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In: Accounting

Murray Compensation, Inc. (Murray), an SEC registrant that provides payroll processing and benefit administration services to...

Murray Compensation, Inc. (Murray), an SEC registrant that provides payroll processing and benefit administration services to other companies, granted 100,000 “at-the-money” employee share options on January 1, 2010 . The awards have a grant-date fair value of $6, vest at the end of the third year of service (cliff-vesting), and have an exercise price of $21. Subsequent to the awards being granted, the stock price has fallen significantly. On January 1, 2012 , Murray decreased the exercise price on the stock options to $12. This downward adjustment to the exercise price was made in order to ensure that the options continue to provide intended motivational benefit to employees. However, in addition to the reduction in the exercise price, Murray also changed the vesting terms, such that the employees must provide an additional two years of service (awards will now vest on January 1, 2015). Immediately prior to the reduction in the exercise price of the awards, the fair value was $1 per award. After considering the impact of the January 1, 2012, re-pricing, the fair value was $4 per award.

How much compensation expense should be record each year before 2012?

How does decreasing exercise price impact on the fair value of stock option?

Solutions

Expert Solution

Employee Share Options 100000 Share options each to Employees
Grant Date January 01 2010
FV on Grant Date 6 $
Let Suppose 01 Employee
Exercise Price on Third year is 21 $
Exercise price Fallen down
The Fair value Change ( 4 $ - 1 $ ) = 3 $ repricing
For Year December Ended 2010 December Ended 2011 December Ended 2012
100000 Share Options X 6 $ 100000 Share Options X 6 $ 100000 Share Options X 6 $ + 100000 X ( 4$ -1 $)
Expenses 100000 Share Options X 6 $ X 1/ 3 100000 Share Options X 6 $ X 2/ 3   100000 Share Options X 6 $ X 3/ 5
Shall be Valued accordingly Shall be Valued accordingly Shall be Valued Accorindingly as, re pricing shall be followed prospectively for balance period.
as Settlement is made in Cash Basis. as Settlement is made in Cash Basis. Modification should be treated and applied prospectovely .
Shall be Revalued at Fair Value at Year End Shall be Revalued at Fair Value at Year End Shall be Revalued at Fair Value at Year End
Change in Repricing - - 100000 X ( 4 $ -1 $ ) X 1/ 3 = 100000 per year
Opening Balance - 200000 400000
to be Charged During the Year 200000 200000 460000
Balance to be Charged 200000 200000 60000

Decrease in the Exercei price has impacted increase in the employee cost of the Company over the balnce period .

ekkarill92 answered 2 years ago
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