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Hi sir,
In case of equity settled share based payments to employees, we record transaction at the fair value of the equity instrument at grant date.
My question is that why do we recognise expense over the vesting period, measuring it at the FV at grant date?
As FV keeps on changing, why we do not revise the FV and then recognise expense on the basis of revised FV each year?
As in cases other than employees, we recognise asset or expense using the FV of equity instruments at the date when goods or services are received, which is quite logical.
Why in case of employees we keep on expensing the grant date FV over the whole vesting period, when the FV keeps changing over the period in which services are rendered by employees?Hi,
The assumption is that any change in fair value of the option is not recognised by the company as it is a benefit that is taken by the employee. There are more technical reasons than this but that will complicate it further as it is P4 related.
The key to remember in any exam question is that if it is an equity settled share based payment we do not adjust the fair value at the grant date.
Thanks
Even in cash settlement the benefit is taken by employee, yet we adjust FV while accounting for it and a benefit to employee is anyway a cost to the company?
Can you please refer the relevant P4 lecture, where I can look for further explanation on this?
Many thanks 🙂But in a cash settled scheme the company has a larger obligation to pay at the end of each year as the price of the share increases.
Trust me, I wouldn’t waste your time looking at anything to do with P4. Focus your attention on everything P2 related as it will give you a much better chance of being successful.
The standard is by no means perfect but it is what we will be examined upon so I’d just focus on applying the rules to the past exam questions.
Thanks
Hi Sir,
In measuring value in use, the discount rate used should be the pre-tax rate, can you please explain the reason behind using pre-tax rate. Why don’t we take into account tax implications, when it affects the future cash flows to be generated by the asset?Mahrukh,
This question is not related to your original one posed. If you have a new question can you please start it on a new thread.
IAS 36 specifically excludes the financing and tax effects from the cash flows used to calculate the value in use. We therefore are looking at pre-tax cash flows and must discount using a discount rate that is also pre-tax.
Thanks
Ok, i’ll do so from next time. 🙂
That’s what i’m asking, why does IAS 36 excludes tax, when it does affects the cash flows directly ?I’d have thought it is excluded as it is maybe difficult to predict the tax rate five years into the future plus we don’t consider any tax impact on the fair value less costs to sell, so shouldn’t on calculating the value in use.
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