IFRS-02 SHARE BASED PAYMENTS

Question 1 (J-21)
Ice Cream Limited (ICL) is a listed company. A junior accountant has prepared draft consolidated financial
statements of ICL for the year ended 31 December 2020 in which results of Gelato Limited (GL) and Trifle
Limited (TL) have also been included. However, he could not prepare consolidated statement of changes in
equity due to certain outstanding issues.
For the purpose of preparation of consolidated statement of changes in equity, following information is
available:
(i) Share capital of ICL, consolidated retained earnings and non-controlling interest as of 31 December 2018
were Rs. 700 million, Rs. 1,013 million and Rs. 310 million respectively.
(ii) Net profit for 2020 as per draft consolidated financial statements amounted to Rs. 440 million (2019: Rs.
312 million) of which Rs. 60 million (2019: Rs. 50 million) was attributable to non-controlling interest.
(iii) The draft consolidated statement of financial position as on 31 December 2020 shows total assets and total
liabilities of Rs. 3,804 million and Rs. 985 million respectively.

Details of outstanding issues:

On 31 December 2020, ICL cancelled share appreciation rights (originally granted to 10 executives on 1 January
2019) and, in their place, granted 32,000 share options to those executives on the condition that they will
remain in ICL’s employment for the next two years.
ICL originally granted 30,000 share appreciation rights to each of 10 executives that will be settled in cash on
the condition that they will remain in ICL’s employment for the next four years.
Fair value of each share appreciation right as at 31 December 2019 and 2020 was estimated at Rs. 150 and Rs.
190 respectively. On 31 December 2020, the fair value of each share option was estimated at Rs. 200. All the
executives are expected to remain in employment for the required period of time.
Nothing has been recorded in 2020 in respect of share appreciation rights and their cancellation.

Required:
Determine the revised amounts of total assets and total liabilities after incorporating the effects of the above
corrections.

Question 2 (D-19)
You are the Finance Manager of Dirham Limited (DL). Your assistant has prepared draft financial statements of
DL for the year ended 31 December 2018. However, he could not prepare statement of changes in equity due
to certain outstanding issues
Net profit for 2018 (draft), 2017 (audited) and 2016 (audited) were Rs. 198 million, Rs. 311 million and Rs. 242
million respectively.
The draft statement of financial position as on 31 December 2018 shows total assets and total liabilities of Rs.
2,977 million and Rs. 785 million respectively.

Details of outstanding issues:

(i) In 2018, it was discovered that a senior executive was granted share options on 1 January 2016 but nothing
was recorded in the books in 2016 as well as in subsequent years.
DL had granted 120,000 share options to the senior executive, conditional upon the executive remaining in
DL’s employment till 31 December 2019. The exercise price per option is Rs. 90. However, the exercise price
drops to Rs. 50 if DL’s net profit increases by at least 8% in each year.

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Estimated fair values of share option are as under:

On grant date On 31-Dec-2018

--------- Rs. per option ---------
Exercise price of Rs. 90 150 190
Exercise price of Rs. 50 175 225

The increase in net profit by more than 8% was always expected. However, due to unexpected economic
conditions, DL could not achieve 8% increase in profits in 2018.
Required:
Determine the revised amounts of total assets and total liabilities after incorporating effects of the above
corrections. (06)

Question 3 (J-19)
Fiji Limited (FL) is involved in the manufacturing and trading of consumer goods. The following
transactions/events have occurred during 2018.
In October 2018, FL purchased a manufacturing plant having a fair value of Rs. 350 million. According to the
agreement, FL has the option to settle the obligation either through:
 1.6 million shares of FL to be issued in June 2019; or
 fair value of 1.5 million shares of FL to be paid in cash in March 2019.
The installation of the plant was in process as at 31 December 2018. Nothing has been recorded in the FL’s
book in this respect.

