CR

Question 1

Equity settled scheme

Answer 1

Grant date - date SBP (usually option) comes into existence

Vesting date - date from which conditions associated with SBP are achieved by employee, allowing access to SBP

Vesting period - period from grant date to vesting date

Exercise date - date equity based SBP actually exercised by employee

Question 2

ES scheme - recognition

Answer 2

No vesting conditions - expense or asset in FS immediately

Vesting conditions - expense spread over vesting period on a cumulative basis
DR Expense CR Equity

Question 3

Impact of vesting conditions - non market-based

Answer 3

Conditions unrelated to MV of the share eg completing minimum service period, achieving sales/profit target

FV calculated at grant date

FV spread over vesting period BUT value revised each year to account for expected shares to be vested

Vesting conditions subsequently not met - any prior expense recognised is reversed

Question 4

Impact of vesting conditions - market-based

Answer 4

Conditions linked to price of share in some way

Eg minimum increase in share price/SH return

Already accounted for at grant date so ignore when calculating expense

Conditions not expected to be met - still recognise expense

Question 5

Transactions with third party eg supplier

Answer 5

Eg supplier

Direct method used

Dr Purchases
Cr SC/SP

FV of transaction

Question 6

Transactions with employees

Answer 6

Difficult to measure directly so indirect method used = FV of equity instrument at date option granted using ‘option pricing model’ (takes into account any expected market conditions)

Equity required =

FV at grant (doesn’t change) x No. options (Contractual per employee) x Expected no. vestors (Estimation that can change) x Vesting period lapsed/Total vesting period (Months if begun in middle of period)

P/L charge = CY equity required - PY equity required

Question 7

Exercising options

Answer 7

Exercised:
Dr Cash (Proceeds)
Dr Equity (Remove balance created over vesting period)
Cr Share Capital (Nominal value)
Cr Share Premium (Balance)

Lapsed:
Dr Equity (Remove balance created)
Cr Retained earnings

Question 8

Modification of equity

Answer 8

Due to change in exercise price as a result of share price being less than expected or general fall in stock market

1. Continue original transaction over full vesting period
   X = FV at grant x No. of options x Expected no. of vestors

Allocated to reporting period by splitting into years/months eg 4 year vesting period, which started before the current year, x 1/4

2. Account for change in FV over time remaining (prospectively)
   Y = (FV now – FV before modification) x No. of options x Expected no. of vestors

Allocated to reporting period by splitting into years/months, eg 30 months remaining, happened 6 months into reporting period, x 6/30

Dr Expense x+y
Cr Equity x+y

Question 9

Cancellation and settlement

Answer 9

FV of accelerated vesting based on actual employees at the time - Dr Expense Cr Equity

Any payment to employee treated as share buyback

Dr Equity (Vested to date)
Dr Retained earnings (FV of option at cancel x options x vestors to date)
Dr P/L (Balance)
Cr Cash (Amount paid)

Question 10

Cash settled transactions

Answer 10

Bonus based on entity’s share price aka ‘share appreciation rights’

Same DE as equity, but liability, re-estimate FV each YE

Dr Expense
Cr Liability

Full liability from vesting to exercise

Question 11

Choice of settlement

Answer 11

Entity choice:

• Obligation to deliver cah eg past options have been settled with cash - cash settled
• No obligation - equity settled

3rd party choice:
- Transaction is a compound instrument equity/liability

Equity element = FV per equity settled method - FV per cash settled method at grant date

Question 12

Distributable profits

Answer 12

Companies prohibited from paying dividends except out of available profits

Dividends available = acc realised profits - acc realised losses (usually retained earnings)

Question 13

DPs - Rules for all companies CA06

Answer 13

Provision - realised loss

Revaluation surplus - unrealised gain

Additional depn on revaluation may be treated as part of realised profit

Disposal of revalued asset = unrealised surplus/loss = realised

Financial instruments at FV gains/losses = realised if FV from active market

Question 14

DPs - NCA revaluations

Answer 14

Gains = unrealised unless reverse prior loss

Losses = realised except where loss

• Offsets surplus on asset
• Arises from reassessment of value of all NCAs
• Arises from reassessment of some NCAs where assets not revalued worth at least their book value

Question 15

DPs - Additional rules for public companies

Answer 15

PLC may not reduce net assets below aggregate amount of called up share cap and undistributable reserves

NA less SC, UR = DPs

URs = Share prem + excess unrealised profit over unrealised losses + any other reserve the company is prohibited from distributing by memorandum, articles, statute

Question 16

Employee benefits

Answer 16

Post employment eg pensions

Other long term eg sabbatical, long service leave - same as DB scheme, remeasurement to P/K

Short term eg bonus, holiday pay - accruals concept, expense in period, o/s liability in SFP

Termination payments eg redundancy, severance - IAS37: provision if entity demonstrably committed

Question 17

Defined contribution scheme

Answer 17

Contribution made is % of salary, future pension depends on how fund performs

No legal/constructive obligation to make further contributions if fund does not hold sufficient assets

Expense = % contribution x total pay (inc bonus relating to the year)

Asset/liability = expenses - amount paid

Disclosure - size of expense and description of scheme

Question 18

Defined benefit scheme

Answer 18

Outcome is guaranteed and typically depends on eg final salary and years worked.

Contributions vary in order to achieve this outcome.

Obligation to pay funds into pension plan

Disclose difference between plan obligation and plan assets in SFP as deficit/surplus

Table

Question 19

DB scheme - settlement

Answer 19

When entity eliminates obligations for part/ all of benefits under a plan

Dr Plan liabilities (reduction in PV)
Cr Plan assets (amount paid)
Dr/Cr P/L Balance

Question 20

Net asset ceiling

Answer 20

Threshold to ensure DB scheme surplus is carried at no more than recoverable amount

Net surplus restricted to amount of cash savings available to entity in future