IAS 37 – PROVISIONS CONTINGENT LIABILITIES AND...
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IAS 37 – PROVISIONS, CONTINGENT LIABILITIES AND
CONTINGENT ASSETS
- Anand Banka
BASIC CONCEPTS
Liability
Present obligation
Past event
Which will result in outflow
Obligating event
Legal or constructive obligation
Provisions
Uncertain timing or amount
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BASIC CONCEPTS
Contingent liability
Possible obligation
Present obligation but
outflow not probable
Not reliably measurable
Onerous contractOnerous contract
Obligations exceed economic benefits
PROVISION VS. REVENUE
Customer Loyalty ProgramBad DebtsBad DebtsWarrantiesCash discount – if paid 45 daysDealer discounts – escalation clause
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ProvisionPresent obligation (Legal or Constructive)
RECOGNITION
Present obligation (Legal or Constructive)Probable outflow of resourcesReliable estimate can be made
Contingent LiabilityNot recognized Disclosed
Contingent AssetsNot recognized Disclosed only when probable
Legal Obligation Constructive ObligationC t t E t bli h d tt f t ti
LEGAL OR CONSTRUCTIVE OBLIGATION
Contract Established pattern of past practicesLaw/ Act/ Legislation Published Policies
Creation of valid expectations
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CASE STUDY
Which of the following does not lead to recognising a provision?recognising a provision?
There is a legal or constructive obligationThere is a probable outflow of resourcesThere is a general risks of future lossesThe amount can be estimated reliably
Case filed by customer on September 15
CASE STUDY
Year end December 31
Whether provision required?
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Government planning to declare a land as forest
CASE STUDY
land
The Company has a warehouse on that land
Whether provision required?
Best estimate
MEASUREMENT
◦ Judgment
◦ Expected value
Present value, if material
Future events
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Warranty on productsManufacturing defects repaired for free
CASE STUDY
Manufacturing defects repaired for freeMinor defects in all – 1 mioMajor defects in all – 4 mioPast experience
75% - no defects20% - minor defects5% - major defects
Expected value = 75% * NIL + 20% * 1 mio + 5% * 4 mio
Dismantling cost
CASE STUDY
A new technology to be launched after 3 years
Existing cost: 10 lacs
Cost as per new technology: 7 lacs
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2009
CASE STUDY
Provision for advertisement = 100
2010
Actual expense for advertisement = 70
Bonus given to salesman based on 2009 sales = g
20
Can the company setoff the provision against this expense and reverse the remaining 10?
Separate asset
REIMBURSEMENTS
Expense may be net of reimbursements
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ONEROUS CONTRACTS
Unavoidable costs > Economic benefitsExample: Example: -
Company X enters into a contract to lease a warehouse for Rs. 10,000 a monthContract cancellable within 2 years only on payment of Rs. 1 LakhsCompany stops using the warehouse after one year
Sale or termination of a line of business
RESTRUCTURING
Closure of business at a location
Relocation
Changes in management structure e.g.
eliminating a layer of management
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Detailed formal plan including identification of
CONSTRUCTIVE OBLIGATION
Business concerned
Locations
Approximate number of employees
Expenditure involved
Timing of implementation of the plan
Raised a valid expectation by making an
announcement
CASE STUDY
XP oil company limited
N l / l i l ti No laws/ legislations
regarding contamination
Company announces
environmental policy for
clean upp
Whether provision required?
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CASE STUDY
Manufacturer Purchaser
Contract Price: 100 mio
Cost of the project: 70 mio
Penalty of 50 mio if not delivered on time
SUMMARY
Asset Virtually certain (>=90%) Recognizey ( ) g
Contingent AssetProbable (> = 50%)Possible (< = 50%)Remote (< = 10%)
DiscloseNo DisclosureNo Disclosure
LiabilityVirtually CertainProbable (reliably measurable)
RecognizeRecognize
P b bl di lContingent Liability
ProbablePossibleRemote
disclosedisclosedo not disclose
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DECISION TREEStart
Present Obligation as a
result of an obligating event?
Probable outflow Remote?
Possible Obligation
Yes
Yes
Yes
Yes
No No
No
No
Yes
Yes
No
No
No
Yes
No
Yes
Reliable estimate
Provide
Disclose Contingent liability Do nothing
Yes
Yes
No
No (rare)
Yes
Yes
No
No
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QUESTION # 1The company introduced a new car model two
months before the reporting date. months before the reporting date. This model, in accordance with company policy
which applies to all cars sold by the company, is guaranteed for a period of 12 months, whereby the company covers the costs of repairs for any defects.
By the reporting date and the date when the By the reporting date and the date when the financial statements are prepared, no claims have been received concerning this model.
QUESTION # 2A famous actor, who bought a specially designed version of the A170 model from the company last year, had an accident with a deer five days before the reporting date accident with a deer five days before the reporting date. The car was completely destroyed and the actor was badly hurt. A few days ago, the company received notification that the actor had filed a lawsuit against the company, alleging that the brakes which were guaranteed to last for two years, had failed and caused his accident. He claims Rs. 50L for the replacement of the car and another Rs.20L for medical and hospital bills and
i f l d i h k h i compensation for revenue lost during the week he spent in the hospital. The company reviewed the situation with its legal advisor who recommended that the company contest the case and strongly believes that the company will not be required to pay anything based on similar cases in the past.