Required:
Discuss how the above transactions/events should be dealt with in FL’s books for the year ended 31 December
2018. (Show all calculations wherever possible. Also mention any additional information needed to account
for the above transactions/events) (06)

Question 4 (D-18)
On 1 January 2014, Corolla Limited (CL) granted share options to each of its 50 executives to purchase CL’s
shares at Rs. 1,000 per share. In this respect following
information is available:
(i) The share options will vest and become exercisable upon completion of 3 years provided that:
 The executives remain in service till the vesting date.
 CL’s share price increases to Rs. 1,500 per share.
(ii) Each executive will receive 4,000 share options if average annual gross profit during the vesting period is
atleast Rs. 900 million. However, if the average gross profit exceeds Rs. 1,000 million each executive would be
entitled to 6,000 share options.
(iii) On 1 January 2016, CL extended the vesting period to 31 December 2017 and reduced the exercise price to
Rs. 900 per share. On 1 January 2016, fair value of each share option was Rs. 580 for the original share option
granted (i.e. before taking into account the re-pricing) and Rs. 710 for re-priced share option.

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Following further information is also available:

At each year-end, CL estimated that gross profit for the future years would approximately be the same as of
current year.

Required:
Calculate the amounts recorded in respect of share options in CL’s financial statements for the years ended 31
December 2014, 2015, 2016 and 2017 and explain the basis of your calculations. (16)

Question 5 (J-18)
During the year ended 31 December 2017, following transactions were made by Zebra Limited (ZL):
On 1 October 2017 ZL purchased a piece of land from Cow Limited (CL) having fair value of Rs. 230 million.
According to the agreement, CL has the option to receive:
 75,000 shares of ZL to be issued on 30 April 2018; or
 Cash equivalent to the value of 70,000 ZL’s shares to be paid on 28 February 2018.
The actual/estimated fair values of ZL’s share at various dates were as follows:

Date 1-Oct-2017 31-Dec-2017 28-Feb-2018 30-Apr-2018

FV per share (Rs.) 3,000 2,900 3,300 3,400

Required:
Discuss how these transactions should be recorded in ZL’s books of accounts for the year ended 31 December
2017. (04)

Question 6 (D-17)

On 1 July 2016 Ravi Limited (RL) offered 1000 share options to each of its 500 employees. The offer is
conditional upon completion of five years’ service from the date the offer was given. The award of options
would depend on attainment of the following additional conditions:
 Condition 1: Average sales for the next five years is Rs. 300 million or more.
 Condition 2: At the end of the 5th year, share price of the company exceeds Rs. 200 per share.
Market values of the options at grant date were estimated as under:

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Rupees
Without taking into account any of the two conditions 50
Taking into account only condition 1 44
Taking into account only condition 2 38
Taking into account both the conditions 36

Following information is available at year end:

(i) Sales for the year ended 30 June 2017 was Rs. 210 million however it was estimated that sales would
increase by 20% each year.
(ii) The share price was Rs. 160 per share.
(iii) It was estimated that 15% of the employees would leave the company before completion of five years.
Required:
Discuss how this transaction should be recorded in RL’s books of accounts for the year ended 30 June 2017.
(05)

Question 7 (D-16)
The financial statements of XYZ Limited for the year ended 30 June 2016 are in the final stage of preparation
and the following matters are under consideration:
On 1 July 2013, XYZ offered 5000 share options each to its 10 marketing managers and 10 back office
managers. The offer is conditional upon completion of three years’ service from the date the offer was given. It
was estimated at the time of offer that two managers from each department would leave the company before
the completion of 3 years. The fair market value of the company’s shares on 1 July 2013 was Rs. 50 per share.
Other conditions and information are as follows:
(i) Conditions specific to marketing managers:
 Marketing manager can exercise the offer if the profit of the company increases by 10% per annum on
average over the next three years.
 The offer can be exercised at Rs. 18 per share at the completion of vesting period.
Profit for the first two years increased by 12% and 10% respectively. However, profit for the third year has
increased by 3% only.

