prepare any necessary entries in e s financial statements as at dec 31 for the years 613344

Award modified by reducing the exercise price and extending the vesting period

At the beginning of year 1, an entity grants 100 share options to each of its 500 employees, with vesting conditional upon the employee remaining in service over the next three years. The entity estimates that the fair value of each option is €15.

By the end of year 1, the entity’s share price has dropped, and the entity reprices its share options. The repriced share options vest at the end of year 4. The entity estimates that, at the date of repricing, the fair value of each of the original share options granted (i.e. before taking into account the repricing) is €5 and that the fair value of each repriced share option is €7.

40 employees leave during year 1. The entity estimates that a further 70 employees will leave during years 2 and 3, and a further 25 employees during year 4, such that there will be 390 employees at the end of year 3 (500 – 40 – 70) and 365 (500 – 40 – 70 – 25) at the end of year 4.

During year 2, a further 35 employees leave, and the entity estimates that a further 30 employees will leave during year 3 and 30 more in year 4, such that there will be 395 employees at the end of year 3 (500 – 40 – 35 – 30) and 365 (500 – 40 – 35 – 30 – 30) at the end of year 4.

During year 3, 28 employees leave, and hence a total of 103 employees ceased employment during the original three year vesting period, so that, for the remaining 397 employees, the original share options would have vested at the end of year 3. The entity now estimates that only a further 20 employees will leave during year 4, leaving 377 at the end of year 4. In fact 25 employees leave, so that 372 satisfy the criteria for the modified options at the end of year 4.

In our view IFRS 2 requires the entity to recognise:

• The cost of the original award at grant date (€15 per option) over a three year vesting period beginning at the start of year 1, based on the ongoing best estimate of, and ultimately the actual, number of employees at the end of the original three year vesting period;
• The incremental fair value of the repriced options at repricing date (€2 per option, being the €7 fair value of each repriced option less the €5 fair value of the original option) over a three year vesting period beginning at the date of repricing (end of year one), but based on the ongoing best estimate of, and ultimately the actual, number of employees at the end of the modified four year vesting period.