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Sooner or Later

In: Business and Management

Submitted By btip
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Should Sooner or Later use the $6 grant-date fair value or the $9 grant-date fair value to measure its compensation cost?

Codification 718-10-30-6 states the measurement objective for equity instruments awarded to employees is to estimate the fair value at the grant date of the equity instruments that the entity is obligated to issue when employees have rendered the requisite service and satisfied any other conditions necessary to earn the right to benefit from the instruments (for example the exercise share options). That estimates is based on the share price and other pertinent factors, such as expected volatility, at the grant date.

In this case Sooner or Later is issuing stock options to employees in order to align their compensation with the performance of the company. However these options can only be vested if revenue for the company is greater than $10 million over a three year period and employees are still employed with the company. The debate is whether Sooner or Later should grant the stock at $9 which is the current grant date fair value or grant the stock at $6 which the fair value taking into consideration the revenue target. According to Codification 718-10-30-6 Sooner or Later should grant the stock at $9 because this is the fair value at the grant date not at some future grant date when conditions have been met.

However, Codification 718-10-30-15 Market, performance, and service conditions (or any combination thereof) may affect an award’s exercise price, contractual term, quantity, conversion ratio, or other factors that are considered in measuring an award’s grant-date fair value. A grant-date fair value shall be estimated for each possible outcome of such a performance or service condition, and the final measure of compensation cost shall be based on the amount estimated at the grant date for the condition or outcome that is

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