Options accounting solutions - Gore's option grant Class...

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I've "rounded" the grant date to 3/31 to make the math easier. Terms of the option grant: Options granted 10,000 Recorded date of grant 3/31/2009 Expiration date of grant 3/31/2019 Market price on grant date $101.62 Exercise price for stock purchase $101.62 Vesting dates: Already vested! The time line above shows the contract terms (green) and potential events (red) for the options grant; the 3/31/2008 start date reflects the class's conclusion that at least part of the grant compensates Gore for past services. Black-Scholes Calculator Exercise Price (K) $101.62 At left is a Black-Scholes option price Market Price (S) $101.62 calculator that produces the fair value of Duration period (T) 10 the options that Apple disclosed in forms Volatility (σ) 0.20 filed with the SEC. Risk free rate (rf) 3.18% Dividend (q) 0.00% Note here that the vesting period isn't F 139.66412 shown; it's not a model parameter, and d1 0.819029914 therefore the options have the same d2 0.186574 value regardless of vesting period. In Fair Value $38.21 this case, vesting period is zero anyway. This options grant is somewhat trickier than Kumar's grant because it requires a bit more involved Gore providing director services to Apple in exhange for the right to purchase Apple stock at a discount. At the same time, the class agreed that the grant is meant to the options on 3/31/2009; so, how do we reconcile these two points of view? In class I took a shortcut by having the class assume that compensation was only for past services instead of for both past and future services. (Later I'l suggest you do an exercise Gore for effort from 3/31/2008, when he received the previous options grant, to 3/31/2009. The class consensus was that the director's plan ratified by Apple served as the contract for the overal transaction. Thus, Apple should accrue compensation as it is earned by Gore before the stock option grant. Specifical y, given Apple's fiscal year-end of 9/30 each year, Apple should accrue 6 months' worth of compensation expense on 9/30/2008. Apple should continue to accrue compensation as Gore provides services over the period in which he is compensated for his effort (until the vesting date of 3/31/2009). Expense - Apple consumes Gore's director services when Gore provides them Liability (Options payable) - Apple has an obligation under the plan to deliver ful y-vested options on the grant date. Upon granting, the obligation is met, and the options are re- classified to equity as they are equity-based instruments armed with the rights of use. This is an important issue because on the first recognition date, Apple doesn't know al of the terms of the option grant - specifical y, the exercise price / market price on grant date. The class determined that achieving a proper matching of expense to the period of effort
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This note was uploaded on 02/16/2012 for the course ACCY 510 taught by Professor Staff during the Fall '08 term at University of Illinois, Urbana Champaign.

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Options accounting solutions - Gore's option grant Class...

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