Award with independent market conditions and non-market vesting conditions
An entity grants an employee 100 share options that vest after three years if the employee is still in employment and the entity achieves either:
- cumulative total shareholder return (TSR) over three years of at least 15%, or
- cumulative profits over three years of at least £200 million.
The fair value of the award, ignoring vesting conditions, is £300,000. The fair value of the award, taking account of the TSR condition, but not the other conditions, is £210,000.
In our view, the entity has, in effect, simultaneously issued two awards – call them ‘A’ and ‘B’ –which vest as follows:
A on achievement of three years’ service plus minimum TSR,
B on achievement of three years’ service plus minimum earnings growth.
If the conditions for both awards are simultaneously satisfied, one or other effectively lapses.
It is clear that award A, if issued separately, would require the entity to recognise an expense of £210,000 if the employee were still in service at the end of the three year period. It therefore seems clear that, if the employee does remain in service, there should be a charge of £210,000 irrespective of whether the award actually vests. It would be anomalous for the entity to avoid recording a charge that would have been recognised if the entity had made award A in isolation simply by packaging it with award B.