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I have uploaded the question and the solution on the docstoc website, here is the link so you can view it
https://www.docstoc.com/docs/160613489/KPT-TYU-1-IFRS-2?
I cannot understand the solution for part b(i). I have mentioned the solution for part (a) too because its linked with part b(i).
“All eligible directors”. Should this be equal to 10 directors (1 million shares) or 9 directors (1 million shares)? Is it 9 directors because these are expected to vest at the end of the third year? Please correct me if I am wrong.
I can understand that the cash paid by the directors would be $2 for each share so $18m for the 1 million share.
My additional queries are:
What does “use of equity reserve $2.7 m actually mean here”? Is a liability being settled (debit liability)? or the “Shares are being transferred from “shares to be issued” to the “Share Capital”?
I cannot understand why the “Satisfied by section has been given” Does that $2 for a share include $1 for the nominal value of the share? If yes, then aren’t the NV(nominal value) and Share premium the same thing?
I know I am asking too many questions at a time, sorry for that
Hi – I have a copy of the Kaplan text from 2012 – I presume your version is 2013. The text has been changed since 2012 and I think that I’m correct in saying that the example has been changed without a proper check being made of the suggested solution.
I think!
Yes I have 2013 text. Is it possible for you to answer the queries or suggest another solution for part b(i)?
Hi
It seems that, without actually specifying / identifying the number of directors who are granted this option, there must in fact be 9 of them. The number of rights expected to vest as at the end of year 3 (per the table) is 9 million and the right is exercisable shortly after the end of the third year. I think that answers your first question.
Throughout the three years of the grant period, Beginner has had to account for the value of the option expense spread over the three years (700, 900 and 1,100) with the credit entry going to “Other components of equity”. On the final exercise of the grant, money will be received amounting to 9 million shares @ $2.
So there’s the debit entry – Dr Cash 18 million with corresponding credit entries of Cr Share Capital Account (9 million shares @ $1) and Cr Share Premium Account with the remaining 9 million
But that leaves us with 2.7 million stuck in “Other components of equity” and this is a credit representing benefit received for which the debit has been expensed. But this benefit which has been received is in respect of shares now being issued and, at least according to UK company law, “where shares are issued, whether for cash or otherwise, for an amount in excess of their nominal value, an amount equal to that excess shall be credited to the Share Premium Account”
And that’s what we have here – shares being issued for $2 each PLUS the value of the benefit historically recognised over the previous three years. So Share Premium Account contains not just the $1 premium per share received on the date of cash receipt but also the transfer of the benefit historically received over the previous three years
Whilst not specifically addressing your questions as you have phrased them, I believe that the above should be a satisfactory explanation of what’s going on! I hope
If you’re still in doubt, post again
Hi,
Thank you very much for an immediate and comprehensive response.
I understood the explanation and the double entries. Will my answer be correct if I solve part b(i) in this way:
Dr Cash 18m
Cr Share Capital 9m
Cr Share Premium 9m
Cr Share Premium 2.7 (an amount equal to that excess shall be credited to the Share Premium Account)
Dr Liability 2.7Hi – all correct except the last debit entry. I don’t think you have an outstanding liability against which to debit the 2.7 million. But you DO have an outstanding credit balance in an account – the “Other Components of Equity” account so I believe that the final debit entry of 2.7 million should be against that account
Otherwise, I think that you are correct
Thanks for the correction. I always used to think that the credit entries are made to the liability account whereas these are made to the “Other components of equity” account. I think the liability account is credited in case of cash settled share based payment transactions.
Hello Mike
In Beginner question, it says that “Upon excersie of the share options, those directors eligible would be required to pay $2 for each share of $1 nominal value”.
I don’t understand this part of the questions at all! What does it mean?
As far as I understand IFRS2, in the equity settled shared based payment, for example instead of giving salary to the directors or employees (or for any other reason), we promise to give them equity shares if they (say) stay in the company for next 3 years! But here we are saying to the directors that they should pay us $2 for each of the shares!!!
Why directors should pay us for those share! Those share are for them (just instead of their say salary or bonus or our promise).
So in fact here, the comany does not pay anything (salary) to the directors, but also give money from directors to give them these shares!And this is confusing me!
Many thanks with all your help …
The company is giving the directors the opportunity to buy shares at a cost rather lower than the market value of those shares. In other words, the directors have been given options as part of their overall remuneration package
Don’t forget that when the directors DO pay the 2 GBP per share, they are then the lucky owners of all those extra shares that are being traded on the open market at a value of, say, 2.80 GBP so they can sell any or all of them and enjoy the fruits of their labour that they are now just harvesting
OK?
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