In: Accounting
Fashion Inc.
(“Fashion” or “the Company”), an SEC registrant, is a fashion
retailer that sells men’s...
Fashion Inc.
(“Fashion” or “the Company”), an SEC registrant, is a fashion
retailer that sells men’s and women’s clothing and accessories. As
an incentive to its employees, the Company established a
compensation incentive plan in which a total of 100,000 options
were granted on January 1, 2020. On that date (the grant date),
Fashion’s stock price was $15.00 per share.
The significant terms
of the incentive plan are as follows:
- The options have a $15.00 “strike” or exercise price (the price
the employee would pay to purchase a share of stock if the options
vest).
- For the options to vest, the following must occur:
- The employee must continue to provide service to the Company
throughout the entire explicit service period of five years (i.e.,
a five-year “cliff-vesting” award).
- The Company must achieve annual sales of at least $20 million
during the fifth year of the explicit service period.
- The Company’s share price must increase by at least 25 percent
over the five-year explicit service period.
- In addition, if the Company achieves sales of at least $25
million during the fifth year of the explicit vesting period, the
strike price of the options will decrease from $15 to $10.
- The options expire after 10 years following the grant
date.
- The options are classified as equity awards.
Additional Information:
- Assume it is probable at all times that 100 percent of the
employees receiving the awards will continue providing service to
the Company as employees for the entire five-year explicit service
period and that the five-year explicit service period is determined
to be the requisite service period.
- On the grant date, Fashion’s management determined that it is
probable that the Company’s sales in year 5 will be $30 million,
and therefore it is probable on the grant date that sales are
greater than or equal to at least $25 million.
- The grant-date fair value of the options assuming a strike
price of $15 is $8 per option. The grant-date fair value assuming a
strike price of $10 per option is $12 per option.
Questions:
- What types of conditions are present in the plan for the
vesting of the units? Are they service, performance, market, or
“other” conditions?
- How do the service, performance, and market conditions affect
vesting of the units? More specifically, of the various conditions
present in the awards:
- Which conditions affect the vesting of the award?
- Which conditions affect factors other than vesting of the award
and what is their accounting treatment?
- As described above, on January 1, 2020 (the grant date), $30
million of sales were probable for year 5. During years 1, 2, and
3, $30 million of sales for year 5 remained probable. At the
beginning of year 4, management determines that it is probable that
only $22 million of sales will occur for year 5. What are the
proper accounting treatment and journal entries for each year?
- Through the end of year 5, Fashion’s share price remained at
$15 and therefore the market condition was not met. What is the
accounting impact of the market condition not having been met?