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?
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 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.