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Question 1

What does the FASB/IASB conceptual framework project suggest that makes financial information useful

Answer 1

When it’s relevant and represents faithful information. Usefulness of financial information is enhanced if its comparable, verifiable, timely and understandable 

Question 2

When is Financial information relevant

Answer 2

Capable of making a difference in decision making and predictive Value, confirmatory value, or both

Question 3

When is financial information represented faithfully 

Answer 3

Financial reports are present economic phenomena in words and numbers
Must be relevant and faithfully represents phenomena
This fundamental characteristic seeks to maximise underlying characteristics of completeness neutrality and freedom from error

Question 4

What is completeness

Answer 4

Nothing which is important is left out

Question 5

What is neutrality

Answer 5

Information provided shouldn’t be overly optimistic or overly pessimistic but neutral

Question 6

What is freedom of error

Answer 6

Process used to produce information presented was selected and applied without errors in process

Question 7

What are the problems with representational faithfulness

Answer 7

Transactions may be structured to get an appearance (legal form) that differs from underlying economic reality for example, leases, sales with right to repurchase.

Question 8

What do financial statements focus on reporting

Answer 8

Owners interests and profit attributable to owners. Hence financial statements focus on providers of capital and assume existence of a capitalist economy

Question 9

In capitalist accounting, is cost of labour treated as an expense

Answer 9

Yes. Company seeking to maximise profits will therefore try to minimise cost of labour. Managers are in an ambiguous position as they are employees and hence their pay is an expense that shareholders will want to minimise however shareholders want managers to act in shareholders interests and this may require them to be given incentives. A commonly used way of incentivising managers is to give them share or share options

Question 10

What is a share option

Answer 10

Right to buy/sell a certain number of shares at a fixed price some period of time in future within a company

Question 11

What are the two types of share option

Answer 11

A call and a put 

Question 12

What is a call option

Answer 12

Gives holder right but not obligation to buy a share on or in some cases on or before stated date at a stated price

Question 13

What is a put option

Answer 13

Gives holder right but not obligation to sell a share on or in some cases on or before a stated date at a stated price

Question 14

What are employee share options

Answer 14

It’s part of employee remuneration/incentive package. Company grants employees right to buy new shares in company at a specified date in future at a specified price so employee share options are call options. If employees meet certain conditions usually working for a specified period, they can then exercise the option. Pay agreed price to company, In exchange for which company issued new shares. When an employee works long enough and eventually exercise the option, then need to pay price to company and then exchange company issues new shares and are then given to employee

Question 15

What are the key dates for options

Answer 15

Grant date, vesting date, and exercise date

Question 16

What is grant date

Answer 16

Date on which options are granted to employees – usually exercise price is the determined on grant date 

Question 17

What is Vesting date

Answer 17

Date when employees have right to keep options even if they leave the company

Question 18

What is exercise date

Answer 18

Date when employees have right to convert options into shares

Question 19

What does Treatment before IFRS 2 exercise of option mean

Answer 19

Company received cash from employees
Company credited share capital with nominal value of new shares and share premium accounts with any excess over nominal value
There was no impact on income statement when options were exercised
If option is not exercise, nothing usually needed to be accounted for

Question 20

What are the problems with treatment before IFRS 2 exercise of option

Answer 20

Options have an economic value when they are issued but were mostly being recorded as having zero value.
This is against faithful representation. Also against matching principle as employees work for reward but no cost was being recorded. Company has an obligation to issue shares if options exercised, but no liability was shown on balance sheet. Share options appear to provide a way for companies to reward employees without recording a cost. Before IFRS 2 companies were using employee share options to reward work of employees without incurring any cost in income statement

Question 21

What is IFRS 2 Share Based payment general principle

Answer 21

Covers transactions where company receives goods or services in exchange for equity instruments of company which include shares and share options. Goods or services are recognised as and when they are received. If goods or services do not qualify as assets, they must be treated as expenses.

Issue of equity instruments gives rise to increase in equity

Question 22

What is IFRS 2 Share Based payment measurement at fair value 

Answer 22

Goods or services received, and increase in equity, should be measured at fair value of goods or services received. If fair value of goods or services received cannot be estimated reliably, then they are measured indirectly by reference to fair value of equity instruments issued

Question 23

What is IFRS 2 accounting treatment of share options

Answer 23

Requires recognition of cost/expense of share options in accounts at fair value of option measured on a date option is granted (grant date). This can be observed market price, if identical options are traded but terms associated with employee share options are usually very different from terms of traded options. Fair value of employee share options are usually estimated using an option pricing model.

Question 24

What is IFRS 2 accounting treatment of share options. What are employee share options usually subject to.

Answer 24

Vesting period. If an employee leaves during vesting period then options are cancelled. Employee services given in exchange for actions are considered to arise over vesting period so cost/expense of options is recognised over vesting period. Company can reduce options expense to allow for options that will not vest because employees leave before end of vesting period.

Question 25

How do you calculate expense for current year

Answer 25

Fair value of options X Cumulative proportion of overall service during vesting period performed by employees X proportion of options expected to vest

Question 26

How do you calculate fair value of options

Answer 26

Number of employees X Number of options X Value of each option at grant date 

Question 27

What happens if estimates change

Answer 27

After fair value of an option is calculated as grant date, no subsequent change in fair value is recognised. However, company must change its final vesting estimate each year in light of actual expense