Share options treatment

Employee Share Options Issues:

How to i treat share options the following cases:

1.     An employee resigns during/ after vesting period

2.     An employee is made redundant during/after vesting period

3.     A medication of the share option agreement after resignation or redundancy.

Accounting treatment of Share options when an employee resigns during vesting period
Resignation would be classed as a forfeiture of the agreement by the employee.  A forfeiture is defined as when a vesting condition (other than market conditions) is not met (e.g. a 3 year service condition).  The cumulative expenses from prior periods will need to be reversed, which means that no expense will remain in the financial records in relation to forfeited agreements.

Accounting treatment of Share options when an employee is made redundant during vesting period  
There are two permitted treatments, either forfeiture or cancellation:

Cancellation - given that the company terminated the employment of the employee, they were cancelling the share based payment agreement.  Cancellations during the vesting period by the entity are accounted for as accelerated vesting and therefore any unrecognized cost is recognised immediately.

Forfeiture - the performance conditions within the agreement being terms of service were not met due to the employee no longer being in the employment of the company.  In the forfeiture situation, companies should reverse all of the expense that was previously recognised in relation to the employee in the existing agreement as part of the revision of the estimate of the number of vesting instruments ("true up" to nil). 

Accounting treatment of Share options when an employee resigns after vesting period 
If the option had vested before the date of resignation/redundancy, then there would be no change in expense since no change to the number of vested shares.  This means that an expense will remain in the financial records in relation to the unexercised agreements. 

Accounting treatment of Share options when an employee is made redundant after vesting period 
If the option had vested before the date of resignation/redundancy, then there would be no change in expense since no change to the number of vested shares.  This means that an expense will remain in the financial records in relation to the unexercised agreements.

Accounting treatment of Share options still exercisable after terminating employment  
Where employees have a six month period following redundancy/resignation to exercise a pro-rata share of the share based payment, if the expense had been recognised on a straight line basis and it was an exact pro-rata share, then there would be no adjustment to the number of vested shares, so no "true up" adjustment to the expense.  The already recognised expense will remain in the financial records in relation to the unexercised agreements.