SBP – S/D19 Q1(c)

Luploid Co acquired 60% of the 10 million equity shares of Hammond Co on 1 July 20X7. Two Luploid Co shares are to be issued for every five shares acquired in Hammond Co. These shares will be issued on 1 July 20X8. The fair value of a Luploid Co share was $30 at 1 July 20X7. Hammond Co had previously granted a share-based payment to its employees with a three-year vesting period. At 1 July 20X7, the employees had completed their service period but had not yet exercised their options. The fair value of the options granted at 1 July 20X7 was $15 million. As part of the acquisition, Luploid Co is obliged to replace the share-based payment scheme of Hammond Co with a scheme of its own which has the following details:

Luploid Co issued 100 options to each of Hammond Co’s 10,000 employees on 1 July 20X7. The shares are conditional on the employees completing a further two years of service. Additionally, the scheme required that the market price of Luploid Co’s shares had to increase by 10% from its value of $30 per share at the acquisition date over the vesting period. It was anticipated at 1 July 20X7 that 10% of staff would leave over the vesting period but this was revised to 4% by 30 June 20X8. The fair value of each option at the grant date was $20. The share price of Luploid Co at 30 June 20X8 was $32 and is anticipated to grow at a similar rate in the year ended 30 June 20X9.

How much of an expense for the share-based payment scheme should be recognised in the consolidated profit or loss of Luploid Co for the year ended 30 June 20X8.

‘ The fair value of the replacement scheme at the grant date is $18 million (100 x 10,000 x 90% x $20). Since $9 million has been allocated to the cost of the investment, the remaining $9 million should be treated as part of the post combination remuneration package for the employees and measured in accordance with IFRS 2 Share-based Payment. The fair value at the grant date of the share-based scheme should be expensed to profit or loss over the two-year vesting period. Subsequent changes to the fair value of the shares are ignored.

Luploid Co will need to consider the impact of market and non-market based vesting conditions. The condition relating to the share price of Luploid Co is a market based vesting condition. These are adjusted for in the calculation of the fair value at the grant date of the option. An expense is therefore recorded in the consolidated profit or loss of Luploid Co irrespective of whether the market based vesting condition is met or not. A corresponding credit should be included within equity.’

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FV of replacement scheme @ grant date
= 10,000 x 10 x 90% x $20
= $18m

post combination remuneration package for employees
= $18m – $9m (cost of investment)
= $9m

My question is how do we count for the expense to PL @ 20X8?

Since it’s vesting condition, the expenses will be spread over 2 years. But do we account for the staff that expected to leave 4%? since the FV of replacement scheme @ grant date has account for 10%.

Is it as follow?
Expense to PL @ 20X8
= $9m x 96% x 1/2
= $4.32m

Thanks.