Hello and welcome everyone. Today I am going to give a very basic example about stock options. Stock options, well is not similar to RSU in terms of that the stock options need to be settled. Most of the time is in stock because in stock option I'm giving the right to my employees as a stock-based compensation plan. To give them the right to exercise those and buy stock. In the RSUs, either you can settle in stock or in cash. Thus, in the stock options it's going to be always at an accounting treatment that based on as an equity. In the stock option, I have an exercise price and I give the right for those employees, the holders of those options, to settle in stock and buy those stock and exercise their options by paying the exercise price. We'll take a simple example, very simple straight forward example for this lesson and then we will complicate it as we go either with forfeitures and so on with other complications, let's get started. Under its executive stock option plan, Universal Corporation granted 30,000 options on January 1st 2021. That permit executives to purchase 30 thousand of the companies $1 per common shares for $18 per share, which is the market price of the share on the grant date. It's not always have to be that. But now the exercise price is the market price on the grant date. It does not have to be this way all the time. These executives have the right to exercise their options within the next eight years, but not before December 21st, 2023. Obviously now, the vesting period is obviously three years. Twenty one, 22 and 23. The fair value of the options estimated by an appropriate option pricing model is $10 per option. No, forfeitures are anticipated. All options were exercised on January 6th, 2024, when the market price was $30 per share. Again, when we have that stock options, the market price on the exercise date is not relevant because if we are settling in stock and stock options will always going to be settled in stock. Actually, I will use the value of the compensation that I have calculated or estimated on the grant date because I will not update it, it's different than the liability. But in an equity settlement, then you are taking valuing the compensation at the time of the grant, which is based on the number of options and the fair value of the options at the time. The fair value of the option here was 10, and the number of options were 30,000, the package is 300,000. The vesting period, the package I mean of the compensation itself, the vesting period is three years, then I'm going to allocate simply equally straight line, 100,000 each year. How am I going to record that? I'm going to record that as a compensation expense and some type of paid-in capital stock option. At the end when they are exercise, as it says on January 6th, 2024, I will actually transfer that PIC stock option into an issued common stock and PIC regular common stock. Let's take a look of what I just summarized in the following slide. On January 1st, there is no entry as we know because that is the grant date. The entry will start on December 21st, which is one year that I have received the services. So now I can incur a compensation expense. As you notice, as I said before, the three years are going to have the same journal entry because I took the 300,000, which is the value of the compensation, divided it by three. Each year that is going to be the same journal entry that will be recorded at the end of each year. Recording the compensation expense and as I said, the PIC stock options. On January 6th, 2024, I'm transferring two things, I'm transferring the PIC stock option into those issued shares and I'm actually recording the cash that I collected from my employees as the exercise price when they exercise those options. The exercise price was $18, so the cash, as you can see, the cash that I collected is 540,000, which is $18 per option exercise price for the option. The number of options that were exercised, 30,000. The paid-in capital stock option was debited because that amount will be transferred. It's not anymore in the PIC stock option, but it is going to go into the common stock as it's par value. Whatever in excess of the par value will be accredited in the paid in capital in excess of par. As I said, very straight forward, very easy example, without no complication at all, we are going to complicate it as we go. How would that be affected with forfeitures? Or how would that be affected, for example, by graded vesting? What we referred to graded vesting. Those complications we'll discuss later as you will follow with us. Thank you.
