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Wiley IFRS: Practical Implementation Guide and Workbook
Case
Study
9
June
1, 20X5
May
31, 20X6
May
31, 20X7
May
31, 20X8
August
1, 20X8
266,667
225,000
225,000
Facts
Mack, a public limited company, grants 5,000 share options each to its 20 executives on June I, 20X5,
on these vesting conditions:
• The executives must remain in the company 's employment during the vesting period .
• The share price must reach $ 10 a share before the share options vest.
• The company 's earnings must increase cumulatively by more than 5% in the first year, 10% in
second year, and 16% in the third year after the grant date for the options to vest in that year.
The company has calculated that the fair value of each option at the grant date is $5. The exercise price
of the option is $3, and the exercise date is August
I ,
20X8 . The shares will vest as soon as all of the
above conditions are met.
The company's earni ngs increased by 4% in the year to May 3 1, 20X6. At that date, it expects that the
earnings will increase by 7% in 20X7 and 6% in 20X8 . Additiona lly, it is anticipated that one director
will leave every year.
At May 31, 20X6, no directors had left, but it is anticipated that two directors will leave in the next year
(they did) and two in the year to May 3 1, 20X8 . The cumulative increase in earn ings by the end of
May 31, 20X7, is 10%. The performance target will be met in 20X8, and only one director will leave in
that year.
The shares of the entity are ordinary shares of $ 1, and the tax rate appl icable in the jurisdiction is 30%.
Tax allowances are based on the intrinsic value of the share. The share price of Mack was
$
per share
5
7
10
13
14
Required
Show the accounting entries, including deferred taxation, for the above share-based payment transac–
tions.
Solution
IFRS
2,
paragraph
2
I, states that the grant date fair value of the share-based payment with a market–
based condition that has met all the other vesting conditions should be recognized irrespective of
whether the market condition is achieved. Thus the market condition can be ignored for the purpose of
accounting for the share-based transaction.
Calculation
of
Charge
Fair value of award expec ted to vest is 5000 x (20 - 2) x $5
=
$450,000.
May
31,
20X6
The earni ngs have not met the target, but it is expected that by May 31, 20X7, the earnings target
will have been met. Therefore, the vesting period is taken as two years as of the date. Also, it has
been anticipated that two directors will have left by this date.
Compensation chargeis therefore
$450,000/2
=
$225,000
Employeebenefits expense-incomestatement
Equity (separate account)
May
31,
20X7
It is estimated that by this date, four directors will leave. The shares do not vest because the earnings
have cumulatively increased only by 10%, and not more than 10%. Therefore the vesting period is
taken as three years.
Compensation charge is, therefore, (cumulative)
5,000
x
(20 - 4)
x
$5
x
2/3
Employee benefits expense - income statement
(266,667 - 225,000)
Equity (separate component)
41,667
41,667