(ii) Conditions specific to back office managers:

 Back office managers can exercise the offer if share price of the company increases by 10% per annum on
average over the next three years.
 The offer can be exercised at Rs. 23 per share at the completion of vesting period.
 On 1 July 2013, fair value of these share options was Rs. 30 per option taking into account the estimated
probability that the necessary share price growth would be achieved.
On 1 January 2016, the share price declined. Considering the decline, XYZ modified the share option scheme
for back office managers by reducing the exercise price to Rs. 10 per share. The fair value of the option
immediately before and after the reduction in exercise price was Rs. 5 and Rs. 14 respectively.
Required:
In accordance with the requirement of International Financial Reporting Standards, describe the accounting
treatment in respect of the above transactions in the financial statements of XYZ Limited for the year ended 30
June 2016. (10)

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Question 8 (J-15)
On 1 January 2015, Mr. Talented was appointed as the President of Meharban Bank Limited (MBL). According
to the terms of the employment contract, MBL granted Mr. Talented the right to receive either 100,000 shares
of the bank or a cash payment equivalent to the value of 80,000 shares. This grant is conditional to completion
of 3 years of service with the bank and can be exercised within 1 year of vesting date. If he chooses the share
alternative he would have to hold the shares for a period of two years after the vesting date.
The par value of MBL’s shares is Rs. 10 each. At the grant date, MBL’s share price was Rs. 145 per share. The
share prices on 31 December 2015, 2016, 2017 and 2018 are estimated at Rs. 150, Rs. 156, Rs. 165 and Rs. 175
respectively. Dividends are not expected to be announced during the next three years.
After taking into account the effects of the post-vesting transfer restrictions, MBL estimates that the fair value
of the share alternative on the date of appointment of Mr. Talented was Rs. 135 per share.
Required:
Suggest journal entries to record the above transactions in the books of MBL for the years
ending 31 December 2015, 2016, 2017 and 2018 if Mr. Talented chooses the share alternative (11)
in July 2018.

Question 9 (D-12)
Quail Pakistan Limited (QPL), a listed company, is reviewing the following transactions which have not yet
been accounted for in the financial statements for the year ended 30 June 2012:
(a) On 1 July 2011, QPL announced a bonus of Rs. 30 million to its employees if they achieved the annual
budgeted targets by 30 June 2012.
The bonus would be paid in the following manner:
 25% of the bonus would be paid in cash on 31 December 2012 to all employees irrespective of whether
they are still working for QPL or not.
 The balance 75% will be given in share options, to those employees who are in QPL's employment on 31
December 2012. The exercise date and number of options will be fixed by the management on the same
day.
The budgeted targets were achieved. The management expects that 5% employees would leave between 30
June 2012 and 31 December 2012.
(b) On 30 June 2012, a plant having a list price of Rs. 50 million was purchased. QPL has allowed the following
options to the supplier, in respect of payment there against:
 To receive cash equivalent to price of 1.5 million shares of the company after 3 months; or
 To receive 1. 7 million shares of the company after 6 months.
QPL estimates that price of its shares would be Rs. 35 per share after three months and Rs. 40 per share after
six months.
Required:
Discuss how the above share-based transactions should be accounted for in QPL's financial statements for the
year ended 30 June 2012. Show necessary calculations. (Journal entries are not required)

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Question 10 (D-10)
Engineering Works Limited (EWL) is in the process of finalizing its Financial Statements for the year ended
June 30, 2010. The issue as detailed below is being deliberated upon by the CFO.
It is the policy of EWL to pay annual bonus of Rs. 10,000 each to all of its 600 workers, after two months of
closure of the financial year. On June 1, 2010 the management announced a scheme whereby each worker
was given the option to purchase 1,000 shares of EWL on a payment of Rs. 8 per share, in lieu of cash bonus
for the year ended June 30, 2010. The face value of the company's shares is Rs. 10 each.
The last date to exercise the option was fixed at July 31, 2010. Other related information is as follows:
 60% employees exercised the option by June 30, 2010.
 By July 31, 2010 further 20% employees had accepted this option.
 The workers who exercise the option are required to retain the shares up to June 30, 2012 before
being eligible to sell them.
 The shares were issued on September 1, 2010.
 The market price and fair value of the shares at various dates were as under:

