Award with non-market vesting condition and variable number of equity instruments
At the beginning of year 1, an entity grants an option over a variable number of shares (see below), estimated to have a fair value at grant date of £20 per share under option, to each of its 100 employees working in the sales department on the following terms. The share options will vest at the end of year 3, provided that the employees remain in the entity’s employment, and provided that the volume of sales of a particular product increases by at least an average of 5% per year. If the volume of sales of the product increases by an average of between 5% and 10% per year, each employee will be entitled to exercise 100 share options. If the volume of sales increases by an average of between 10% and 15% each year, each employee will be entitled to exercise 200 share options. If the volume of sales increases by an average of 15% or more, each employee will be entitled to exercise 300 share options.
By the end of the first year, seven employees have left and the entity expects that a total of 20 employees will leave by the end of year 3. Product sales have increased by 12% and the entity expects this rate of increase to continue over the next two years, so that 80 employees will be entitled to exercise 200 options each.
By the end of the second year, a further five employees have left. The entity now expects only three more employees to leave during year 3, and therefore expects a total of 15 employees to have left during the three year period. Product sales have increased by 18%, resulting in an average of 15% over the two years to date. The entity now expects that sales will average 15% or more over the three year period, so that 85 employees will be entitled to exercise 300 options each.
By the end of year 3, a further seven employees have left. Hence, 19 employees have left during the three year period, and 81 employees remain. However, due to trading conditions significantly poorer than expected, sales have increased by a 3 year average of only 12%, so that the 81 remaining employees are entitled to exercise only 200 share options.
The entity will recognise the following amounts during the vesting period for services received as consideration for the options.
|
Year Calculation of cumulative expense |
Cumulative expense L |
Expense for period L |
|
1 80 employees x 200 options x L 20 x 1/3 |
106,667 |
106,667 |
|
2 85 employees x 300 options x L 20 x 2/3 |
340,000 |
233,333 |
|
3 81 employees x 200 options x £20 |
324,000 |
(16,000) |