Murray Compensation, Inc. (Murray), an SEC registrant that provides payroll processing and benefit administration services to other companies, granted 100,000 “at-the-money” employee share options on January 1, 2006. The awards have a grant-date fair value of $6, vest at the end of the third year of service (cliff-vesting), and have an exercise price of $21.
Subsequent to the awards being granted, the stock price has fallen significantly. On January 1, 2008, Murray decreased the exercise price on the stock options to $12. This downward adjustment to the exercise price was made in order to ensure that the options continue to provide intended motivation benefit to employees. However, in addition to the reduction in the exercise price, Murray also changed the vesting terms, such that the employees must provide an additional two years of service (awards will no vest on January 1, 2011).
Immediately prior to the reduction in the exercise price of the awards, the fair value was $1 per award. After considering the impact of the January 1, 2008, re-pricing, the fair value was $4 per award.
What amount of compensation expense should Murray recognize in the years ended December 31, 2008, 2009, and 2010?
2008 Compensation expense $166,667
2009 Compensation expense $166,667
2010 Compensation expense $166,667
FAS 123 was revised during 2004. For public entities that are not small business issuers, the effective date of FAS 123(R) is June 15, 2005. FAS 123(R) 74 states that all public entities that used the fair-value-based method for either recognition or disclosure shall adopt this Statement using a modified prospective application. Under the modified...
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...would result in non-recognition of compensation expense, thus misrepresenting the costs of operating the business. The accounting for the modification of the share-based payments provides feedback value to investors. By making the change in compensation expense, this alerts investors that there has been a modification to the terms of the share based payments. By alerting the investors of the change, this is telling investors that management believes the company will still be successful, however management wishes to induce employees to continue work hard to help raise the share price. Lastly, as the 12/31/06 journal entry shows, the offsetting debit is to additional paid in capital-share-based payments. The provides predictive value to investors because investors will know the amount of cash inflows to expect from future exercise of the share-based payment awards.
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