4.10 Valuation of Awards With Graded Vesting Schedule

Some share-based payment awards may have a graded vesting schedule (i.e., awards that are split into multiple tranches in which each tranche legally vests separately). For example, an entity may grant an employee 1,000 stock options that vest over four years in increments of 25 percent each year. As discussed in Section 4.9.2.2, vesting indirectly affects the fair-value-based measure of a stock option by affecting the expected-term assumption. For options and similar instruments with graded vesting, an entity can either estimate separate fair-value-based measures for each vesting tranche, each with a different expected term, or estimate the fair-value-based measure of the entire award by using a single weighted-average expected term. Regardless of the valuation approach, for employee awards with graded vesting and only service conditions, an entity can still make a policy decision to recognize compensation cost on a straight-line basis over the total requisite service period of the entire award (see Section 3.6.5).