Jensen Inc. is a publicly-held company and is a fashion retailer that sells mens and womens clothing and accessories. As an incentive to its employees, the Company established a compensation incentive plan in which a total of 100,000 options were granted on January 1, 2017. On that date (the grant date), Jensens stock price was $15.00 per share.

The significant terms of the incentive plan are as follows:

• The options have a $15.00 strike or exercise price (the price the employee would pay to purchase a share of stock if the options vest).
• For the options to vest, the following must occur:
  • The employee must continue to provide service to the Company throughout the entire explicit service period of five years (i.e., a five-year cliff-vesting award).
  • The Company must achieve annual sales of at least $20 million during the fifth year (2021) of the explicit service period.
  • The Companys share price must increase by at least 25 percent over the five-year explicit service period.
• Also, if the Company achieves sales of at least $25 million during the fifth year (2021) of the explicit vesting period, the strike price of the options will decrease from $15 to $10.
• The options expire after 10 years following the grant date.
• The options are classified as equity awards.

Additional Facts:

• Assume it is probable at all times that 100 percent of the employees receiving the awards will continue providing service to the Company as employees for the entire five-year explicit service period and that the five-year explicit service period is determined to be the requisite service period.
• On the grant date (1/1/17), Jensens management determined that it is probable that the Companys sales in 2021 will be $30 million, and therefore it is probable on the grant date that sales are greater than or equal to at least $25 million.
• The grant-date fair value of the options assuming a strike price of $15 is $8 per option. The grant-date fair value assuming a strike price of $10 per option is $12 per option.

The Setting

You are the Manager on the 2021 audit of Jensen, Inc. and are examining the above accounting issues that have subjective aspects. The audit partner has asked you to analyze these issues and prepare an accounting issues memorandum (minimum 2 pages, maximum 3 pages, single-spaced) to assess the appropriate accounting treatment of this stock option plan and to support your position. Also, the partner has asked you to present your work to the Controller and CFO of Jensen, each of whom has limited accounting knowledge in this area. The presentation is approx. 15 minutes and should include approx. 8-10 Powerpoint slides. Use the ASC and, in addition, you must include 2 references to accounting firm literature.

Required:

In your memo and presentation, you must address each of the following:

1. What types of conditions are present in the plan for the vesting of the units? Are they service, performance, market, or other conditions? (Explain your reasoning and provide support).

2. How do the service, performance, and market conditions affect vesting of the units? Of the various conditions present in the awards:
   1. Which affect the vesting of the award?
   2. Which affect factors other than vesting of the award and what is their accounting treatment?

Explain your reasoning and provide support.