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QUESTION # 3The company purchased a batch of goods from its supplier, which contained some defective items. Th b h h ld d f h The batch was then sold unopened to one of the company’s customers. The company was informed, prior to the issuance of its financial statements, that this customer won its claim for the defective product delivered – Rs. 3 L. However, under the terms of the company’s agreement with its supplier, the cost of any defect is recoverable from the supplier including along with
l d dd ( l ) f 2%penalty and an add-on (penalty) of 12%.The supplier has already indicated that it will reimburse Rs. 3.36L to the company.No provision had been recognised as it was believed that no obligation was incurred.
Anand Banka
Email: [email protected]: 98673 53743
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IAS 12 –INCOME TAXES
- Anand Banka
SCOPE
Deferred taxCurrent tax
Income tax
=
+
2
RECOGNITION OF CURRENT TAX
On the basis of computation of taxTax for the year = expenseTax for the year = expenseTax payable = liabilityTax paid but recoverable = asset
MEASUREMENT OF CURRENT TAX
Applicable tax rate for that type of income
1. General rate2. Specific rates (e.g. capital gains tax rate)
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RACK YOUR BRAINS!!!
What is deferred tax?
Why is it required?
UNDERSTANDING DEFERRED TAX
Library X purchases books
costing Rs. 100 million
having a useful life of 2 years
As per the tax laws, 100% depreciation is allowed
in the first year itself
Profit before depreciation and tax was Rs. 200
million
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UNDERSTANDING DEFERRED TAX
Year 1 Year 2
Profit before depreciation and tax 200,000,000 200,000,000
Depreciation (100,000,000/2) (50,000,000) (50,000,000)
Profit before tax 150,000,000 150,000,000
Profit as per taxation laws 100,000,000 200,000,000
Current tax expense (30% of tax profits) (30,000,000) (60,000,000)
Effective tax rate 20% 40%
Profit after tax 120,000,000 90,000,000
WHY DEFERRED TAX?
Fundamental Accounting Assumptions
Going concern
Consistency
AccrualAccrual
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WHY DEFERRED TAX?
Year 1 Year 2
Profit before depreciation and tax 200,000,000 200,000,000
Depreciation (100,000,000/2) (50,000,000) (50,000,000)
Profit before tax 150,000,000 150,000,000
Profit as per taxation laws 100,000,000 200,000,000
Current tax expense (30% of tax profits) (30,000,000) (60,000,000)
Deferred tax (15,000,000) 15,000,000
Profit after tax 105,000,000 105,000,000
BALANCE SHEET METHOD
The Balance Sheet Liability method is based on
the following principles:
Asset recorded in the financials will be realised
for at least its carrying amount
in the form of future economic benefits, in future
i dperiods
that will give rise to amounts used in determination
of tax
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IMPORTANT TERMS
Timing differences are the differences between taxableincome and accounting income for a period that originate inincome and accounting income for a period that originate inone period and are capable of reversal in one or moresubsequent periods
Temporary Difference is a difference between thecarrying amount of an asset or liability and its tax baseBalance Sheet methodBalance Sheet method
Tax Base is the amount that will be deductible for taxpurposes. If the economic benefits will not be taxable, thetax base of the asset is equal to its carrying amount
TAX BASE – CASE STUDY
Cost of Machine = 100
Depreciation rate as per books = 10%
Depreciation rate as per tax = 20%
Tax Base after 1 year = ?
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TAX BASE – CASE STUDIES
Interest receivable = 100 (taxed on cash basis)
Trade receivable = 100 (related revenue taxed)
Penalties payable = 100 (not allowable as an
expense)
IMPORTANT TERMS
Taxable temporary differences are temporarydifferences that will result in taxable amounts indifferences that will result in taxable amounts indetermining taxable profit (tax loss) of futureperiods when the carrying amount of the asset orliability is recovered or settled
Deductible temporary differences aretemporary differences that will result in amountstemporary differences that will result in amountsthat are deductible in determining taxable profit(tax loss) of future periods when the carryingamount of the asset or liability is recovered orsettled
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SHORTCUT
BV f BV f BV of Assets > Tax Base
BV of Assets < Tax Base
BV of Liability
< Tax Base
BV of Liability
< Tax Base
DTL DTA DTL DTA
CASE STUDY
PPE original cost = 100Useful life = 10 yrs depreciation = 10%Useful life = 10 yrs, depreciation = 10%Tax depreciation = 20%Year 1:
Book Value = 90Tax Base = 80
Taxable Temporary Difference = 10
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CASE STUDY
Interest receivable = 100Tax Base = 0Tax Base = 0Taxable Temporary Difference = 100
CASE STUDY
Warranty Provision = 100Tax Base = 0Tax Base = 0Deductible Temporary Difference = 100
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SUMMARY
Book Value vs. Tax base= =
Temporary differences
Taxable Deductible
MEASUREMENT OF DEFERRED TAX
Applicable tax rateBased on expected manner of recoveryBased on expected manner of recovery
