This workout says a company grants some options at the end of fiscal year zero, calculate the stock based compensation expense in fiscal year one to fiscal year three using the information below. Okay, so let's see what information we are given. We are told these stock options granted at 56,450, the vesting period for these options at three years. Fair value of each option on grant dates at 2.5. There is a vesting condition, continual service throughout vesting period, and we are given some more information here, proportion of vesting period. So this is quite handy. What it's actually told us is that we know the full vesting period is three years. In year one, we only want one third of that, year two two thirds, and year three, 100% or three over three. We are also told that forecast levels of staff retention for every single year. So management have predicted how many of their staff they predict will remain at the firm. Remember, we are interested in the number of options expected to vest, so this is really, really important.

Okay, so let's start at fiscal year one. Cumulative stock based compensation expense. So I know that at the end of year one, 97% of the staff are expected to remain at the firm. So I am going to multiply this by the number of stock options granted, this means that I'm adjusting this number for the number that I expect to vest. I'm actually going to lock this so I can copy it across. Now I need to multiply this by the fair value of each option on grant date, which is 2.5. Again, I'm going to lock this so we always times it by the fair value of each option on the grant date. Really, really important. Now, I know that this is a three year vesting period and I have been given some information at the top that I can use as we are only one year into the three year vesting period. I only want one third of this, so I'll times it by that. This means that the cumulative stock-based compensation expense is 45,630.4. However, I actually want to calculate the expense recognized on the company's income statement at the end of year one. Well, I actually know that it's going to be the same as this, so I can just copy that down.

For year two, remember, we are two thirds of the way through the vesting period, and management have told us that the staff retention rate has changed to 95%. So we need to adjust the number of options that we expect to vest by the 95% and because it's the cumulative expense, we only want two thirds of this as we're two thirds of the way through the vesting period. So I can actually copy this across, but If I show the formula, you can see that stock options has locked those sales fair value because it hasn't changed. However, for year two, we are using 66% and 95% staff retention levels. When it comes to calculating the actual expense recognized at the end of year two in the income statement. Remember, the cumulative amount is this. However, for year one, we have already recognized 45,630.4. So if I find the difference, this actually tells me that 43,748.8 is recognized at the end of year two. I'm going to do the same for year three and just to show the stock options granted remains the same. The fair value also remains the same, but we are now all the way through the vesting period. So I can time this by 100% for the cumulative amount and forecast levels of staff retention has changed again, but this time to 96%. So that gives us 135,480. When it comes to calculating the expense recognized at the end of year three through the income statement, I take the cumulative amount for all three years and I minus it by the cumulative expense in year two because we've already recognized the first year and the second year. So we need to deduct this from the total amount. This means that in the final year, 46,100.8 is recognized in the company's income statement.