Proxima Centauri, Inc. On January 1, 2012, Proxima Centauri Inc., a publicly-traded U.S. corporation, granted 1,000 “at-the-money” employee stock options to the founding employees of the high-tech company. To align the compensation of the employees with the financial performance of Proxima, the award was designed to vest only if cumulative revenue over the following three-year reporting period was greater than $10 million and the employees were still employed by the organization at the end of the exercise period. At the date of the grant, management believed it was probable that Proxima would achieve cumulative revenue in excess of $10 million over the prescribed three-year period. Each award had a grant-date fair value of $9. At the request of the CFO, Proxima engaged an outside valuation professional to review the impact of the performance conditions on the stock option value. According to the “hired gun,” if revenue targets were factored into the fair value assessment, the grant-date fair value would be $6, rather than $9. As it turned out, revenue in each of the next three years was as follows: 2012: $2 million 2013: $5 million 2014: $4 million Given the conflicting information provided by the valuation consultant, Proxima’s Chief Financial Officer, Boone Kwon, isn’t certain how to measure the compensation cost arising from the stock option award. He also has expressed concern over the timing of expense recognition and the amount to charge to expense for any given year. In terms of employee retention, the stock option plan has been a huge success – there were zero forfeitures over the three-year vesting period. Even better Proxima’s favorable tax position (loss carry-forwards) negates any need to consider income taxes when analyzing the accounting treatment for the stock options. CFO Kwon wants to make it clear, that at no point during the period 2012 to 2014 did Proxima elect fair value measurement under FAS 157 for any of its assets. ###