Stock option case study
BDO Case Study – “Accounting for Stock Options”
Congratulations, your firm has just won a new engagement for the December 31, 2012 audit of Stock It (the Company). You are the lead senior on the engagement and thus were delegated the task of auditing the client’s equity balances. In review, you noted that the client has a significant amount of stock options issued to their employees, a means that many start-up companies use to compensate employees and entice them to put in the effort to make the company successful. Stock It acquired Options R Us on December 28, 2011 and merged Options R Us into their operations. When examining the stock option details, you noted that Options R Us had a stock option plan, the ORU 2007 Plan, and Stock It had a stock option plan, the SI 2010 Plan.
You discussed the effect of the business combination on the plans with the Company and requested copies of the plan documents and acquisition agreement. In reading the acquisition agreement, it was stated that the ORU 2007 Plan options will be replaced with the SI 2010 Plan options. On December 29, 2011, each employee who had Options R Us options signed a conversion notice acknowledging the option modification outlined in the acquisition agreement. Based on valuations, the Company concluded that five Options R Us options with an exercise price of $0.10 were the equivalent value of one Stock It option with an exercise price of $0.50, and therefore exchanged the options on a five for one basis. All other terms of the Options R Us options remained the same. Any previously vested options remained vested.
The December 31, 2011 audit was performed by a solo practitioner who may not have had the technical expertise to deal with complex equity transactions. Since the December 31, 2011 balance sheet will be presented in the 2012 financial statements, you will need to perform procedures to gain assurance over the December 31, 2011 balances. As a result, you needed to ensure that the
Congratulations, your firm has just won a new engagement for the December 31, 2012 audit of Stock It (the Company). You are the lead senior on the engagement and thus were delegated the task of auditing the client’s equity balances. In review, you noted that the client has a significant amount of stock options issued to their employees, a means that many start-up companies use to compensate employees and entice them to put in the effort to make the company successful. Stock It acquired Options R Us on December 28, 2011 and merged Options R Us into their operations. When examining the stock option details, you noted that Options R Us had a stock option plan, the ORU 2007 Plan, and Stock It had a stock option plan, the SI 2010 Plan.
You discussed the effect of the business combination on the plans with the Company and requested copies of the plan documents and acquisition agreement. In reading the acquisition agreement, it was stated that the ORU 2007 Plan options will be replaced with the SI 2010 Plan options. On December 29, 2011, each employee who had Options R Us options signed a conversion notice acknowledging the option modification outlined in the acquisition agreement. Based on valuations, the Company concluded that five Options R Us options with an exercise price of $0.10 were the equivalent value of one Stock It option with an exercise price of $0.50, and therefore exchanged the options on a five for one basis. All other terms of the Options R Us options remained the same. Any previously vested options remained vested.
The December 31, 2011 audit was performed by a solo practitioner who may not have had the technical expertise to deal with complex equity transactions. Since the December 31, 2011 balance sheet will be presented in the 2012 financial statements, you will need to perform procedures to gain assurance over the December 31, 2011 balances. As a result, you needed to ensure that the