View the step-by-step solution to: Case 13-5 Occupy Mall Street Occupy Mall Street (“OMS” or “the Company”) is a l...

Case 13-5 Occupy Mall Street
Occupy Mall Street (“OMS” or “the Company”) is a leading real estate management firm that owns and manages over 100 shopping malls across the United States. The Company went public in 2009 and experienced a continued increase in stock price through 2011. With the sustained growth of the business and rising stock price, OMS developed a practice of granting annual stock option awards to its executives at the beginning of each year.
On January 1, 2012, OMS granted 1,000 employee share options that cliff vest after a four-year service period, with an exercise price of $30 per share. Using the Black-Scholes pricing model, the Company determined that the grant-date fair-value-based measure of the awards was $15. On the grant date, the Company’s stock was trading at $30 per share.
On January 1, 2014, to provide additional retention incentive to its employees for the third and fourth years of service of the 2012 annual grant, OMS will change the terms of the award by modifying the exercise price to $20 per share. Using the Black-Scholes pricing model, management determined that the fair-value-based measure of the awards was $12 after modification and $9 before the terms of the award were modified. The modification did not affect any of the other terms or conditions of the awards.
Note that no forfeitures are assumed for the purposes of this case.
Required:
1. How much compensation cost should OMS recognize in each year of the award’s service period?
2. How would the accounting for these awards change if the modification to the terms (i.e., exercise price) of the award was made on January 1, 2017, after the awards have become fully vested?
Additional Case Facts:
Assume the same facts as described above. However, the terms of the award also include a performance condition in which the awards will vest if cumulative net income over the four-year vesting period is greater than $10 million. On December 31, 2013, because of the loss of several tenants, projected cumulative net income over the four-year period had been revised down to $9 million. As a result, management determined that the performance condition had become improbable to achieve.
On December 31, 2014, management’s conclusion that the award’s performance condition was improbable of achievement had not changed. In response to this, management reduced the performance condition of the original award to $8 million of cumulative net income over the four-year period. Using the Black-Scholes pricing model, management determined that the fair-value-based measure of the awards was $12 upon modification. The modification did not affect any of the other terms or conditions of the
Case 13-5: Occupy Mall Street Page 2
Copyright 2012 Deloitte Development LLC
All Rights Reserved.
awards; thus, the modification did not affect the option’s per-share fair-value-based measure.
Note that OMS had actually achieved $9.2 million of cumulative net income over the four-year period.
Required:
3. How would the Year 2 accounting change if management determined that the performance condition was improbable of achievement on December 31, 2013? What would be the cumulative amount of compensation cost recognized?
4. How much compensation cost would management recognize in Year 3 and Year 4 if the December 31, 2014, modification resulted in the awards becoming probable of achievement?
4a. How would the accounting for this modification differ under IFRSs?
Additional Case Facts:
Assume the same facts as described above. However, contemporaneously with the December 31, 2014, modification, OMS will lose a major tenant to bankruptcy; this loss will have a detrimental effect on the Company’s financial results for the year ended December 31, 2014. Even though OMS modified the options to reduce the performance target, loss of the significant tenant prompts OMS to maintain that the achievement of the performance target is improbable (i.e., the options are not expected to vest under the original or modified terms).
Required:
5. If the awards continued to be improbable of achievement after modification, how much cumulative compensation cost would be recognized through December 31, 2015? December 31, 2016?
Case 13-5 Occupy Mall Street (1).pdf

Case 13-5
Occupy Mall Street
Occupy Mall Street (OMS or the Company) is a leading real estate management firm
that owns and manages over 100 shopping malls across the United States. The Company
went public in 2009 and experienced a continued increase in stock price through 2011.
With the sustained growth of the business and rising stock price, OMS developed a
practice of granting annual stock option awards to its executives at the beginning of each
year.
On January 1, 2012, OMS granted 1,000 employee share options that cliff vest after a
four-year service period, with an exercise price of $30 per share. Using the Black-Scholes
pricing model, the Company determined that the grant-date fair-value-based measure of
the awards was $15. On the grant date, the Companys stock was trading at $30 per share.
On January 1, 2014, to provide additional retention incentive to its employees for the
third and fourth years of service of the 2012 annual grant, OMS will change the terms of
the award by modifying the exercise price to $20 per share. Using the Black-Scholes
pricing model, management determined that the fair-value-based measure of the awards
was $12 after modification and $9 before the terms of the award were modified. The
modification did not affect any of the other terms or conditions of the awards.
Note that no forfeitures are assumed for the purposes of this case.
Required:
1. How much compensation cost should OMS recognize in each year of the awards
service period?
2. How would the accounting for these awards change if the modification to the
terms (i.e., exercise price) of the award was made on January 1, 2017, after the
awards have become fully vested?
Additional Case Facts:
Assume the same facts as described above. However, the terms of the award also include
a performance condition in which the awards will vest if cumulative net income over the
four-year vesting period is greater than $10 million. On December 31, 2013, because of
the loss of several tenants, projected cumulative net income over the four-year period had
been revised down to $9 million. As a result, management determined that the
performance condition had become improbable to achieve.
On December 31, 2014, managements conclusion that the awards performance
condition was improbable of achievement had not changed. In response to this,
management reduced the performance condition of the original award to $8 million of
cumulative net income over the four-year period. Using the Black-Scholes pricing model,
management determined that the fair-value-based measure of the awards was $12 upon
modification. The modification did not affect any of the other terms or conditions of the
Copyright 2012 Deloitte Development LLC
All Rights Reserved.

Case 13-5: Occupy Mall Street

Page 2

awards; thus, the modification did not affect the options per-share fair-value-based
measure.
Note that OMS had actually achieved $9.2 million of cumulative net income over the
four-year period.
Required:
3. How would the Year 2 accounting change if management determined that the
performance condition was improbable of achievement on December 31, 2013?
What would be the cumulative amount of compensation cost recognized?
4. How much compensation cost would management recognize in Year 3 and Year 4
if the December 31, 2014, modification resulted in the awards becoming probable
of achievement?
4a. How would the accounting for this modification differ under IFRSs?
Additional Case Facts:
Assume the same facts as described above. However, contemporaneously with the
December 31, 2014, modification, OMS will lose a major tenant to bankruptcy; this loss
will have a detrimental effect on the Companys financial results for the year ended
December 31, 2014. Even though OMS modified the options to reduce the performance
target, loss of the significant tenant prompts OMS to maintain that the achievement of the
performance target is improbable (i.e., the options are not expected to vest under the
original or modified terms).
Required:
5. If the awards continued to be improbable of achievement after modification, how
much cumulative compensation cost would be recognized through December 31,
2015? December 31, 2016?

Copyright 2012 Deloitte Development LLC
All Rights Reserved.

View the entire interaction

Why Join Course Hero?

Course Hero has all the homework and study help you need to succeed! We’ve got course-specific notes, study guides, and practice tests along with expert tutors and customizable flashcards—available anywhere, anytime.

-

Educational Resources
  • -

    Study Documents

    Find the best study resources around, tagged to your specific courses. Share your own to gain free Course Hero access or to earn money with our Marketplace.

    Browse Documents
  • 890,990,898

    Question & Answers

    Get one-on-one homework help from our expert tutors—available online 24/7. Ask your own questions or browse existing Q&A threads. Satisfaction guaranteed!

    Ask a Question
  • 890,990,898

    Flashcards

    Browse existing sets or create your own using our digital flashcard system. A simple yet effective studying tool to help you earn the grade that you want!

    Browse Flashcards