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Hello Tutor,
Could you kindly help me understand this paragraph from Kaplan Text.
”……….. The fair value of a SAR could exceed its intrinsic value at exercise
date. This is because SAR holders who do not exercise their rights at that time
have the ability to benefit from future share price rises.
At the end of the exercise period, the intrinsic value of a SAR will equal its fair
value. The liability will be cleared and any remaining balance taken to profit or
loss.”
Thank you.
…….. The fair value of a SAR could exceed its intrinsic value at exercise
date. This is because SAR holders who do not exercise their rights at that time
have the ability to benefit from future share price rises.
I AGREE – FV WILL TAKE ACCOUNT OF WHAT MIGHT HAPPEN TO THE SHARE PRICE IN THE FUTURE
At the end of the exercise period, the intrinsic value of a SAR will equal its fair
value.
I THINK THEY ARE SAYING THAT THE NEW FV WILL BE THE SAME AS THE INTRINSIC VALUE- BECAUSE THERE IS NO FUTURE!
The liability will be cleared and any remaining balance taken to profit or
loss.”
TRUE – THE NEW FV WILL BE DIFFERENT BECAUSE THE ORIGINAL FV WAS AN ESTIMATE
I am sorry I am still unable to understand it.
When SARs are exercised, they are accounted for at their intrinsic value at the
exercise date.The intrinsic value of share/option is the difference between the FV and exercise date price, right?
Yes – that’s correct
I’m confused that you are using jargon that the examiner doesn’t use. If you interested in ‘intrinsic value’ you could recap FM notes
The question will tell you:
– FV – used for year liability
– Cash paid – intrinsic value if you want to call it that – used to calculate settlements in the year
If you are happy with our Example 5 in our Course Notes, I would move on..
If you need detailed guidance KPMG have a guide:
https://home.kpmg/content/dam/kpmg/xx/pdf/2018/11/ifrs-2-handbook-2018.pdf
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