Salt Limited grants 1000 share options to each of its 100 employees. Each grant is conditional on the employee working for the company for the next two years. The fair value of each option is estimated to be €5.00 at grant date and €7.50 at vesting date. The amount to be recognised as an expense by Salt in year 2 is:
A) €250 000
B) €375 000
C) €500 000
D) €750 000

Question

Quizplus · Accepted Answer

Each employee has been granted 1000 share options, so the total number of share options granted is 100,000 (100 employees x 1000 share options each). The fair value of each option is estimated to be €5.00 at grant date and €7.50 at vesting date. This means that each share option has an intrinsic value of €2.50 (€7.50 - €5.00).

In year 1, no expense is recognised, as the options have not yet vested.

In year 2, the options have vested, and an expense must be recognised. The expense to be recognised is the fair value of the options at vesting date, less any consideration paid by the employees. As no consideration is paid by the employees in this case, the expense to be recognised is the fair value of the options at vesting date.

The fair value of the options at vesting date is €7.50 per option, which gives a total expense of €750,000 (100,000 options x €2.50 intrinsic value per option). However, only half of the options were vested in year 2, so the expense to be recognised in year 2 is €375,000 (€750,000 / 2).

Salt Limited Grants 1000 Share Options to Each of Its