CFA Level I · CFA Level I Exam · Topics in Long-Term Liabilities and Equity
On 1 January, Altona Corp grants 1,000 share options to each of 100 employees. Each option has a grant-date fair value of €6, and the options cliff-vest after four years of service. At the end of Year 1, Altona expects 90% of the options to vest. The compensation expense recognized for Year 1 is closest to:
The Year 1 expense is about €135,000. Expected vesting is 90,000 options at €6 each, giving €540,000 of total cost, which is spread evenly over the four-year vesting period. Ignoring forfeitures would overstate the expense at €150,000.
- A€135,000Correct
- B€150,000
- C€540,000
Explanation
Total options = 100 × 1,000 = 100,000. Expected to vest = 90,000. Total cost = 90,000 × €6 = €540,000. Spread over four years: €540,000 / 4 = €135,000. Choosing €540,000 ignores the vesting period; €150,000 ignores the forfeiture estimate (600,000/4).
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