What is Retesting of share options?
Retesting of share options occurs when an entity chooses to modify the terms and conditions on which it granted equity instruments. For example, it might change (reprice/retest) the exercise price of share options previously granted to employees at prices that were higher than the current price of the entity’s shares. It might accelerate the vesting of share options to make the options more favourable to employees; or it might remove or alter a performance condition. If the exercise price of options is modified, the fair value of the options changes.
A reduction in the exercise price would increase the fair value of share options. Irrespective of any modifications to the terms and conditions on which equity instruments are granted, paragraph 27 of IFRS 2 requires the services received, measured at the grant-date fair value of the equity instruments, to be recognised unless those equity instruments do not vest. Although some companies provide for retesting to allow for the potential volatility of earnings and the cyclical nature of the market, many companies limit the retesting opportunities and others do not allow retesting at all.