Menghan Jiang
Xiaoyang Xu
Case Study: “Occupy Mall Street”
The answer to the #1Q:
According to the ASC 718-10-30-2: When companies grant share options to their employees, the calculations of payment (compensation cost) only depend on the fair value. This means that only fair value is useful to calculate compensation cost of OMS recognize in each year of the award’s service period.
Therefore, calculation of compensation cost:
$15*1000 (employee share options)= $15000 for four years service period
$15000/4=$3750 for each period. --- $3750 is compensation cost of OMS recognize in 2012 and in 2013.
According to the ASC 718-20-35-3: If there are some modification to share options transactions with employees, the total compensation cost should include two parts: 1. The compensation costs before modifications. 2. The incremental costs because of modifications. In
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addition, the calculation of incremental costs should equal the excess between fair-value of awards after modification and fair-value before the terms of the award are modified. Therefore, calculation of modification compensation cost: ($12-$9)*1000 employee share options=$3000 for 2014 and 2015 two years service period and $3000/2years=$1500 for each year.
$1500+ $3750(this figure is calculated in the above)=$5250
Therefore, $5250 is the compensation cost of OMS recognize in 2014 and 2015
The answer to the #2Q:
According to the ASC 718-20-55-94: If modifications happen after the awards have become fully vested, the additional compensation costs should be recognized on modification dates.
Refer to OMS case, if the modification to the terms of the award was made on January 1, 2017, this implies that the modified share options are immediately vested. Therefore, the additional compensation cost should be recognized in the 2017.
Based on the calculation of additional compensation from ASC 718-20-55-95:
Fair value of modified share option at January 1, 2017 $12
Less: Fair value of original share option at January 1, 2017 9
Additional compensation cost to be recognized $3
Therefore, the additional compensation cost $3 per share should be recognized in the 2017 by
OMS. The answer to the #3Q: In year 2013 the management of the OMS believed the option would not be achieved due to the loss of tenants, therefor they modified the condition----lowered the 4 years cumulative net income from $10 million to $9 million, however it is probable that the company still won’t meet the revised condition. According to FASB 718-10-35-3, the company has to recognize any compensation cost based on the rendered services, In FASB 718-10-55-61 the company only recognize compensation cost as time the market condition is possible to achieve. Therefor if the company decided that there’s no service would be rendered, the revise entry should be made if there’s no prier rendered required services. Also based on FASB’s codification 718-20-55-108 and 718-20-55-118, this modification is classified as “type IV improbable to improbable modification”. OMG would recognized 0 incremental compensation cost at the end of the year 2013, also a revise entry should be made to reduce the total estimate compensation cost to 0 due to the fact the manager of OMG believe it is improbable to achieve neither the original nor the modification goal. The answer to the #4Q: In year 2014 the management further reduced the cumulated net income to $8 million, and believed the target is probable to reach. This change did not affect other conditions, and by using the Black-Scholes -pricing formula the fair-value-based measure of the option is $12 per share at modification. This case now is considered as “Type III improbable to probable modification” (FASB codification 718-20-55-108), which means the vest modification options should be count for the incremental cost at date of modification. Based on FASB 718-20-35-3 “the cumulative effect on current and prior periods of a change in the estimated number of instruments for which the requisite service is expected to be or has been rendered shall be recognized in compensation cost in the period of the change” thus the compensation cost should be recognized in year 3 and year 4. The calculation should be like this. Fair Value of modified share option $12 Share options expected to vest under modified shales target 1,000 Fair value of modified award $12,000 Fair value of original share option $9 Share options expected to vest under original sales target --- Fair value of original award $--- Incremental compensation cost of modification $12,000 Which means the total compensation cost is $12,000. In yrear 3 the compensation cost is $12,000/4*3 = $9,000. To recognize prior compensation cost. In year 4 the compensation cost recognized would be $3,000. The answer to the #5Q: If the award continued to be improbable to achieve after the modification made in 12/31/2014 because of losing a major tenant. The accumulated compensation cost for year 2015 and year 2016 would be 0 based on FASB codification 718-20-55-118 and 119 “type IV improbable to improbable modification”. Like in Question #3 because employee would not be able to achieve neither the original nor the modified target. Also as stated in FASB 718-10-55-61 if only one market condition changes the possibility to achieve the target “compensation cost for that award is reversed if the employee does not render the requisite service”, and the compensation cost only recognize when it is possible the market condition is satisfied before the end of the service period. Therefore In this case the prior years recognized compensation cost should be revised: the adjusting entry should be made to reduce the cumulative compensation cost to 0.
ARB43, Ch.4, Par.9 ?Where evidence indicates that cost will be recovered with an approximately normal profit upon sale in the ordinary course of business, no loss should be recognized...?
= (487 x 1) / 80 = 6.09 General and Admin. = (.091 x 12.76 x.185) + 23.59 = 2.38 Total Cost (per 100 parts) $32.83
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