stock option comp

if a ceo’s 50,000 options valued at $5 each vest all at once after 2 years of his service to the firm, schweser is saying the annual stock option expense is $125k since the service period is 2 years. so options that haven’t yet vested can be included in compensation expense if the service life is known?

the 250K is allocated over the period of years until vesting takes place. 250/2 = 125k a year. whats your question? if it is what to do about options with no period of years until vesting provided, i dont think a Q like that will be on the exam.

there was a question on one of the prac tests where options vested at the end of two years, not over the course of two years, and you had to calc comp expense based on the fair value of the option. whatever - i think you just have to remember to allocate comp expense over THE SERVICE PERIOD, not the period after which they’ve vested. that makes sense in the context of accrual accounting i guess.

does the service period (of 2 years in your case) repreent the time during which he can strike for the first time or is the 2 years as long as he has to strike. i.e. in 2 years, is that the first time he can strike or the last time

first - he can’t exercise until fully vested after two years. that’s why i got confused. i would think there shouldn’t be any comp expense if the options aren’t even exercisable.

ridgefield Wrote: ------------------------------------------------------- > first - he can’t exercise until fully vested after > two years. that’s why i got confused. i would > think there shouldn’t be any comp expense if the > options aren’t even exercisable. That would be a violation of the matching principle if they issued the stock options and didn’t record ANY expense during that period.

got it - so you expense over service period to satisfy matching principle. thanks.

so you amortize the expense from today to the date he is vested (which also represents the day he can exercise). so $500,000 stock compensation which cant be vested for 5 years means that you charge $100,000 a year, 5 years is the service period, vesting doesnt occur until year 5, and year 5 is the first time he can exercise. also, what are teh balace sheet entries? +$500,000 to expense, -$500,000 equity, and subtract $500,000 to what asset account?

the show NY Wrote: ------------------------------------------------------- > so you amortize the expense from today to the date > he is vested (which also represents the day he can > exercise). > > so $500,000 stock compensation which cant be > vested for 5 years means that you charge $100,000 > a year, 5 years is the service period, vesting > doesnt occur until year 5, and year 5 is the first > time he can exercise. > > also, what are teh balace sheet entries? > +$500,000 to expense, -$500,000 equity, and > subtract $500,000 to what asset account? Cash, or if it’s funded with debt, increase liabilities.

just checked - regardless of when vesting starts, stock option expense is recognized over service period. schweser says offset to compensation expense is an increase to paid-in capital in equity.