Suppose an entity grants 40 share options to each of its 100 employees on the condition that they remain in service for 3 years.The employees may choose to exercise their options at the end of year 3,4 or 5.The payment will be in cash based on the value of the option at the exercise date.During the first year 7 employees leave and the company estimate that 13 people will leave in year 2.In fact,6 leave and the company estimate that 8 will leave in year 3.In the third year 10 people leave.At the end of the third year 10 employees exercise their options; and in year 4 a further 20.The remainder exercise their options in the final year.The company estimates the fair value of the options in years 1 - 4 as €20,€22,€28 & €34 respectively.Intrinsic values in years 3 - 5 are estimated as €2,500,€3,000 & €4,000 respectively. What is the remuneration expense in year 2?

Question

Quizplus · Accepted Answer

To calculate the remuneration expense in year 2, we need to first determine how many share options remain outstanding at the end of year 2.

We were initially granted 40 share options per employee, for a total of 4,000 share options (40 x 100). However, 7 employees left in year 1, so we can subtract 280 share options (7 x 40) from the total.

The company estimated that 13 employees would leave in year 2, but only 6 actually did. Therefore, we can subtract 240 share options (6 x 40) from the total that remained after year 1.

So, at the end of year 2, there are 3,480 share options remaining (4,000 - 280 - 240).

The remuneration expense for year 2 is calculated as follows:

Remuneration expense = (fair value of share options in year 2 x remaining share options) / remaining vesting period

The fair value of share options in year 2 is €20, and the remaining vesting period is 2 years (since the share options were granted with a 3-year vesting period and 1 year has already passed).

Therefore, the remuneration expense in year 2 is:

(€20 x 3,480) / 2 = €27,840

So the closest option is B)€25,014.

Suppose an Entity Grants 40 Share Options to Each of Its