Use – normal tax rateSale/ disposal – capital gains
Rate enacted or substantively enacted by end of the reporting periodNo Discounting
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SUMMARY
Book Value vs. Tax base= =
Temporary differences
Taxable Deductible
Tax rate applicablepp
SPECIFIC ISSUES
Revaluation of AssetsBusiness CombinationBusiness CombinationConsolidationUndistributed ProfitsLandForeign Currency Translation Reserve (FCTR)
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REVALUATION OF ASSETS
WDV as per book as well as tax = 100Remaining useful life = 5 years i e 20% p aRemaining useful life = 5 years i.e. 20% p.a.Tax depreciation rate = 20%Revalued Amount = 150Taxable Temporary Difference = 50Reversal on
SaleExcess depreciation every year
ACCOUNTING ENTRY
R l ti R A/ D 15Revaluation Reserve A/c Dr.(50 * 30%)
15
To DTL A/c 15
13
BUSINESS COMBINATION
Company A buys Company B for Rs. 1,500Book value of assets of B = 1 000Book value of assets of B = 1,000Fair value of assets of B = 1,200Goodwill = 1,500 – 1,200 = 300Taxable temporary difference = 1,200 – 1,000 = 200DTL = 200 * 30% = 60DTL 200 30% 60Goodwill = 300 + 60 = 360
ACCOUNTING ENTRY
G d ill A/ D 60Goodwill A/c Dr.(200 * 30%)
60
To DTL A/c 60
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CONSOLIDATION
Company X
(Holding)
Company Y
(Subsidiary)
Cost to X = 60
Sold to Y = 100
Consolidated Accounts
Stock = 100
Unrealised Gain = (40)Unrealised Gain (40)
Net Stock = 60
Tax Base for Y = 100
ACCOUNTING ENTRY
DTA A/ D 12DTA A/c Dr.(40 * 30%)
12
To P&L A/c 12
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LAND
Land is a non-depreciable assetAs per Income Tax Act land is eligible for As per Income Tax Act, land is eligible for indexation benefitTax base of land > Carrying amount of land
FCTR
H ldi C S b idi CHolding CompanyNet Assets Rs. 7,000
Subsidiary CompanyNet Assets $ 50
Consolidated CompanyNet Assets Rs. 9,500
FCTR Rs. 300FCTR Rs. 300
DTL on 300 @ 30% = 90
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ACCOUNTING ENTRY
FCTR A/ D 90FCTR A/c Dr.(300 * 30%)
90
To DTL A/c 90
RECOGNITION
• If the item has been OCI If the item has been recognized in OCIOCI
• If the item has been recognized in EquityEquity
• If it arises on business combinationGoodwill
• All other casesP&L
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EXAMPLES
• Revaluation of• PPE (IAS 16)PPE (IAS 16)• Intangibles (IAS 38)• AFS (IAS 39)
• FCTR (IAS 21)• Cash Flow Hedge (IAS 39)
OCI
• Compound Financial Instruments p(IAS 39)
• Adjustments to opening balance of retained earnings (IAS 8/ IFRS 1)
• Share Based Payments (IFRS 2)Equity
SUMMARY
Book Value vs. Tax base= =
Temporary differences
Taxable Deductible
Tax rate applicable
GoodwillOCI / EquityProfit or loss
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RECOGNITION OF DEFERRED TAX ASSETS
All Deferred Tax Assets – Probable CertaintyTaxable temporary differencesTaxable temporary differencesTaxable profits
CASE STUDY
Company Deductible Tax DTA Forecasted DTA p yTemporary Difference
Rate profit recognized
A 400 50% 200 1,000 ?B 400 50% 200 300 ?C 400 50% 200 (500) ?
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REASSESSMENT
Unrecognized deferred tax assetsRecognized deferred tax assetsRecognized deferred tax assets
Anand Banka
Email: [email protected]: 98673 53743
1
IFRS 2/ IND-AS 102 – SHARE BASED PAYMENTS
-Anand Banka
SCOPE Share-based payments
Share-basedEquity-settledshare-based
payments
Cash-settled share-based
payments
Share based paymentswith cash
alternatives
Entity receives goods/services as consideration for
Entity receives goods/services by
incurring a liability to transfer cash or
other assets to the supplier for amounts
Either entity or the counterparty has a choice to settle in
equity instruments or equity instruments. supplier for amounts
that are based on the price (or value) of the
entity’s shares.
in cash or other assets.
e.g. Shares, Optionsagainst receipt
of services from employees
e.g. Share appreciation
rights
2
EXAMPLES
Company purchases 10 sacks of rice for 100 shares
Company grants 100 ESOPs
Company gives 100 shares for 10 years’ land lease
Company gives 100 shares for advertisement in newspaper
Company buys 10 sacks of rice for 100 shares worth
(100 shares * share value on the date of delivery)(100 shares share value on the date of delivery)
ABC Ltd. obtains 60% of the equity of XYZ Ltd. by issuing
equity shares
SCOPE OUT
Transactions with employee-shareholders (in capacity of shareholders)capacity of shareholders)Transactions under business combination
3
CASE STUDY
Employee holds 100 sharesEntity grants ESOP of 100 more sharesEntity grants ESOP of 100 more sharesWhether share based payment?
Entity declares bonus of 1:1 to all share holdersEmployee gets another 200 sharesEmployee gets another 200 sharesWhether share based payment?
EXAMPLE
Franco Ltd procures 75% of the shares of Macro Ltd. In the financial books of Franco Ltd, does Ltd. In the financial books of Franco Ltd, does this transaction qualify as a share based payment?
Answer:This transaction is a procurement of shares,
hi h fi i l i t t Fi i l which are financial instruments. Financial instruments are outside the scope of share-based payment. Hence this transaction does not fall within the scope of share-based payment.
