Fundamental of Auditing

FV of modified share option $12 Share options expected to vest under modified target 750 (=1000*3/4) FV of modified award $9,000 FV of original share option $12 FV of original award $ 0 Incremental compensation cost of modification $9,000 2015: compensation expense= $12*1000*4/4-$9,000=$3,000 FASB ASC 718-20-55-117: “E ntity should recognize for the modified award based on three potential outcomes ”. As to OMS, the actual amount of $9.2 million cumulative net income has achieved the modified target of $9 million, while did not reach the original target of $10 million yet, whose outcome is compliance with “Outcome 1” described in FASB ASC 718-20-55-117. In that outcome, OMS would recognize cumulative compensation cost of $12,000. 4a. According to IFRS 2—Share-based Payment, Modifications, Cancellations, and Settlements section, “ Modification of the terms on which equity instruments were granted may have an effect on the expense that will be recorded… If the fair value of the new instruments is less than the fair value of the old instruments, the original fair value of the equity instruments granted should be expensed as if the modification never occurred. ” As to OMS, the fair value of the new instruments is $12 million, whereas fair value of the old instruments is $15, so that the original fair value of the equity instruments, which is $15 million granted should be expensed as if the modification never occurred. Therefore, total compensation should be $15 million. OMS should recognize $11,250 (=$15*1,000*3/4) million and $3,750 ($15*1,000*4/4-$11,250) compensation expense in December 31, 2014 and 2015, respectively. 5. In December 31, 2014, loss of a major tenant causes the awards continued to be improbable of achievement even after modification to $8 million cumulative net income, and the modification did not affect any of the other terms or conditions of the awards. FASB ASC 718-20-55-118, “Case D: Type IV Improbable to Improbable Modification”: “ Because no other terms or conditions of the award were modified, the modification does not affect the per-share-option fair value. Furthermore, the modification does not affect the number of share options expected to vest; hence, there is no incremental compensation cost associated with the modification. ” Therefore, OMS should recognize no compensation cost in 2014, thus $12 multiplied by the number of share options expected to vest (zero). The same illustration can be applied to 2015, so that OMS should recognize no compensation cost in 2015. FASB ASC 718-20-55-119: “ Entity should recognize for the modified award based on three potential outcomes ”. As to OMS, even modified cumulative net income target cannot be achieved, whose outcome is compliance with “Outcome 3” described in FASB ASC 718-20-55-119. In that outcome, no share options vest because the modified sales target is not achieved; in that case, no share options vest because the modified sales target is not achieved; OMS would recognize cumulative compensation cost of $0. REFERENCES FASB ASC 718-10-25-20: Stock Compensation—Overall—Recognition—Market, Performance, and

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