Free Cima F2 Training Exam Question Answers - Dumps4download

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.