Kylee-Quinn Associates, Inc. (KQ), a private company, is a manufacturer of exterior building products. On January 1, 2017, KQ granted non-qualified stock options under its 2017 stock incentive plan (the plan) to certain employees. KQ can only settle the stock options by issuing common stock. The fair market value of KQs underlying stock on January 1, 2017 was $10 per share. Some of the stock options are time-vesting options, and some are performance-vesting options.

A summary of the options grant terms is as follows:

• Time-vesting options

Date of grant: January 1, 2017

Exercise price: $10 per share

Vesting (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 shares vest immediately

• Performance-vesting options

Date of grant: January 1, 2017

Exercise price: $10 per share

Vesting (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 2017 through 2021, and also have a cumulative catch-up feature such that EBITDA shortfalls in any given year can be made up through EBITDA surpluses in future years); OR,
• Upon a change in control or IPO, the installment of options (1) associated with the year in which the change in control or IPO occurs, and (2) associated with future years EBITDA targets become immediately vested and exercisable

During 2017, it was not probable that KQ would meet any years EBITDA target, or that a change in control or IPO would occur.

On November 15, 2018 KQ announced its intention to undertake an IPO of its common stock. The IPO was completed and KQs stock began trading in October 2019. During all periods in 2018 and 2019, it was still not probable that KQ would meet any years EBITDA target (either individually or cumulatively).

Required:

1. For each award, how should KQ initially recognize compensation cost?

2. How does the IPO announcement in 2018 and the completion of the offering in 2019 affect KQs accounting for these options in the years ended December 31, 2018 and 2019?