30-June-10 31-Jul-10 01-Sep-10

Market Price Rs. 32 37 42
Fair value per share (after taking effect of post vesting transfer Rs. 30 34 40
transaction)
Required:
Prepare journal entries for the above transactions and adjustments during the years June 30, 2010 and 2011.
(10)

Question 11 (D-09)
Rahman Limited (RL) is a listed company engaged in the manufacture of leather goods. Its financial year ends
on June 30. In a meeting held on July 1. 2009 its Board of Directors acknowledged the outstanding
performance of the company’s Chief Operating Officer (COO) and in recognition thereof, decided to allow him
either of the following options:
Option I Receive a cash payment equal to the current value of 64.000 shares of RL.
Option II Receive 80.000 shares of RL.
However, the above offer was subject to certain conditions. These conditions and other relevant information
are as follows:
(i) The right is conditional upon completion of three years· service from the date the right was granted and the
decision to select the option shall also be exercised on the completion of the said period.
(ii) The share price of RL on July 1. 2009 is Rs. 125 per share. It is estimated that the share price at the end of
year 2010. 2011 and 2012 will be Rs. 130. Rs. 138 and Rs. 150 respectively.
(iii) If the COO chooses option II. he shall have to retain the shares for two years i.e. up to June 30. 2014 before
being eligible to sell them. However, the fair value of the shares after taking into account the effects of the
post vesting transfer restrictions is estimated at Rs. 110 per share.
(iv) RL does not expect to pay any dividend during the next three years.

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Required:
Prepare the journal entries:
a) To record the above transactions in the books of Rahman Limited for the year ending June 30. 2010. 2011
and 2012.
b) To record the settlement of right on June 30. 2012 under:
 Option I
 Option II. (15)

Question 12 (D-08)
Red Limited has carried out the following transactions during the year ended June 30, 2008.
On August 1, 2007, the company granted 200,000 employees’ stock options at Rs. 5, when the market price
was Rs. 13 per share. 95% of the options were exercised between March 1, 2008 and April 30, 2008. The
remaining options lapsed. The share capital of the company is divided into shares of Rs. 10 each.
Required:
Prepare journal entries to record the above transactions including the effect of deferred tax thereon, if any, in
the books of Red Limited, for the year ended June 30, 2008. (07)

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Solution 1

Solution 2

Solution 3

It is a share based payment transaction in which the terms of the arrangement provide FL with choice of
settlement.

Cash settled share based payment transaction

FL shall determine whether it has a present obligation to settle in cash and account for the transaction as cash
settled share based payment transaction.
The asset and liability would be recorded at the fair value of the plant amounting to Rs. 350 million.
Liability would be re-measured at the year end on the basis of fair value of 1.5 million shares of FL and the
difference would be taken to the profit and loss account.
Equity settled share based payment transaction

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However, if there is present obligation to settle in cash, then FL should account for the transaction as equity
settled share based payment transaction.
The asset and equity would be recorded at the fair value of Rs. 350 million.
Equity would not be re-measured at year end.
Additional info needed:

 Information about assessment whether FL has a present obligation to settle in cash or not.
 Fair value of the shares at the year end.
Solution 4

Explanation of basis of calculation:

Service condition/No. of executives:
Service condition shall be taken into account by adjusting the number of share options based on
expected number of executives that would remain in service till the vesting date at each year end.
Performance condition/No. of share options:
Performance condition other than market condition shall be taken into account by adjusting the number
of equity instruments included in the measurement of the transaction amount at each year end. In this
respect, number of options are based on expected average annual gross profit during the vesting period
as worked-out below:

Market condition/Fair value per option:

Market conditions are only taken into account when estimating the fair value of the share options at the
measurement date.

