Award with non-market vesting condition and variable vesting period
At the beginning of year 1, the entity grants 100 shares each to 500 employees, conditional upon the employees remaining in the entity’s employment during the vesting period. The shares will vest:
- at the end of year 1 if the entity’s earnings increase by more than 18%;
- at the end of year 2 if the entity’s earnings increase by more than an average of 13% per year over the two year period; or
- at the end of year 3 if the entity’s earnings increase by more than an average of 10% per year over the three year period.
The award is estimated to have a fair value of $30 per share at grant date. It is expected that no dividends will be paid during the whole three year period.
By the end of the first year, the entity’s earnings have increased by 14%, and 30 employees have left. The entity expects that earnings will continue to increase at a similar rate in year 2, and therefore expects that the shares will vest at the end of year 2. The entity expects, on the basis of a weighted average probability, that a further 30 employees will leave during year 2, and therefore expects that an award of 100 shares each will vest for 440 (500 – 30 – 30) employees at the end of year 2.
By the end of the second year, the entity’s earnings have increased by only 10% and therefore the shares do not vest at the end of that year. 28 employees have left during the year. The entity expects that a further 25 employees will leave during year 3, and that the entity’s earnings will increase by at least 6%, thereby achieving the average growth of 10% per year necessary for an award after 3 years, so that an award of 100 shares each will vest for 417 (500 – 30 – 28 – 25) employees at the end of year 3.
By the end of the third year, a further 23 employees have left and the entity’s earnings have increased by 8%, resulting in an average increase of 10.67% per year. Therefore, 419 (500 – 30 – 28 – 23) employees receive 100 shares at the end of year 3.
The entity will recognise the following amounts during the vesting period for services received as consideration for the shares.
|
Year Calculation of cumulative expense |
Cumulative expense ($) |
Expense for period ($) |
|
1 440 employees x 100 shares x $30 x 1/2* |
660,000 |
660,000 |
|
2 417 employees x 100 shares x $30 x 2/3* |
834,000 |
174,000 |
|
3 419 employees x 100 shares x S30 |
1,257.000 |
423.000 |
The entity”s best estimate at the end of year 1 is that it is one year through a two year vesting period and at the end of year 2 that it is two years through a three year vesting period.