4
IFRS 2 VS. IAS 32/39Company E enters into a forward contract to buycertain quantity of steel at a price equal to 1000certain quantity of steel at a price equal to 1000of company E’s ordinary shares. Company E cansettle the contract net, but does not intend to doso (nor does it have a practice of doing so). Thistransaction would be with in the scope of IFRS 2.However, if company E had a practice of settlingthese contracts net, or did not intend to takethese contracts net, or did not intend to takephysical delivery, then the forward contractwould be within the scope of IAS 32 and IAS 39
RECOGNITION
EQUITY
Goods or Services received or acquired
are recognised asAsset or Expense
EQUITY (Equity settled transactions)
LIABILITY (cash settled transactions)(cash settled transactions)
5
MEASUREMENT PRINCIPLESMeasurement principles
Equity-settledshare-based
payments
Cash-settledshare-based
payments
Non-employees Employees
Goods/services are measured directly
Goods/services are measured by Good/services are Goods/services aremeasured directly,
based on fair value of goods/services
received
measured by reference to fair value of equity
instruments granted
measured at the intrinsic value of the equity instruments
If not reliably measurable
If not reliably measurable (only
in very rare cases)
Goods/services are measured at the fair value of the liability
DETERMINING THE FAIR VALUE OF EQUITYINSTRUMENTS GRANTED
Fair ValueMeasure employee services indirectly, based on fair value of equity instruments grantedFair value of equity instruments measured at market price for instruments with similar terms and conditions (rarely available)If no market exists, fair value is estimated by applying an option pricing modelIf f i l i t bl li bl ( l i If fair value is not measurable reliably (only in very rare cases), then services are measured at the intrinsic value of the equity instruments
Date of measurementFair value measured at grant date
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CASE STUDY
Company buys 100 sugarcane for 10 shares
FV of Sugarcane= 10 per sugarcane
Face value of shares = 10Market value of shares =
50
SC = 1000SC = 500
or 100
CASE STUDY
Papa Ltd. is a parent entity of Beta Ltd.
Papa Ltd. transfers its own equity instruments to
the employees of Beta Ltd.
7
ESOP
Grant date
Vesting period
Vesting date
Exercise period
Exercise date
Exercise price
ESOPVesting period
Vesting period - the period during which all the specifiedvesting conditions are to be satisfied
Year 1 Year 2 Year 3
Grantdate
Vestingdate
Exercisedate
Time
Grant date - the date atVesting date – the date when the vesting conditions for entitlement are satisfied
Exercise date is the datewhen awards (e.g. options) are exercised.
Grant date the date at which the entity andthe counter party have ashared understanding ofthe terms and conditions of the arrangement
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CASE STUDY
Company A agrees with its CEO to grant the CEO share options (to be vested immediately) on 31 May share options (to be vested immediately) on 31 May subject to ratification at the AGM. The company’s year- end is 30 June and the AGM is held on 31 July. The share options are ratified at the AGM and are eventually issued on 30 September.
Grant Date is Grant Date is ...31 May31 July30 September
VESTING CONDITIONS
Vesting diti
The conditions that determine whether
the entity receives the services
conditions
Service conditions
Performance conditions
Market conditions
Non-market conditions
To complete a specified Performance,
b t t k t Related to the market price of
To stay employed for 3 three years after grant
date
Revenue must increase by
10%
Share price must increase
by 15%
spec e period of service
but not market price related
pthe equity instrument
9
NON-VESTING CONDITIONS
Non-vesting conditions are all requirements that do not represent service or performance p pconditions, but which have to be met in order for the counterparty to receive the share-based payment.
share-based payment arrangements in which an employee has to provide funding during the vesting period, which is then used to exercise the options;scenarios in which the entity can discontinue the share-based payment plan at its own discretion
Taken into account when estimating the fair valueSimilar to market based performance condition
MEASUREMENT ILLUSTRATION (1) -PERFORMANCE CONDITIONS
Vesting conditions:Three years continued employment (service Three years continued employment (service condition)A performance condition (see next slide)
Assumptions:100 options granted on 1 January 2001All employees remain in service over the vesting period of the optionpe od o t e opt oGrant date fair value of each option, 3.50 (excluding market conditions)Best estimate is that the performance condition is met
10
MEASUREMENT ILLUSTRATION (2) -PERFORMANCE CONDITIONS
If market condition, e.g., share price hitting a specified levelThe estimated discount for market-based performance condition is 0 500.50Therefore grant date fair value of each option is 3.00 (3.50 - 0.50) Total compensation cost is 300
Market conditionExpense recognised:p g
Year 2001 100 Year 2002 100
MEASUREMENT ILLUSTRATION (3) -PERFORMANCE CONDITIONS
Now, assume that at the end of 2002 the best estimate becomes that the market condition will not be met (the target share price will not be reached).will not be reached).All service conditions are expected to be met
Employee service cost of 300 is recognised even if the market condition is not met (as long as services are provided)
Market conditionExpense recognised:
Year 2001 100Year 2001 100 Year 2002 100 Year 2003 100Total 300
11
MEASUREMENT ILLUSTRATION (4) -PERFORMANCE CONDITIONS
If non-market condition, e.g., certain revenue target must be met:
G d f i l f h i i Grant date fair value of each option is 3.50Total expected compensation cost is 350Allocate over service period based on best estimate of outcomeEmployee service cost is adjusted for any forfeiture
Expected total compensation
t
Accumulated attribution
Expensed in prior period(s)
Expense incurrent year
cost2001 350 117
(350/3)*10 117
2002 350 233(350/3)*2 -117 116
MEASUREMENT ILLUSTRATION (5) -PERFORMANCE CONDITIONS
Now, assume that at the end of 20X2 the best estimate becomes that only 50% of employees will meet the
f diti All i diti performance condition. All service conditions are expected to be met.
