Example of changing estimates about vesting

Example of changing estimates about vesting

In earlier examples we saw the management has a fixed estimates for vesting, but practice, there may be a situation that management have a new estimate about the expected vesting. In below example the treatment of changing estimates regarding vesting is being explained

Rules

1. Cost of equity is spread over the vesting period

2. Cumulative balance of liability is calculated at end of each year

3. Cumulative balance is based on best estimates of management

4. Cost of Service charged each year is change cumulative balance

5. Finally, cost is charged against the actual vested option.

6. Liability is measured at fair value of equity instrument at the end of each year

Number of Employees	200
Options Grant each employee	50
Condition of work	3 years
Estimation of leave each year	20%, 25%, 22%
Fair value of option	20
Employee left ( first year)	18
Employee left ( 2nd year	26
Employee left ( 3rd year	22
Fair value First year	18
Fair value 2nd year	22
Fair value 3rd year	20

Solution

Cumulative liability Table

	Option Value	Timing	Cumulative Liability
First year	80%(200 x 50 ) x18	1/3	48,000
2nd year	75%(200 x 50 ) x22	2/3	110,000
3rd year	100% (134 x50) x20	3/3	134,000

Service charges during the three years

                              

	Cumulative Liability	Cumulative Liability	Service charge
	Closing	Opening
First year	48,000	0	48,000
2nd year	110,000	48,000	62,000
3rd year	134,000	110,000	24,000