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CL should recognize an expense irrespective of whether market conditions are satisfied at year end
provided all other vesting conditions are satisfied.
Vesting period:
The expense is spread over the vesting period. At the grant date the vesting period was three years
which was subsequently revised to four years on 1 January 2016.
Modification: (Extension of vesting period and repricing of option)
Irrespective of any modification, CL is required to recognize, as a minimum, three year services
(i) received, measured at the grant date fair value of the equity instrument. So, for 2016 expense will
be recorded for 43 executives who have served the original vesting period of 3 years at fair value
of the options measured at grant date.
Modification of the vesting conditions in a manner that is not beneficial (increase in vesting
(ii) period) would not be taken into account.
However, repricing of the option is beneficial for executives. Therefore, increase in fair value of
(iii) share option by Rs. 130 (710–580) at the modification date would be expensed out over the
period between the modification date and the expected vesting date.

Solution 5

Since ZL has granted the supplier the right to choose whether the share-based transaction is settled in
cash or by issuing equity instruments, the entity has granted a compound financial instrument.
Since the fair value of land is available so the Land will be recorded at Rs. 230 million and corresponding
effect will be taken to liability to the extent of Rs. 210 million (fair value of the debt component on 1
October 2017 i.e. 7,000 shares × 3,000 per share) and remaining Rs. 20 million to the equity.
On 31 December 2017 the liability will be remeasured in accordance with the prevailing fair value of HL’s
share to Rs. 203 million (i.e. 7,000 × 2,900) and the resulting decrease of Rs. 7 million will be credited to
Profit and loss account.

Solution 6

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IFRS-02 SHARE BASED PAYMENTS

In light of above, Rs. 3.23 million should be debited to P & L account and credited to equity account.
W1: Average sales:

Year 2017 2018 2019 2020 2021 Average

Sales 210 252 302.4 362.88 435.46 312.55

Solution 7

Treatment of share options issued to Marketing Managers

Since options granted to back office managers are granted under non-market condition, any subsequent
change in the non-market condition from previous estimates should be taken in to account in estimating
the expense to be recognized.
Since XYZ is not able to achieve the average 10% profit during the three years, the expenses booked till
the previous year should be reversed i.e. Rs. 853,333 [(8×(50-18)×5000×2÷3]
Treatment of share options issued to Back Office Managers
Since options granted to back office managers are based on market conditions under which the
probability of meeting the condition was taken into account in fair value of share option at the grant
date, any subsequent changes in the probability of meeting the condition has no effect on the expense
recognition.
Furthermore, when a modification occurs during the vesting period, the incremental fair value of the
option is recognized over the period from the modification date until the date when equity instruments
vest.
By considering the above, XYZ should record the following expenses at 30 June 2016 and taking the credit
effect to the equity:
In order to record modification impact, the incremental fair value of the option should be
recognized as expense i.e. Rs. 405,000 [(14-5)×5,000×9]
When options is settled, XYZ should recognize the following expense:

Rupees
Expense to be recorded at settlement date (9×30×5,000) 1,350,000
Expense already recorded till last year (8×30×5,000×2÷3) (800,000)
550,000

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Solution 8

Solution 9

(a) 25% of the bonus is to be paid in cash, so a liability of Rs. 7 .5 million (30 x 25%) must be accrued. The
remaining amount of bonus is to be paid in share options. The services must be recognized when they are
received. Therefore, 12 months of the 18 months service period up to the grant date must be recognized.
Hence, Rs. 14.25 million [(30 x 75% x 95%) x 12/18] would be provided upto 30 June, 2012.
(b) In the given situation, the purchase of plant involves a share-based payment in which the counterparty has
a choice of settlement, either in shares or in cash. Such transactions are treated as cash-settled to the extent
that the entity has incurred a liability i.e. Rs. 50 million.

If the value of the liability based on share price. at the time of transaction. is less than the fair value of the
plant i.e. less than Rs. 50 million. the transaction would give rise to a compound financial instrument, with a
debt and an equity element. The fair value of the equity element would be the difference between fair value of
the plant and the fair value of the debt element of the instrument.
However. if the value of the liability based on share price at the time of transaction is more than the fair value
of the plant i.e. more than Rs. 50 million, the difference shall be recognized as an expense.

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Solution 10

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Solution 11

Solution 12

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