I worked on this question and the answer seems to me too easy to be true. Could you see if my answer is right?

1 Case 08-2 Sooner or Later Issue 1. At the beginning of 2006, Sooner or Later Inc. granted 1,000 ATM (At-The-Money) employees stock options. The stock option awards will vest if the employees' service period reaches three years, and cumulative 3-year revenue surpasses $10 million. As the management believes the company will achieve this goal within the time line, the stock option grant day fair value needs to be estimated to recognize compensation expense. Alternatives, Analysis and Recommendation Corporations are required to use fair value method to account for compensatory share option plans (FASB, Statement No. 123 (R)). It could either use the known option grant-day fair value of $9, or the option grant-day fair value of $6 suggested by the valuation professionals. In this case study, FASB standards are examined and applied to determine which fair value should be used to estimate compensation expense. GAAP stated that, factors relating to award's fair value assessment, such as award's exercise price, contractual term, quantity, conversion ratio, etc., are affected by market, performance and service conditions (FASB Cod. #718-10-55-64). In this case, the contractual terms required meeting no market condition, and the exercise price is fixed at the grant-date stock price. For employees to be vested the awards, they have to satisfy two conditions: (1). To provide services to the company for three years, which is an explicit vesting period; (2). To attain the revenue target of $10 million cumulatively for the following three years. If both requirements are met, all granted awards vest to employees; if either requirement is not met, all granted awards forfeit. \"Performance or service conditions that only affect vesting are excluded from the estimate of (option award) grant-date fair value, but all other performance or service conditions that affect an award's fair value are included in the estimate of grant-date fair value...\" (FASB Cod.#718-1055-64) Therefore, Sooner or Later should use the original grant-date option fair value of $9 to estimate its compensation expense. Issue 2. Sooner or Later should recognize compensation cost associated with the stock options over three years. Ignoring the effects of forfeitures and income taxes, $3,000 annual compensation expenses should be recorded in each year based on straight-line method: 2 2006 2007 2008 Estimated total compensation cost ($9 x 1,000) Fraction of service period expired $9,000 x 1/3 $9,000 x 2/3 $9,000 x 3/3 Estimated compensation expense to date Less: Previously recognized compensation expense 3,000 (0) 6,000 (3,000) 9,000 (6,000) Current compensation expense 3,000 3,000 3,000 Reference: Financial Accounting Foundation. Citing Websites. In FASB Accounting Standard Codification. Retrieved January 18, 2012, from http://asc.fasb.org/ Deloitte Development LLC. Citing Websites. In FASB Statement No. 123(R), Share-Based Payment, Second Edition, Retrieved January 18, 2012, from http://www.deloitte.com/us/RoadmapFASB123R