Facts
Mack, a public limited company, grants 5,000 share options each to its 20 executives on June 1, 20X5, on these vesting conditions:
• The executives must remain in the company’s employment during the vesting period.
• The share price must reach $10 a share before the share options vest.
• The company’s earnings must increase cumulatively by more than 5% in the first year, 10% in second year, and 16% in the third year after the grant date for the options to vest in that year.
The company has calculated that the fair value of each option at the grant date is $5. The exercise price of the option is $3, and the exercise date is August 1, 20X8. The shares will vest as soon as all of the above conditions are met.
The company’s earnings increased by 4% in the year to May 31, 20X6. At that date, it expects that the earnings will increase by 7% in 20X7 and 6% in 20X8. Additionally, it is anticipated that one director will leave every year.
At May 31, 20X6, no directors had left, but it is anticipated that two directors will leave in the next year (they did) and two in the year to May 31, 20X8. The cumulative increase in earnings by the end of May 31, 20X7, is 10%. The performance target will be met in 20X8, and only one director will leave in that year.
The shares of the entity are ordinary shares of $1, and the tax rate applicable in the jurisdiction is 30%.
Tax allowances are based on the intrinsic value of the share. The share price of Mack was
|
$ per share |
|
|
June 1, 20X5 |
5 |
|
May 31, 20X6 |
7 |
|
May 31, 20X7 |
10 |
|
May 31, 20X8 |
13 |
|
August 1, 20X8 |
14 |
Required
Show the accounting entries, including deferred taxation, for the above share based payment transactions.