Sooner or Later

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On January 1, 2006 Sooner or Later Inc. granted $1,000 at-the-money employee stock options. To ensure that the company can afford to compensate their employees based on their financial performance the award will only be absolute if the revenue over the following three years is greater than 10 million dollars and if the employees are still employed with the company. Sooner or Later’s management believes that the company will have revenues in excess of 10 million dollars over the next three year period. According to FASB, Statement no. 123(R) A Corporation must use the fair value method to account for compensatory share option plans. Sooner or Later has two options: they can either use the grant date fair value of $9.00 or they can use the grant date fair value of $6.00 determined by their valuation professionals. Our group has assumed that the grant date fair value of $9.00 is calculated without the revenue target included. The grant date fair value of $6.00 is when the revenue target is factored into the fair value assessment.

As mentioned earlier, employees will only be guaranteed the awards if two criteria are present. The first being that the employee provides services to the company for three years. The second criteria is that the company attains a revenue target of 10 million dollars cumulatively for the following three years. Sooner or Later has met both of these criteria. The revenues from 2006 to 2008 are $11 million and their employees have provided services to the company for three years. Sooner or Later should use the grant date fair value of $6 when measuring compensation cost because the revenue target is factored into the fair value and the employees would be vested the award. A second reason the company should use the $6 grant date fair value would be because, “an award’s quantity may double, or an award’s contractual term may be extended, if a company-wide revenue target is achieved. (FASB code 718-10-55-64).” This option would seem very...
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