Expected total compensation cost
Accumulated attribution
Expensed in prior period(s)
Expense in current year
2001 350 117(350/3)*1
0 117
2002 350 117 117 02002 350
175
117
(175/3)*2
-117 0
2003 175 175(175/3)*3
-117 58
Total 175
12
MEASUREMENT ILLUSTRATION (6) -PERFORMANCE CONDITIONS
Comparison:A change in the expectation whether or not a performance condition will be met
is ignored for market-conditionsbut recognised for non-market conditions.
Market condition Non-market conditionExpense recognised:
Year 2001 100 117
Year 2002 100 0
Year 2003 100 58 Total 300 175
MEASUREMENT ILLUSTRATION (7) -PERFORMANCE CONDITIONS
Question:What if 50% of the employees left the company at p y p ythe end of 2002? (assuming that this is split equally between employees that have fulfilled and have not fulfilled the performance condition)
Market condition Non-market conditionExpense recognised:
Year 2001 100 117
Year 2002 0 -58
Year 2003 50 29 Total 150 88
13
MEASUREMENT ILLUSTRATION (8) -PERFORMANCE CONDITIONS
Question:What if only 80% of the 100 options ultimately are What if only 80% of the 100 options ultimately are exercised?
Answer:There are no subsequent adjustments after vesting date for equity-settled share-based payments!
IFRS
SUMMARY
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RELOAD FEATURE
For options with a reload feature, the reload feature shall not be taken into accountfeature shall not be taken into accountwhen estimating the fair value of options granted at the measurement date.Instead, a reload option shall be accounted for as a new option grant, if and when a reload option is subsequently granted.
AFTER VESTING DATE
No change in equityEven if no options exercisedEven if no options exercisedEven if market conditions do not get fulfilledTransfer within equity allowed
15
CASE STUDY
ESOP granted for 100 sharesFV on the date of grant = 10FV on the date of grant = 10Vesting period = 2 years
ACCOUNTING ENTRIES
Particulars Dr/ Cr
Amount
Year 1Share based payment expense A/c Dr 500Option Reserve Cr 500Year 2Share based payment expense A/c Dr 500Option Reserve Cr 500Year end entriesOption Reserve A/c Dr 1,000Share Capital A/c Cr 100Securities Premium A/c Cr 900
16
MODIFICATION
Separate additional expense if modifications are beneficial to employee e.g. reduction in the beneficial to employee e.g. reduction in the exercise price or vesting periodNo reduction in expenses if modification is not beneficial to employeeMinimum expense = original grant date fair value
Sit ti M difi tiSituation Modification
Decrease in exercise price
Increase in vesting period
Increase in number of shares offered
Shortening exercise period
CANCELLATION
To be accounted for on accelerated basisPayments madePayments made
To the extent of FV – deduct from equityExcess – charge to P&L
New equity instruments grantedAccounted for as modificationBeneficial – accountedN b fi i l i dNon-beneficial – ignored
Non-vesting condition not met – account for it as cancellation
17
CASE STUDY
An entity grants an employee the opportunity to participate in a plan in which the employee obtains p p p p yshare options if he agrees to save 25 per cent of his monthly salary of Rs.40,000 for a three-year period. The monthly payments are made by deduction from the employee’s salary. The employee may use the accumulated savings to exercise his options at the end of three years, or take a refund of his contributions at any point during the three-year y p g yperiod. The estimated annual expense for the share-based payment arrangement is Rs.12,000.After 18 months, the employee stops paying contributions to the plan and takes a refund of contributions paid to date of Rs.180,000.
CASH SETTLED
FV of the liabilityEach year endEach year endDifference to profit or loss
18
CASE STUDY
Mona Ltd manufactures and sells utensils. It buys steel from Steelcraft Ltd. Steelcraft Ltd is to buys steel from Steelcraft Ltd. Steelcraft Ltd is to be paid amount equivalent to 1,500 shares of Mona Ltd on the date when the steel is to be delivered. Does this transaction qualify as a cash-settled share based payment transaction?
Answer:This transaction involves purchase of “goods” This transaction involves purchase of goods . The amount of consideration is based on the value of the shares of Mona Ltd. Hence this qualifies as a cash-settled share based payment transaction.
STOCK APPRECIATION RIGHTS (SAR)Stock Appreciation Rights (SAR) entitle the employees to claim cash payment to the extent of employees to claim cash payment to the extent of excess of market price of underlying shares on exercise date over the exercise price. Stock Appreciation Rights are not exercised if market price of underlying shares on exercise date is less than the exercise price. SAR is therefore a call option held by employees SAR is therefore a call option held by employees. The employer recognise the value of call as expense over the vesting period.
