Part II FASB ASC Research Restricted Stock Award with Contingent Settlement

Now what do I do? moaned your colleague Matt. This is a first for me, he confided. You and Matt are recent hires in the Accounting Division of Nutrition For Me, Inc. (NFM) A top executive in the company has been given a Restricted Stock Award that permits her to receive shares of NFM equal in value to the amount the company shares rise above the shares value two years ago when the awards were granted to her as compensation. The awards vest over five years. A clause was included in the compensation agreement that would permit her to receive cash rather than shares upon exercise if revenues in her division were to double by that time. Because that contingency for cash settlement was considered unlikely, the instruments have been accounted for as equity, with the grant date fair value being expensed over the five-year vesting period.

Now, though, surging sales of her division indicate that the contingent event has become probable, and the instruments should be accounted for as a liability rather than equity. The fair value of the award was initially estimated (measured) at $5 million on the grant date, but now is $8 million. Matt has asked your help in deciding what to recommend to your controller as the appropriate action to take at this point.

Required:

1. Research and determine the type of model your valuation specialist would likely utilize to measure this type of award with this type of condition. Reference applicable FASB ASCs as well.