We know now that a share-based compensation plan is a compensation arrangement in which employees receive share options, shares of stock, or cash payments based on the change in stock price instead of cash bonus. The accounting objective of share-based compensation plans is to recognize compensation expense over the periods in which the employees perform a service and earn the share-based award.

A compensatory share option plan is intended to provide additional compensation to selected employees within the corporation by awarding them options to purchase the companys stock. Restricted share awards and share appreciation rights are also intended to provide additional compensation by awarding employees shares in the company or cash bonuses tied to changes in the companys stock price.

In developing a compensatory share option plan, a companys objective is to better align the companys goals with those of management and its owners. Awarding options on shares in the company should motivate executives and employees to manage the company in a way that increases stock price. If this happens, both the managers and shareholders benefit. In addition, by awarding share options that become exercisable after a certain length of time (often 3 years after the grant date), it provides incentives for managers and employees to remain with the company for that period, reducing employee turnover.

You are correct with fair valuation. In response to the need for high-quality transparent financial reporting that faithfully represented the underlying substance of the arrangement, the FASB, along with the IASB, updated the accounting for share-based compensation plans. The change by the FASB and IASB required the use of the fair value method, which measures options-based compensation expense using the fair values of the options granted, and provides a more relevant and representationally faithful measure of an employees total compensation.

So, under a common type of plan, a corporation grants selected employees the rights to purchase shares of stock at an exercise price sometime in the future in exchange for their services. The date on which the company provides the share options to the employees is called the grant date. For instance, a corporation may grant an employee the right to purchase 1,000 shares of common stock at the end of three years at an exercise (strike) price of $20 per share.

Answer the fallowing:

If the market price increases to $35 per share at the end of 3 years, the employee can exercise the option and acquire shares with a value of what do you think?

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