When a company issues stock$-$based compensation with a vesting period, it must estimate the number of employees expected to leave before the vesting period ends. If$,$ in subsequent years, the company determines that more employees will leave than initially estimated, it must decrease the cumulative expense recognized for that compensation in its financial statements. Conversely, if the company determines that fewer employees will leave than initially estimated, it must increase the cumulative expense recognized.

Key Points:

Initial Estimate: At the grant date, the company makes an estimate of employee turnover $($how many will leave before the options vest$).$ This estimate influences the total compensation expense recognized over the vesting period.

Adjustments Over Time: Each year, the company should review its estimates:

If more employees leave than expected, the company reduces the total compensation expense because fewer options will vest.If fewer employees leave than expected, the company increases the total compensation expense to reflect the higher number of options that will vest.

Expense Recognition: These adjustments affect the annual compensation expense recognized in the income statement. The adjustments ensure that the reported expenses align with the actual economic costs incurred by the company due to the stock options granted.

This approach helps maintain the quality of accounting earnings by ensuring that they accurately reflect the costs associated with stock$-$based compensation based on employee retention. Let me know if you need more clarification or further details!