Question No 8:
KOL granted share options to all of its 400 employees on 1 January 2010.
Each employee will receive 1,000 share options provided they continue
to be employed by KOL for four years from the grant date. The fair value
of an option at the grant date was $2.20.
On the same date KOL
granted 500 share appreciation rights to each of its employees. To be
eligible, employees again have to be employed by KOL for four years from
the grant date. The rights are exercisable in the two-month period from
1 January 2014 and will be settled in cash. The fair value of each
share appreciation right was $12 at 31 December 2010 and $14 at 31
December 2011.
The actual and expected future staff movements as at 31 December 2010 and 31 December 2011 are provided below.
2010 15 left and another 55 were expected to leave over the next three years.
2011 a further 22 left and another 36 were expected to leave over the next two years.
Required:
(a)
Prepare, in accordance with IFRS 2 Share-based Payment, the accounting
entries required in the financial statements of KOL for the year to 31
December 2011 in respect of the two financial instruments identified
above.
(b) Explain the main principle of recognition set out by
IFRS 2 Share-based Payment for share based payments AND why the
treatment of the two financial instruments identified above will differ
in the statement of financial position.
(a) Accounting entries Accounting entries for year ended 31 December 2011:
Share options
Dr Staff costs (income statement) (W1) $178,200
Cr Equity $178,200
Share appreciation rights
Dr Staff costs (income statement) (W2) $649,500
Cr Liabilities (non-current) $649,500
Working 1
1,000 options x (400-15-22-36) employees x FV$2.20 x 2/4 years = $359,700
Less recognized in 2010:
1,000 options x (400-15-55) employees x FV$2.20 x 1/4 years = $181,500
Charge for 2011 $178,200
Working 2
500 SARs x (400-15-22-36) employees x FV$14 x 2/4 years = $1,144,500
Less recognized in 2010:
500 SARs x (400-15-55) employees x FV$12 x 1/4 years = $495,000
Charge for 2011 $649,500
(b)
In accordance with IFRS 2, the share options and the share appreciation
rights are recognized as an expense in the income statement as they are
awarded in return for employee service.
The treatment of each,
however is different in the statement of financial position. The share
appreciation rights will result in a future outflow of cash and
therefore represent an obligation and are presented as a liability. The
liability should reflect the most reliable measurement at each balance
sheet date and so the total amount payable that is estimated at each
year-end date is estimated using the updated fair values.
The
options represent an equity-settled share-based payment and do not meet
the definition of obligation, and so instead the entry is to equity. The
equity element is measured initially and subsequently at the fair value
at the grant date.
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