On 1 July 2021 Pearl Pty Ltd granted 800 share options with an exercise price of $35 to the Finance Director, conditional on the Finance Director remaining in employment with the company until 30 June 2024. The fair value of Pearl's shares at that time were assessed to be $40. The exercise price will drop to $30 if Pearl's earnings increase by an average of 8% per year over the three year period. On 1 July 2021 the estimated fair value of the share options with an exercise price of $35 is $10 per option, and if the exercise price is $30, the estimated fair value of the options is $12 per option. During the year ended 30 June 2022 Pearl's earnings increased by 10% and they are expected to continue to increase at this rate over the next two years.
During the year ended 30 June 2023 Pearl's earnings increased by 9% and Pearl management continued to expect that the earnings target would be achieved.
During the year ended 30 June 2024 Pearl's earnings increased by only 2%. At 30 June 2024 the share price is $23.
The remuneration expense to be recognised for the year ended 30 June 2022 is:
A) $2667.
B) $3200.
C) $8000.
D) $9600.

Question

Quizplus · Accepted Answer

The Finance Director was granted 800 share options on 1 July 2021 with an exercise price of $35. At that time, the fair value of the share options was $10 per option. Therefore, the total fair value of the options on grant date was 800 × $10 = $8,000.

The exercise price will drop to $30 if Pearl's earnings increase by an average of 8% per year over the three year period. During the year ended 30 June 2022, Pearl's earnings increased by 10%. Therefore, the Finance Director will be able to exercise the options at the lower exercise price of $30.

The fair value of the options with an exercise price of $30 is $12 per option. Therefore, the total fair value of the options at 30 June 2022 is 800 × $12 = $9,600.

The Finance Director is expected to remain in employment until 30 June 2024, which is the vesting date for the options. Pearl's earnings increased by 9% during the year ended 30 June 2023, and management continued to expect that the earnings target would be achieved.

However, during the year ended 30 June 2024, Pearl's earnings only increased by 2%. As a result, the Finance Director will not be able to exercise the options as the earnings target was not met.

The remuneration expense to be recognized for the year ended 30 June 2022 is the portion of the options expense that relates to the service provided by the Finance Director in that year. The expense should be recognized over the vesting period, which is three years.

The total fair value of the options on grant date was $8,000. Therefore, the remuneration expense to be recognized for the year ended 30 June 2022 is $8,000 ÷ 3 = $2,667. Option B is correct.

On 1 July 2021 Pearl Pty Ltd Granted 800 Share