Oliver Clothsoff, CFA is discussing stock based compensation under FAS 123® with her coworkers. She makes two statements: #1 Service-based awards allow a “true-up” that allow a reversal of previous expense for options that don’t vest. #2 Performance based awards with stock price goals allow a “true-up” if the target is not met, but no “true-up” if the target is met. Is Oliver correct with her statements? …Statement 1…Statement 2 a)…true…true b)…false…true c)…true…false d)…false…false
wtf is a “true-up”?
I’m taking C. A true up is when you adjust the compensation expense down at the end of the period for options that weren’t exercised. I think you can do this for service-based awards and performance based awards that don’t use stock price goals.
ilvino Wrote: ------------------------------------------------------- > I’m taking C. A true up is when you adjust the > compensation expense down at the end of the period > for options that weren’t exercised. Be careful with that wording. It is for options that don’t vest, not for options that aren’t exercised. I think you > can do this for service-based awards and > performance based awards that don’t use stock > price goals.
Good call on the wording. The service-based example usually arises when someone leaves the firm before their options have vested.
Agreed with C. No true up for market based performance awards if the goal is not met or not met. And unvested service awards are trued up.
C is the correct answer and mwvt9’s clarification is very important. “true-up” allows you to reverse previous expensed compensation related to stock compensation that did not VEST. It is allowed with service based awards, performance based awards with non-stock priced goals (say a certain ROE level), but is not allowed with performance based awards with stock price goals. It is out of SS 7, reading 25 page 149 for those who care (CFAI text).
BTW, nobody noticed “Oliver Clothsoff”?
tricky question, thanks for explanation