Option exercise term. Exercise Definition
This one is kind of a doozy.
Can you explain the accounting treatment in 75 words or less? The company will recognize incremental cost equal to the excess of the option fair value immediately after the modification over its fair value immediately beforehand.
Accounting for Extending a Post-Termination Exercise Period
This cost will be recognized in full in the period the modification occurs. What will change in the before and after valuations?
The primary difference between the two values will be the expected life of the option. Before the modification, the expected life will usually be close to zero maybe a few months because the option is about to expire. After the modification, the valuation will be the new period in which the option can be exercised.
That increases the time value of the option and results in a higher valuation. How about an example?
What does exercising stock options mean?
Say that an employee terminates while holding an option to purchase 10, shares that is fully vested. None of this expense is reversed. In addition, the company will recognize incremental cost for the modification. After the modification, the expected term will increase to three years, which could in turn affect the interest rate, expected dividend yield, and expected volatility. Just like with acceleration of vestingthis will be a facts and circumstances determination.
What about modifying the contractual term of the option rather than the post-termination period?
In most cases, this question is a non-starter. Under Section A, if an in-the-money option is modified to allow exercise beyond its original contractual term or longer than ten years after the grant date, if earlierthis is considered to be the addition of a prohibited deferral feature.
It causes the option to become subject to Section A retroactive to the date of grant.
The accounting consequences would be the least of your worries. Section A allows an exception, however, for options that are underwater or at-the-money.
VC Spotlight March 1, From time to time an employer may consider changing the terms of a stock option granted to an employee. This article explores the tax impact of one such change in greater depth, namely, the extension of the exercise period of a stock option. A corporation extending a stock option outside of these two situations must tread with care, however, as such an extension may cause adverse tax consequences to the employee, as described below. What is the exercise price of the option? What is the fair market value FMV of the underlying stock at the time of extension?
What if the board accelerates vesting and extends the exercise period at the same time? For this modification, you have to look at the vested and unvested portions of the option separately. The vested portion is accounted for exactly as I have described above Option exercise term I, probable-to-probable modification. For the unvested portion, the acceleration of vesting drives the accounting treatment.
This will be an improbable-to-probable Type III modification: Any expense already option exercise term in connection with the unvested portion of the option is reversed and the expense originally computed for this portion is no longer recognized. The new fair value of the modified portion of the award is recognized as expense in the period the acceleration occurs.
Roger Wohlner is a financial advisor and writer with 20 years of experience in the industry. He specializes in financial planning, investing, and retirement. When used appropriately, these options can be worth a lot of money to you. Employee Stock Option Basics With an employee stock option planyou are offered the right to buy a specific number of shares of company stock, at a specified price called the grant price also called the exercise price or strike pricewithin a specified number of years.
When computing the new fair value, the company should increase the expected term for the extended exercise period. Are there any other considerations to worry about?
Employee Stock Option (ESO)
You bet! Expected term of 5 years at time of grant. Expected term of.
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Interest rate of. I kept these variables constant in all three valuations so that I could focus on the impact of the change in the expected term.
In real life, these variables could also change. Related Posts.