19
CASE STUDY
Company grants share appreciation rightsCurrent share value = 100Current share value = 100After one year = 110After two years = 120After third year = 130
CASH ALTERNATIVES
Counter-party has the right to chooseAccounted for as Compound Financial Accounted for as Compound Financial InstrumentDebt portion accounted as cash settledEquity portion accounted as equity settled
Entity has the right to chooseAccounted for as Equity SettledAccounted for as Cash Settled if present Accounted for as Cash Settled, if present obligationPresent obligation when settlement in equity has no commercial substance or based on past practice or stated policy
20
CASE STUDIES
The following particulars in respect of stock options granted by a company are available:
CASE I
Grant date April 1, 2006Number of employees covered 525Number of options granted per employee 100Vesting condition: continuous employment for 3 yearsExercise per share(Rs.) 125 Market price per share on grant date (Rs ) 149 Market price per share on grant date (Rs.) 149 Vesting Date March 31, 2009 Exercise date March 31, 2010 Fair value of option per share on grant date (Rs.) 30
21
Position on 31.3.2007Estimated annual rate of departure 2%Number of employees left=15
Position on 31.3.2008Estimated annual rate of departure 3%Number of employees left=10
Position on 31 3 2009Position on 31.3.2009Number of employees left=8
Number of employees entitled to exercise option = 492
Position on 31.3.2010
Number of employees exercising the option = 480Number of employees not exercising the option = 12
Compute expenses to recognise in each year by (i) fair value method (ii) intrinsic Value method and show important accounts in books of the Company by both of the methods.
22
Year 2006-07Fair value of option per share=Rs.30
SOLUTION
Number of shares expected to be vest under the scheme = (525 X 0.98 X0.98X 0.98) X 100 = 49,400Fair value = 49,400 X Rs. 30 = Rs 14, 82,000Vesting period = 3 yearsValue of option recognized as expense in 2006-07 = Rs. 14, 82,000/3 = Rs.4, 94,000.
Year 2007-08Fair value of option per share = Rs.30Number of shares expected to be vest under the scheme = (525 –15) X 0.97 X 0.97) X 100 = 47,986Fair value = 47,986 X Rs. 30 = Rs 14, 39,580Vesting period = 3 yearsNumbers of years expired = 2 YearsCumulative value of option to recognize as expense in 2006-07 and 2007-08 = (Rs. 14,39,580/3) X 2 = Rs.9,59,720Value of option recognised as expense in 2007-08 = Rs. 9,59,720 –Rs. 4,94,000 = Rs. 4,65,720
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Year 2008-09Fair value of option per share=Rs.30Number of shares actually vested under the scheme = 492 X 100 = 49,200Fair value = 49,200 X Rs. 30 = Rs 14, 76,000Vesting period = 3 yearsCumulative value of option to recognize as expense in 3 years = Rs. 14,76,000Value of option recognised as expense in 2008-09 = Rs. 14,76,000 – Rs. 9,59,720 = Rs. 5,16,280
Year 2009-10Fair value of option per share=Rs.30Number of shares not subscribed = (492-480) X 100 = 1, 200Value of option forfeited = 1,200 X 30 = Rs. 36,000
Employees’ Compensation A/c.Year Rs Year Rs.
2006-07 To ESOP o/s A/c 4,94,000 2006-07 By P/L A/c 4,94,000
4,94,000 4,94,000
2007-08 To ESOP o/s A/c 4,65,720 2007-08 By P/L A/c 4,65,720
4,65,720 4,65,720
2008-09 To ESOP o/s A/c 5,16,280 2008-09 By P/L A/c 5,16,280
5,16,280 5,16,280
24
ESOP OUTSTANDING A/CYear Rs Year Rs.
2006-07 To Balance c/d 4,94,000 2006-07 By Emp Comp A/c 4,94,000
4,94,000 4,94,000
2007-08 To Balance c/d 9,59,720 2007-08 By Bal b/d 4,94,000By Emp Comp A/c 4,65,720
9,59,720 9,59,720
2008-09 To Balance c/d 14,76,000 2008-09 By Bal b/d 9,59,720By Emp Com A/c 5,16,280
14,76,000 14,76,000
2009-10 To Gen Res(1,200 X 30)
36,000 2009-10 By Bal b/d(49,200 X 30)
14,76,000
To sh Capital(48,000 X 100)
48,00,000 By bank(48,000 X 125)
60,00,000
To Sec premium(48,000 X 55)
26,40,000
74,76,000 74,76,000
Note: Securities Premium
Rs.Exercise Price received per share 125Value of service received per share 30Consideration received per share 155Less: Nominal value per share 100Securities premium per share 55
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Intrinsic Value method
Year 2006-07Intrinsic value of option per share = Rs.149 – Rs. 125= Rs 24Number of shares expected to be vest under the scheme = (525 X 0.98 X0.98X 0.98) X 100 = 49,400Intrinsic value = 49,400 X Rs. 24 = Rs 11,85,600Vesting period = 3 yearsValue of option recognized as expense in 2006-07 = Rs Value of option recognized as expense in 2006 07 Rs. 11,85,600/3 = Rs.3,95,200
Year 2007-08
Intrinsic value of option per share = Rs.149 – Rs. 125= Rs 24Number of shares expected to be vest under the scheme = (525 –15) X 0.97 X 0.97) X 100 = 47,986Intrinsic value = 47,986 X Rs. 24 = Rs 11,51,664Vesting period = 3 yearsNumbers of years expired = 2 YearsCumulative value of option to recognize as expense in 2006-07 Cumulative value of option to recognize as expense in 2006 07 and 2007-08 = (Rs. 11,51,664/3) X 2 = Rs.7,67,776Value of option recognised as expense in 2007-08 = Rs. 7,67,776 –Rs.3,95,200 = Rs. 3,72,576
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Year 2008-09
Intrinsic value of option per share = Rs.149 – Rs. 125= Rs 24Number of shares actually vested under the scheme = 492 X 100 = 49,200Intrinsic value = 49,200 X Rs. 24 = Rs 11,80,800Vesting period = 3 yearsCumulative value of option to recognize as expense in 3 years = Rs. 11,80,800Value of option recognised as expense in 2008-09 = Rs. 11,80,800 – Rs. 7,67,776 = Rs. 4,13,024
Year 2009-10Intrinsic value of option per share = Rs.149 – Rs. 125= Rs 24Number of shares not subscribed = (492-480) X 100 = 1, 200Value of option forfeited = 1,200 X 24 = Rs. 28,800
Employee’s Compensation A/c.
