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The scenario in part c) is : “On 31May 20X7, Leigh purchased property, plant and equipment for $4 million. The supplier has agreed to accept payment for the property, plant and equipment either in cash or in shares. The supplier can either choose 1.5 million shares of Leigh to be issued in six months’ time or to receive a cash payment in three months’ time equivalent to the market value of 1.3 million shares. It is estimated that the share price will be $3.50 in three months’ time and $4 in six months’ time.” The requirement is:”explain how the purchase of the property, plant and equipment should be accounted for in the financial statements of Leigh at 31May 20X7″
I wonder why the model answer to this part only refers to the case of cash settlement in three months, therefore, there is a liability of $3.9m and $0.1m of equity. The model answer does not refer to the case “1.5 million shares of Leigh to be issued in six months’ time”, which may have fair value of $6m in 6 months time, which may be more advantageous to the supplier and the supplier may choose this option.
Please help me to explain that. Thanks!If a CHOICE is offered we use split accounting:
1. Calculate liability
2. Balance is equityWe are stuck with the approach set out in IFRS 2
I can see that Leigh is still in the BPP revision kit but it’s very old – make sure you can do all the recent questions.
🙂
I don’t understand your answer. In this case, there is 2 options, 1.5m share means potentially $6m in 6 months. Mean while a cash payment in three months’ time equivalent to the market value of 1.3 million shares means only $ 3.9m in 3 months. So why the model answer only refer to the case the case of cash settlement in three months, therefore, there is a liability of $3.9m and $0.1m of equity, not the case 1.5m shares. How to choose between 2 options?
I forget to give another information that on 31May 20X7, the share price of leigh is $3, therefore 1.3m share is equivalent to current value of $3.9m
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