IFRS 2- Cancellation and Settlement of equity – settled share based payment

BPP Textbook (for exam up to June 2021) Chapter 10- Activity 5:

On 1 January 20×1, Piper made an award of 3000 share options to each of its 1000 employees. The employees had to remain in Piper’s employ until 31 December 20×3 in order to be entitled to the share options. At the date of the award and at 31 December 20×1, management estimated that 100 employees would leave the company before the vesting date. Piper accounted for the options correctly in its financial statement for the year ended 31 December 20×1. The fair value of each option on 1 January 20×1 was $5.

The share price of Piper fell substantially during 20×1. On 1 January 20×2 the fair value of the share options has fallen to $1 each and 975 of the employees who were awarded options remained in the company’s employ.

Discuss the accounting treatment of the share options in Piper’s financial statement for the year ended 31 December 20×2 if on 1 Jan 20×2 the original options were cancelled and $4million is paid to employees as compensation.

BPP Answer:

31/1/20×1 Dr. P&L – remuneration expenses $4,500,000
Cr. Equity reserves $4,500,000 (1000-100)*$5*3000*1/3

1/1/20×2 Dr. P/L – remuneration expenses $9,000,000
Cr. Equity Reserves $9,000,000
(Being acceleration of vesting over the remaining period)

1/1/20×2 Dr. Equity reserves (900*300*$1) $2,700,000
Dr. Profit or loss (remainder) $1,300,000
Cr. Cash/Bank $4,000,000
(Being settlement of the shared-based payment)

My question is: How to treat the residual balance of $10.8million ($4.5m+$9m-$2.7m) in the equity reserves? Does the balance have to be reclassified to Profit or Loss or is it transferred directly to retained earnings?