Year Rs Year Rs.2006-07 To ESOP o/s A/c 3,95,200 2006-07 By P/L A/c 3,95,200
3,95,200 3,95,200
2007-08 To ESOP o/s A/c 3,72,576 2007-08 By P/L A/c 3,72,5763,72,576 3,72,576
2008-09 To ESOP o/s A/c 4,13,024 2008-09 By P/L A/c 4,13,0244,13,024 4,13,024
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Year Rs Year Rs.
2006-07 To Balance c/d 3,95,200 2006-07 By Emp Comp A/c 3,95,200
3,95,200 3,95,200
ESOP OUTSTANDING A/C
2007-08 To Balance c/d 7,67,776 2007-08 By Bal b/d 3,95,200 By Emp Comp A/c 3,72,576
7,67,776 7,67,776
2008-09 To Balance c/d 11,80,800 2008-09 By Bal b/d 7,67,776By Emp Com A/c 4,13,024
11,80,800 11,80,800
2009-10 To Gen Res(1,200 X 24)
28,800 2009-10 By Bal b/d(49,200 X 24)
11,80,800
To sh Capital(48,000 X 100)
48,00,000 By bank(48,000 X 125)
60,00,000
To Sec premium(48,000 X 49)
23,52,000
71,80,800 71,80,800
Note: Securities Premium
Rs.Exercise Price received per share 125Value of service received per share 24Consideration received per share 149Less: Nominal value per share 100Securities premium per share 49
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The following particulars in respect of stock options granted by a company are available
CASE II.
Grant date April 1.2006Number of employees covered 500 Number of options granted peremployee
100
Fair value of option per share on grantdate (Rs.)
25
Th i i d h ll b d i d b lThe vesting period shall be determined as below:
a) If the company earns Rs.120 crore or above after taxes in 2006-07, the options will vest on 31.03.2007.
b) If condition (a) is not satisfied but the company. Earns Rs. 250 crores or above after taxes in aggregate in 2006-07 and 2007-08, th ti ill t 31 03 2008the options will vest on 31.03.2008.
c) If conditions (a) and (b) are not satisfied but the company. Earns Rs. 400 crores or above after taxes in aggregate in 2006-07, 2007-08 and 2008-09, the options will vest on 31.03.2009.
Position on 31.03.2007
) Th d R 115 f i 2006 07a) The company earned Rs 115 crore after taxes in 2006-07b) The company expects to earn Rs 140 crores in 2007-08 after taxesc) Expected vesting date: March 31, 2008d) No. of employees expected to be entitled to option = 474
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Position on 31.03.2008
a) The company earned Rs 130 crore after taxes in 2007-08b) The company expects to earn Rs 160 crores in 2008-09 after taxesc) Expected vesting date: March 31, 2009d) No. of employees expected to be entitled to option = 465
Position on 31.03.2009
a) The company earned Rs. 165 crore after taxes in 2008-09b) No. of employees on whom the option actually vested = 450
Compute expenses to recognize in each year
Year 2006-07Fair value of option per share=Rs.25
SOLUTION
Number of shares expected to be vest under the scheme = 474 X 100 = 47,400Fair value = 47,400 X Rs. 25 = Rs 11,85,000Vesting period = 2 yearsValue of option recognized as expense in 2006-07 = Rs. 11,85,000/2 = Rs.5,92,500
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Year 2007-08Fair value of option per share=Rs.25Number of shares expected to be vest under the scheme = 465 X 100 = 46,500Fair value = 46,500 X Rs. 25 = Rs 11,62,500Expected vesting period = 3 yearsCumulative value of option to recognize as expense in 2006-07 and 2007-08 = (Rs. 11,62,500/3) X 2 = Rs.7,75,000Value of option recognised as expense in 2006-07 = Rs. 5,92,500Value of option recognised as expense in 2007-08 = Rs. 7,75,000 –Rs 5,92,500 = Rs. 1,82,500
Year 2008-09Fair value of option per share=Rs.25Number of shares actually vested under the scheme = 450 X 100 = 45,000Fair value = 45,000 X Rs. 25 = Rs 11,25,000Vesting period = 3 yearsCumulative value of option to recognize as expense in 3 years = Rs. 11,25,000Value of option recognised as expense in 2006-07 and 2007-08 = Rs. 7,75,000Value of option recognised as expense in 2008-09 = Rs 11,25,000 –Rs 7,75,000 = Rs 3,50,000
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Rahul Ltd has offered share options of 200 shares to each of its 1,000 employees. The vesting condition is that the employees need t i i ti l t f t 5 Th ti t
CASE III.
to remain in continuous employment for next 5 years. The estimate fair value of each share up to is Rs30. The entity estimates that 25% of the employees will leave the organization during the 5 year period.
