Award modified by repricing
At the beginning of year 1, an entity grants 100 share options to each of its 500 employees. Each grant is conditional upon the employee remaining in service over the next three years. The entity estimates that the fair value of each option is €15.
By the end of year 1, the entity’s share price has dropped, and the entity reprices its share options. The repriced share options vest at the end of year 3. The entity estimates that, at the date of repricing, the fair value of each of the original share options granted (i.e. before taking into account the repricing) is €5 and that the fair value of each repriced share option is €8.
40 employees leave during year 1. The entity estimates that a further 70 employees will leave during years 2 and 3, so that there will be 390 employees at the end of year 3 (500 – 40 – 70).
During year 2, a further 35 employees leave, and the entity estimates that a further 30 employees will leave during year 3, so that there will be 395 employees at the end of year 3 (500 – 40 – 35 – 30).
During year 3, 28 employees leave, and hence a total of 103 employees ceased employment during the original three year vesting period, so that, for the remaining 397 employees, the original share options vest at the end of year 3.
IFRS 2 requires the entity to recognise:
- the cost of the original award at grant date (€15 per option) over a three year vesting period beginning at the start of year 1, plus
- the incremental fair value of the repriced options at repricing date (€3 per option, being the €8 fair value of each repriced option less the €5 fair value of the original option) over a two year vesting period beginning at the date of repricing (end of year one).