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prepare any necessary entries in e s financial statements as at dec 31 for the years 613336

Award with market condition and variable vesting period

At the beginning of year 1, an entity grants 10,000 share options with a ten year life to each of ten senior executives. The share options will vest and become exercisable immediately if and when the entity’s share price increases from £50 to £70, provided that the executive remains in service until the share price target is achieved.

The entity applies a binomial option pricing model, which takes into account the possibility that the share price target will be achieved during the ten year life of the options, and the possibility that the target will not be achieved. The entity estimates that the fair value of the share options at grant date is £25 per option. From the option pricing model, the entity determines that the most likely vesting period is five years. The entity also estimates that two executives will have left by the end of year 5, and therefore expects that 80,000 share options (10,000 share options × 8 executives) will vest at the end of year 5.

Throughout years 1 to 4, the entity continues to estimate that a total of two executives will leave by the end of year 5. However, in total three executives leave, one in each of years 3, 4 and 5. The share price target is achieved at the end of year 6. Another executive leaves during year 6, before the share price target is achieved.

Paragraph 15 of IFRS 2 requires the entity to recognise the services received over the expected vesting period, as estimated at grant date, and also requires the entity not to revise that estimate. Therefore, the entity recognises the services received from the executives over years 1-5. Hence, the transaction amount is ultimately based on 70,000 share options (10,000 share options × 7 executives who remain in service at the end of year 5). Although another executive left during year 6, no adjustment is made, because the executive had already completed the expected vesting period of 5 years.

The entity will recognise the following amounts during the initial expected five year vesting period for services received as consideration for the options.

Year Calculation of cumulative expense

expense (Z)

Expense for period (.C)

1 8 employees x 10,000 options x £25 x 1/5



2 8 employees x 10,000 options x 05 x 2/5



3 8 employees x 10,000 options x 05 x 3/5



4 8 employees x 10,000 options x 05 x 4/5



5 7 employees x 10,000 options x 05



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