Determine the amount to be recognized in the financial statements
SOLUTION
Step-1: Fair value on grant date = 200 X 1,000 X 30 = 6,000,000
Step-2: Cumulative charge to statement of comprehensive income:
Year1: 6,000,000 X 75% X (1/5) = 900,000Year2: 6,000,000 X 75% X (2/5) = 1,800,000Year3: 6 000 000 X 75% X (3/5) = 2 700 000Year3: 6,000,000 X 75% X (3/5) = 2,700,000Year4: 6,000,000 X 75% X (4/5) = 3,600,000Year5: 6,000,000 X 75% X (5/5) = 4,500,000
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Step 3: expense for the period:Amount calculated in 2- Amount charged in previous periodYear 1: 900,000-0 = 900,000Year 2 : 1,8000,000-900,000 = 900,000Year 3: 2,700,000-1,800,000 = 900,000Year 4: 3, 6000,000 – 2,700,000 = 900,000Year 5: 4,500,000-3,600,000 = 900,000
Pretty Ltd offers 200 shares at Rs 30 to each of its 1000 staff if they stay with them for 3 years. At the end of the first year, 15
l l d th tit ti t th t 25 % ill h l ft t
CASE IV.
employees leave and the entity estimates that 25 % will have left at the end of the vesting period. During the second year a further 15 employees leave and the entity revises its estimate of total departures over the vesting period from 25% to 27%. During the third year a further 15 employees leave the entity.
Determine the amount to be recognized in the financial statements
33
SOLUTION
Step 1 - Fair value on grant date: 200 X 1,000 X 30 =6,000,000
Step 2 - Cumulative charge to Statement of comprehensive income: Year 1: 6,000,000 X 75% X (1/3) = 1,500,000Year2: 6 000 000X 73% X (2/3) = 2 920 000 Year2: 6,000,000X 73% X (2/3) 2,920,000 Year3: 5,730,000(955X 30X 200) X(3/3) =5,730,000
Step 3- Expense for the period: Amount calculated in 2 –Amount charged in previous period Year 1: 1,500,000 -0 =1,500,000Year 2: 2,920,000 – 1,500,000 = 1,420,000 Year 3: 5,730,000 -2,920,000 = 2,810,000
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On 1 October 2005, Sanjay LTD granted 100 employees options to purchase 100 shares in the entity. The options
CASE V.
vest on 1 October 2007 for those employees who remain employed by the entity until that date. The options allow the employees to purchase the shares for Rs. 9 per share. The market price of the shares was Rs9 on 1 October 2005 and Rs9.5 on 1 Oct 2006. The market values of options was Rs3 on 1 Oct 2005 and Rs3.60 on 1 Oct 2006.On 1 Oct 2005, the directors estimated that 10% of the relevant employees would leave in each of the years ended 30 sep employees would leave in each of the years ended 30 sep 2006 and 30 sep 2007 respectively. It turned out that 2% of the relevant employees left in the year ended 30 sep 2006 and directors now believe that a further 6% will leave in the year ended 30 sep 2007.
This transaction is an example of an equity-settled share-based payment transaction that is accounted for in accordance with IFRS 2 h b d t S h t ti d
SOLUTION
IFRS 2 – share-based payment. Such transactions are measured using the, market value of the, relevant equity instrument on the grant date. In this case, the relevant market value is Rs.3 (market value of the share option on 1 October 2005). The cost of the grant is taken to statement of comprehensive income over the two-year vesting period. Where the grant is subject to future employment or future conditions then the latest known estimates of the extent of performance are used to determine the total cost. This means that in this case the total charge to the statement of that, in this case, the total charge to the statement of comprehensive income will be: 100 X 92 X 3 = Rs. 27,600. In the year ended 30 September 2006, 1/2 of this amount, i.e. Rs. 14,700, is debited to income as an operating cost and credited to equity.
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On 1 April 2004 Saurav limited granted 50 executives call options to purchase up to 1000 shares each on 1 April 2006. The options only vest if the executives are still employed on 1 April 2006. Personnel estimate that 95% of executives will remain for the 2 year period and exercise their
CASE VI.
95% of executives will remain for the 2 year period and exercise their options in full:
i. The option price is Rs10 per shareii. The market value of each share was Rs15 on 1 April 2004 and Rs18 on
31st March 2005. It is Rs19 on 31st March 2006.iii. The market value of share option was Rs3 on 1 April 2004 and Rs2.20
on 31st march 2005 It is Rs2 25 on 31st March 2006on 31 march 2005. It is Rs2.25 on 31 March 2006.
State where in the statement of financial position and where in the statement of comprehensive income the relevant amounts will be presented. Where appropriate, you should justify your treatment with reference to the relevant international financial reporting standards.
The market value of a Share options on 1April 2004 was Rs. 3 and so the market value of a Share options is Rs.3 X 50 X 1,000 X 95% R 142 500 Si th h ti i b d i
SOLUTION
95% = Rs. 142,500 Since the share option is based on service over a two-year period then the charge to income for the current year is ½ i.e. Rs. 71,250. An equivalent amount will be credited to equity and will be included in the future proceeds of issue of the shares, assuming the options are exercised
