QUESTION THREE: Share-based Payment

On 1 January 2019, P&A Ltd grants 4,000 share options to its 20 employees. At this date the fair value of the share options is $50. The vesting conditions are:

The employees must remain with the company for a minimum of 3 years

The gross profit margin remains at a minimum of 40% over the next 3 years.

At the end of year 1, P&A Ltd adjusts the target for gross profit margin from 40% to 50%. This target proves too difficult to maintain and by the end of year 3 the gross profit margin is at 42%.

At 31 December 2021, there are 12 employees remaining with P&A Ltd, 10 of these employees have been with the entity for the past 3 years. The other employee commenced employment with the entity on 1 December 2021. The fair value of the share options at the end of the vesting period is $55.

Required: (a) Distinguish between vesting and non-vesting conditions. Briefly explain with examples the different types of vesting conditions.

(b) Considering the above mentioned vesting conditions, discuss the implications of a share option grant whereby the vesting conditions are modified and subsequently not satisfied. Give appropriate references from NZ IFRS 2: Share-based Payment.