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B.co grntd 50 m shares to employes.the cost is recognized over 3 yrs.currently assumed options vl vest nd exp is caculated on tht.Co opertes in the juridctn in which no defrd tax consq arise frm shre based payments. what are the financial risk in this?
Hi – I can see that it’s June 2008 but I can’t see it in the exam. Which question number is it?
I can find absolutely no reference to share-based payments in question 1 of the June 2008 exam! Is the question called Medix?
As is not unusual in a P7 exam, you need to put on your P2 hat and cast your mind back to the machinations of IFRS2.
The question itself gives you some ideas of the risks involved but the concept of accounting for share-based payments is entirely based upon estimation, guesswork, the application of models and fundamental assumptions.
That being the case, the is surely never a situation where the numbers arrived at by calculation will exactly match reality.
What we need to do is seek to ensure that the aggregation of all this guesswork results in a set of financial statements that is not a world away from actuality
Now, addressing your specific question – I can’t think of any! And that’s a lesson for you – you need to be more careful with your writing and don’t let your brain accelerate too far ahead of your hands. The reason I asked you for the question was because I couldnt believe that the examiner had asked you to identify financial risks and, sure enough, you posted an incorrect question.
As for financial statement risks, well, that’s a different matter. And, as suggested by my comments at the start of this response, the answer lies in the very nature of share-based payments.
Over- or under-estimation could lead to material over- or under-accounting in terms of expenses recognised and amounts taken to equity. Now take it from there: chances of no-one, no-one at all leaving within three years has surely got to be unrealistic.
The use of a model for the fair value of the options needs to be checked for accuracy and appropriateness,
The calculation should have been correctly time apportioned to ensure that only 6 months (possibly only 5 months) has been used as the options were granted part way through the current year
When the options were granted, they should have been accounted for back in June. A the year end, in November, there should have been a reassessment of the situation and, as necessary, a recalculation
But these are all financial statement risks. I can’t imagine any financial risks that you have asked about!
🙂
Hope that helps
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