My instructions are to identify any and all of the relevant issue(s) to be discussed in the case study, (2) cite the appropriate authoritative standards and (2) you are to provide a solution to the issue(s). You will need to search the online Accounting Standards Codification (ASC) for authoritative support for the positions you are taking in your solution.
Ventura Associates, Inc. (Ventura), a private company, is a manufacturer of exterior building products. On January 1, 20X1, Ventura granted non-qualified stock optionsunder its 20X1 stock incentive plan (the Plan) to certain employees. Ventura can onlysettle the stock options by issuing common stock. The fair market value of Ventura’sunderlying stock on January 1, 20X1 was $10 per share. Some of the stock options aretime-vesting options, and some are performance-vesting options.A summary of the options’ grant terms is as follows:• Time-vesting optionsDate of grant: January 1, 20X1Exercise price: $10 per shareVesting (must be employed upon vesting):· 20 percent per year on each anniversary after the date of grant OR· Upon a change in control or initial public offering (IPO), all unvested sharesvest immediately• Performance-vesting optionsDate of grant: January 1, 20X1Exercise price: $10 per shareVesting (must be employed upon vesting):· 20 percent per year, contingent on achievement of annual EBITDA targets(which are specified in the grant notification and vary each year from 20X1through 20X5, and also have a cumulative catch-up feature such that EBITDAshortfalls in any given year can be ‘made up’ through EBITDA surpluses infuture years) OR· · Upon a change in control or IPO, the installment of options (1) associated withthe year in which the change in control or IPO occurs, and (2) associated withfuture years’ EBITDA targets become immediately vested and exercisableDuring 20X1, it was not probable that Ventura would meet any year’s EBITDA target, orthat a change in control or IPO would occur.On November 15, 20X2 Ventura announced its intention to undertake an IPO of itscommon stock. The IPO was completed and Ventura’s stock began trading in October20X3. During all periods in 20X2 and 20X3, it was still not probable that Ventura wouldmeet any year’s EBITDA target (either individually or cumulatively).Required:• For each award, how should Ventura initially recognize compensation cost?• How does the IPO announcement in in 20X2 and the completion of the offering in20X3 affect Ventura’s accounting for these options in the years ended December31, 20X2 and 20X3?
Solution: Ventura Associates, Inc. (Ventura), a private company