Document ID: chunk:federal_register_of_legislation:F2022C00493:reg:3
Version: federal_register_of_legislation:F2022C00493
Segment Type: reg
Provision Reference: reg 3
Character Range: 148078–152536

3                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            (86 employees × 300 options × CU20 × 3/3) – CU340,000   176,000                          516,000

IG Example 4
Grant with a performance condition, in which the exercise price varies
Background
At the beginning of year 1, an entity grants to a senior executive 10,000 share options, conditional upon the executive remaining in the entity's employ until the end of year 3. The exercise price is CU40. However, the exercise price drops to CU30 if the entity's earnings increase by at least an average of 10 per cent per year over the three-year period.
On grant date, the entity estimates that the fair value of the share options, with an exercise price of CU30, is CU16 per option. If the exercise price is CU40, the entity estimates that the share options have a fair value of CU12 per option.
During year 1, the entity's earnings increased by 12 per cent, and the entity expects that earnings will continue to increase at this rate over the next two years. The entity therefore expects that the earnings target will be achieved, and hence the share options will have an exercise price of CU30.
During year 2, the entity's earnings increased by 13 per cent, and the entity continues to expect that the earnings target will be achieved.
During year 3, the entity's earnings increased by only 3 per cent, and therefore the earnings target was not achieved. The executive completes three years' service, and therefore satisfies the service condition. Because the earnings target was not achieved, the 10,000 vested share options have an exercise price of CU40.
Application of requirements
Because the exercise price varies depending on the outcome of a performance condition that is not a market condition, the effect of that performance condition (ie the possibility that the exercise price might be CU40 and the possibility that the exercise price might be CU30) is not taken into account when estimating the fair value of the share options at grant date. Instead, the entity estimates the fair value of the share options at grant date under each scenario (ie exercise price of CU40 and exercise price of CU30) and ultimately revises the transaction amount to reflect the outcome of that performance condition, as illustrated below.
Year                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   Calculation                      Remuneration expense for period  Cumulative remuneration expense
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        CU                               CU