Thursday, 11 December 2014

Examples of vesting Period in Cash Settlement


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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