price), what do you think? Thanks!

C?

nop, the answer is D

can anyone answer my question? I am so frustrated taking so much time reading fas123 for quite a while but don’t get it…

I’m doing FSA on Monday, I’ll let you know then

If this was a exam question, I would had gone with and guessed a D on this. Since all I remember now is that if the options were not vested we do not need to true-up the CE component. But the credibility of this is doubtful too.

This issue has been debated before and we didn’t get to a real good answer. Options are now expensed using a fair value method based on option pricing models. In the case of vesting the expese is spread out over the vesting period. For example, say your model says the option is worth 1,000 on the GRANT date with a 5 year vesting period. You would expense 200 each year. If the employee left after 4 years you would have to “true up” the compensation expense. Schweser says this would be a downward adjustment only. I can’t remember what that means without going back though. Is a downward adjustment an increase in compensation expense or a decrease (kind of confusing because it is an expense item). I don’t think you ever have a true up for options that expire worthless though.

Yes, it is a downward adjustment because the employee left after 4 yrs, didn’t vest, which was supposed to vest. I see this part. but let me fully understand your last statement I don’t think you ever have a true up for options that expire worthless though. so u mean the some options are out of money, and out of money options don’t need “true up”? But if we don’t true up, the expense will be higher than it should be (since originally we think the options are worth some $)?

orangeyt Wrote: ------------------------------------------------------- > Yes, it is a downward adjustment because the > employee left after 4 yrs, didn’t vest, which was > supposed to vest. I see this part. > > but let me fully understand your last statement > > I don’t think you ever have a true up for options > that expire worthless though. > > so u mean the some options are out of money, and > out of money options don’t need “true up”? But if > we don’t true up, the expense will be higher than > it should be (since originally we think the > options are worth some $)? This is true, but because the model takes into account volatility it should all wash in the long run. Some will expire worthless when you booked expenses too high and some will expire in the money when you booked too low of an expense. That is my understanding. I am not an accountant and it is not a strong area for me. I did have my business partner look at this though and he is a CPA and he concurred with me.

I appreciate it. this makes perfect sense to me mwvt9 Wrote: ------------------------------------------------------- > orangeyt Wrote: > -------------------------------------------------- > ----- > > Yes, it is a downward adjustment because the > > employee left after 4 yrs, didn’t vest, which > was > > supposed to vest. I see this part. > > > > but let me fully understand your last statement > > > > I don’t think you ever have a true up for > options > > that expire worthless though. > > > > so u mean the some options are out of money, > and > > out of money options don’t need “true up”? But > if > > we don’t true up, the expense will be higher > than > > it should be (since originally we think the > > options are worth some $)? > > This is true, but because the model takes into > account volatility it should all wash in the long > run. Some will expire worthless when you booked > expenses too high and some will expire in the > money when you booked too low of an expense. > > That is my understanding. I am not an accountant > and it is not a strong area for me. I did have my > business partner look at this though and he is a > CPA and he concurred with me.

My understanding is that you do have to adjust compensation expense if the service-based goals or performance-based goals (except when the goal is based on stock price) are not met, but not if the goals are met while the options still expire worthless.

From Schweser FSA P. 229 “With a service based award, fair value is measured on the grant date and there is an adjustment (true-up) to compensation expense at the end of the vesting period for awards that did not vest… There is no adjustment if the award simply expires.” Same for non-market-related Performance Based awards.

if target is not met, both service based and non-market related performance need a final “true up”. and no true up for market related performance is permitted even if target is not met. But I think this question is not talking about final stage, it is asking how if some of the options expire without value. Not sure if my understanding is right McLeod81 Wrote: ------------------------------------------------------- > My understanding is that you do have to adjust > compensation expense if the service-based goals or > performance-based goals (except when the goal is > based on stock price) are not met, but not if the > goals are met while the options still expire > worthless.