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Example—Modification of a share-based payment transaction
The 10 directors of Brno received options on January 1, 20X1, to take up 100 CU1 shares in Brno for a purchase consideration of CU20 per share after the completion of a two-year service period. Brno obtained the services of a valuation expert who calculated the fair value of the share options provided to the directors to be CU11 on January 1, 20X1.
The amount recognized as a share-based expense during 20X1 amounted to: (100 options × 10 employees x CU11 × ½ years) = CU5,500
On January 1, 20X2, the share price of Brno shares decreased to CU18. The directors expressed concern that their options carried no value, and requested that the entity decrease the consideration price to be paid to CU15. The entity decreased the purchase consideration from CU20 to CU15; a valuation expert calculated the fair value of the CU20 share option to be CU2 and a CU15 share option to be CU8 as at January 1, 20X1. All the directors exercised their options on December 31, 20X2.Could you please explain how to work out the answer for this question ?
Does the printed solution give you an answer of $9,500 expense for the year to 31 December 20X2?
The answer is as follows:
Employment cost (P/L) 11,500
Equity reserve (Equity) 11,500
Accounting for the 20X2 employment cost.
Bank (SFP) 15,000
(10 directors × 100 share × CU15)
Equity reserve (Equity) 17,000
[CU5,500 (20X1) + CU11,500 (20X2)]
Share capital (Equity) 1,000
(10 directors × 100 Brno share)
Share premium (Equity) 31,000i dont really understand why in the bank account we need to debit 15200 ?
Because that’s how much money these directors are going to pay (10 directors, 100 shares each, $15 cost of each share)
I thought that I should take the re-measurement of the option which is 100x10xCU8. Could i understand in this way, where the re-measurement is not allowed in equity settled and therefore we should only take the original value of the option at the date of modification?
or the the treatment for the purchase price and the option is different?
I think we would have taken 100 x 10 x 8 and then x 2/3 if this had been the second year of three but, because it’s the last year, the value of the option at the end of the second year is irrelevant
Ok?
Maybe my question is not so clear, i try to make it as clear as possible.
Modification
Since the incremental fair value is positive (CU8 ? CU2), the value of the modification based on the incremental fair value is included in the share-based payment expense. The value is CU6,000 [10 directors × 100 options each × (CU8 ? CU2) incremental fair value of options at modification date × 1/1 completed service period].Current year expense
CU 11 , 000 ( original issue ) ÷ CU 6 , 000 ( modification ) ? CU 5 , 500 ( prior year ) = CU11,500i understand the modification.The one i don’t really understood is why the bank should account for 100x10xCU15 instead of 100x10xCU8 ? This means that normally the exercise price is different and higher than the fair value right?
Yes, you are correct. Exercise price will likely be different than fair value but I would have expected the difference to be close to zero in the final year
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