TRUE-UP Accounting for Performance-based compensation

In the article of CFAI book 2 about “FAS123, Accounting for stock option”, it mentions something for accounting both Performance-based and Stock-price based stock option. I don’t understand the term – TRUE UP. Anyone can help me? thanks

When compensation expense is accounted for under FAS 123® you book a certain amount based on the probability of meeting the performance goals. If you projections are off you have to “true it up”. For example, Say you booked $1,000 for compensation expense based on the fair value of stock options that will be granted in the event that a set of employees meets some goals. In reality, a year later they did a better job than expected so compensation expense should have been $1,500. To true it up you book an additional $500 of comp exp (it could also be written down if the actual was lower than $1,000). That is my understanding. I don’t have my books in front of me though. I will take another look when I get home. Some accounting stud (oxymoron?) my be able to give a better example.

mwvt9 Thanks for your help!!~ I believe your explanation is better!~~

willowlau, just to clarify, the true-up is not permitted for both types of performance-based grants you’ve listed. The grant-date fair value of grants of service-based awards (e.g. stay employed with us for three years and the options will cliff-vest at the end of this period) and performance-based awards (nonstock-price goals, e.g. EPS, ROE) are recorded, with subsequent true-up for the actual amount that vests. Performance-based awards that are contingent upon “market-based” (e.g. stock price, TSR) criteria cannot be trued-up. However, the grant-date fair value may be discounted by the estimated probability of actually achieving the performance objective(s). Anyway, a quick review of p.149 of Volume II ought to clarify matters for you.