Accounting for Share-Based Compensation Under IFRS

Very Hard Employee Compensation Share-based Compensation

XYZ Corporation has granted stock options to its executives as part of their compensation package. During the fiscal year, the company recognized $1 million in share-based compensation expense related to the stock options using the Black-Scholes model for valuation. The options have an exercise price of $30, a fair value of $5 at grant date, and are expected to vest over a period of four years, with a total grant of 200,000 options.

As per IFRS, the share-based compensation expense is recognized over the vesting period. However, there has been a significant increase in the stock price, leading to concerns regarding the accounting treatment of the options when the market price exceeds the exercise price significantly. The CFO is reviewing whether adjustments are necessary for the financial statements in the event that the stock options are underwater or if the market price drops below the exercise price during the vesting period.

Based on the situation described, which of the following statements regarding the share-based compensation accounting is true?

If the stock price exceeds the exercise price significantly, the company must recognize an additional expense beyond the initial grant date valuation.

The total share-based compensation expense recognized will only be based on the original fair value determined at grant date, without subsequent adjustments for stock price fluctuations.

If the stock options become underwater (stock price is below exercise price), the company must reverse any previously recognized expense associated with those options.

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