Share- Based Payments

Share- Based Payments


Share based payment transactions are common in organizations. They take several forms, for instance share based payments to employees occur when a decision to pay their services or motivate the employees using shares is rolled out. Employees are expected to offer services to the company in exchange of equity instruments. Employees may also receive such payments to motivate them to better performance.  The total amount computed is expensed in the company’s income statement following the accounting matching principle. Recognizing the compensation cost in the company’s financial statements result to credible financial statements presented to the investors and other users of financial statements. This paper will answer the questions to the case study of Occupy Mall Street(OMS) Share- based payments plan. The paper will provide professional and accounting insights to accounting problems presented in the case study.

Fair Value Requirement and Modifications

Question one

How much compensation cost should OMS recognize in each year of the award’s

Service period?



FASB recommends the use of fair values in computations of share-based payments. The fair value of a share can be calculated using any preferred option pricing method. The most commonly used option pricing method is the black Scholes method. The fair value of the shares is dependent on the current market price of the share and its exercise price. Moreover, the expected volatility of shares, expected dividends and prevailing risk free interest rate affect the shares’ fair values. Compensation cost is expensed over the vesting period outlined by the share based payment program.  OMS uses black Scholes method to compute the fair value of the share. In computing total compensation cost, the fair value amount $15 is multiplied by the 1,000 share options to get $15,000. Since the vesting period in OMS is four years. Compensation expense of a single year is computed by dividing the total compensating cost by the number of years(15,000/4=$3,750).

Modification may be in form of a review of the share’s fair value. When the award’s fair value is modified, the new award’s fair value takes place of the original award. Incremental compensation costs are attributed to the difference in the new fair value’s amount and the fair value immediately before modification. Incremental compensation cost in OMC was due to the review of the shares fair values. The fair value was reviewed  to $12. The fair value before the review was $9.  The number of share options available in computing the total incremental costs should multiply the difference ($3 in our question). The incremental costs should be apportioned to the remaining years of the vesting period ($3*1,000/2). The already vested share compensation costs remains unadjusted. Only the remaining years’ compensation expense is altered.  The current year’s incremental compensation costs should be added to the originally computed compensation costs per year in order to arrive at total compensation costs for the current year.

Question 2

How would the accounting for these awards change if the modification to the terms (i.e., exercise price) of the award was made on January 1, 2017, after theawards have become fully vested?

Answer: Modifications may be made post the vesting period. In such cases, an entity should recognize the incremental compensation costs in the modification period. If modification in OMS occurred post vesting period, for example in 2017, the company should account for the incremental compensation costs as an expense in 2017.  The incremental compensation expense accounted for in 2017 will be computed as follows; 3,000(=(12-9)*1,000).

Question 3

How would the Year 2 accounting change if management determined that the performance condition was improbable of achievement on December 31, 2013? What would be the cumulative amount of compensation cost recognized?

Answer: Share-based payments are conditional. The payments may be based on either performance conditions or service conditions. In case the company believes that the set target is improbable, the company may reset the target to motivate the employees. Modifications on the target performance from improbable to probable result to reducing the accrued compensation expense $0. In OMS, a performance target of 10million profit was the condition set for the share based payment option to remain effective. The modification made by OMS was a type 3 modification (probable to improbable). Once the original target becomes improbable to achieve, no share options are expected to vest in the period prior to modification. Hence, the accrued compensation value for the two years in OMS is $0.

Question 4

How much compensation cost would management recognize in Year 3 and Year 4 if the December 31, 2014, modification resulted in the awards becoming probable of achievement?

Answer: There exist three possible outcomes. One of the outcomes is that the company may achieve the modified target. If the awards become probable, the newly computed share options will vest. In December 2014, OMS achieved the modified target (outcome 1). Since the computed new fair value was $12, the total amount of share options that vested in 2014 was a three quarter of all the shares multiplied by the newly computed fair value. It is computed as follows; $9,000 (=$12*1,000*3/4) million. The amount on the original award is equal to $0. The share options for the original award did not vest since it had been declared improbable.  The amount vested in 2015 was equal to a quarter of the shares multiplied by the fair value of the shares. This is computed as follows;3,000 (=$12*1,000*1/4)

Question 5

Answer: If the awards continued to be improbable of achievement after modification, how much cumulative compensation cost would be recognized through December 31, 2015? December 31, 2016?

When the modified (lowered) performance target is impossible to achieve the condition is referred to as a type 4 modification. Type 4 modification is simply a modification from improbable to improbable. The modification does not affect other terms of the plan. For instance, number of shares expected to vest remain the same and the fair value amount remain the same. There are no incremental compensation costs. Before the modification, the total compensation costs expected to be recognized is Zero. After modification, the expected compensation costs remains at zero. In OMS, no share options were expected to vest through December 2015 and 2016. Hence, the cumulative compensation expense is $0.


Share based payments plans are common in organizations. Such plans are implemented in order to raise the employees’ retention levels. They also motivate employees to meet performance targets set.  FASB requires that the share-based payments to be computed using the fair value of the share. The fair value of a share is determined by a number of factors including the exercise price, current market price, volatility of share prices, risk free interest rate among others. The plans are subject to conditions such as vesting conditions and performance conditions. Due to uncertainties and economic dynamics in organizational environments, modifications are common phenomena. Modifications may alter the fair value of the share, mode of settlement, vesting period or performance conditions. Modifications should be evaluated keenly in order to determine their effects in the share based payment plans.

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