ifrs 2 share based payment leigh 6/2007 continuous

Sorry Mike I dont know why this website is not allowing me to reply, so i created a new topic again.

Hi Mike

in general for Share based payments, you Dr P&L and CR Equity. I dont understand why you would DR equity as the shates should decrease because the company is issuing shares to the directors.?

leigh 6/2007
question b.
on 31/5/2007, leigh purchased PPE for $4m. the supplier agreed to accept payment frr PPE either cash or shares. the supplier can choose 1.5.m shares of the company issued in 6months or to recieve a cash payment in 3months time to the market value of 1.3m shares. it is estimated that the share price will be $3.50 in three months time and $4 in 6 months time.

I dont understand in the solutions how IAS 32 financial instruments -presentation kicks into this question and how the PV is 1.3*$3=$3.9?

do we use the share price on 31.5.2007 or the estimated share price?i am so confused with question.

c. leigh acquired 30% of the ordinary share capital of Handy, a public limited company, on 1/4/2006. The purchase consideration was 1m ordinary shares of leigh which had a market value of $2.50 per share at that date and the fair value of net assets of Handy was $9m . the reatined earnings of handy were $4m and other reserves of handy were $3m at that date. leigh appointed 2 directors to the board of handy and it intends to hold investment for a significant period of time. Leigh exerts significant inflence over handy. the summarised |SOFP of handy at 31.5.2007

share capital $2m
other reserves $3m
Retained earnings $5
Total $10m
There are no new issues of shares by handy since the acquisition by leigh and the estimated recoverable amount of the net assets of handy at 31.5.2007 was $11m

Discuss with computation how the above share based transactions should be accounted for in the F/S for the year ended 31.52007?

i dont understand why the goodwill is negative and how we got the $0.2? again completly confused abt this calculation.

hope you can help.

Thanks very much.

Yes, I think if the company is issuing shares to directors, this would decrease equity, hence you DR equity. am i wrong?

I will type the solutions out as i dont have a scanner:

b.
under ifrs 2 the purchase of the PPE would be treated as a share based payment in which the counterparty has a choice of setlement, in shares or cash.

Such transcations are treated as cash- settled to the extent that the entity has incurred a liabity. It is treated as the issue of a compound Fin instrument, with a debt and an equity element.

similar to ias32 Financial instruments: presentation, IFRS 2 requirement the determination of the equity element. The Fair value of the equity element is the fair value of the goods or services (in the case PPE) less fair value of debt element of the instrument.

The share price of $3.50 is the expected share price in 3months time )assuming cash settlememt). the fair value of the liability component at 31.5.2007 is the present value: 1.3x$3= $3.90.

The journal entries are:
DR PPE $4M
CR Liability $3.9m
CR equity $0.1m

In the three months time, the debt component is remeasured to its fair value. assuming the estimate of future share price was correct at $3.50, the liabity at that date will be 1.3mx$3.50= $4.55. An adjustment must be made as follows
DR expense (4.55-$.90) $0.65m
CR liability $0.65m

Cash settlement
the share based payment to the new director, which offers a choice of cash or share settlement, is also treated as the issueof a compound instrument.

In this case the fair value of the servies is determined by the fair value of the equity instrument given.

the FV of the equity alternative is $2.50x 50000= £125,000. the cash alternative is valued at v40000x $3= $120,000. the difference between these two values $5000 is deemed to be the fair value of the equity component.

At the settlement date, the liabity ellement would be measured at FV and accounting treatment.

at 31.5.2007 accounting entries
DR P&L director remuneration
CR liability
CR Equity

c. Investment in Handy
treated under ias 28 assciates
Associates are accounted for as cost plus post acquisition change in net asset, generally cost plus share plus share of post acq retained earnings

The cost is the fair value of the shares in Leigh exchanged for the shares of handy. However, negative goodwill arises because the fair value of the net assetsof handy exceeds this.

the negative goodwill must be added back to determine the cost to be used for the carrying valueand foloowing a reassessment CR P/L 0.2 DR Cost 0.2

cost 2.50
add back negative goodwill 0.2
post acq profits 0.3
carrying value at 31.5.2007 3.0

the 0.2 is not part of post acq RE. it is adj to the original cost to remove the neg goodwill. because neg goodwill has arisen, the investment must be impairment tested
A comparison must be made with estimated recoverable amount of handyh net assets. The investment must not be carried above recoverable amount: 31.5.2007 11m X 30%= $3.3m.
The recoverable amount is above the carrying value, so the investment at 31.5.2007= $3m.