Question

On 1 July 2021 Lucas Ltd grants 100 options to each of its 50 employees conditional on the employee remaining in service over the next three years. The fair value of each option at the grant date is estimated to be $12. Lucas also estimates that 10 employees will leave over the three year vesting period.

By 30 June 2022 four (4) employees have left and the entity estimates that a further eight (8) employees will leave over the next two years.

On 1 July 2022 Luca decided to reprice its share options, due to a fall in its share price over the last 12 months. At the date of repricing, Lucas estimates that the fair value of each original option is $3 and the fair value of each repriced option is $5.

During the year ended 30 June 2023 a further four (4) employees left and Lucas estimates that another six (6) employees will leave during the next year.

During the year ended 30 June 2024 only three (3) employees left. The share options vested on 30 June 2024.

The yearly incremental remuneration expense for the year ended 30 June 2023 is:

Answer 1

The employee cost to be charged each year can be calculated using the following formula:

[(No. of Employees offered option - No. of Employees left - No. of Employees Expected to leave) * No. of options per employee * Fair Value per option as on the last date of the year

* No. of Years Vested / Total Vesting Period] - Employee cost already recognised in earlier years

On 30/06/2022

Employee cost = [(50 - 4 - 8) * 100 * 12 * 1 / 3] - 0

= $15200

On 30/06/2023

Employee Cost = [(50 - 4 - 8) * 100 * 5 * 2 / 3] - 15200

= - $2533

After above calculations, we know that we have over charged the income statement for the options. Therefore we need to reverse the excess charged employee cost to the tune of $2533.