Examples
of vesting Period in Cash Settlement
The only difference between cash settlement and
equity based settlement is the valuation of liability at the each year end. in
cash settlement liability is measured at the fair value of equity at the end of
each year. While under equity based the liability is measured with fair value
at Grant date.
Rules of solving the example
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%
|
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
|
80%(200
x 50 ) x22
|
2/3
|
117,334
|
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
|
117,334
|
48,000
|
69,334
|
3rd
year
|
134,000
|
117,334
|
16,667
|
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