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Seminar Outline 24

This document outlines the topics and learning objectives for Seminar 24 on share-based payment accounting and employee benefits accounting. It includes a presentation question with two parts analyzing share option and share appreciation rights plans. It also provides three illustrations on accounting for short-term paid absences, profit-sharing bonuses, and employer CPF contributions. Students are required to calculate expenses, prepare journal entries, and address issues related to accounting for share-based compensation and employee benefits.

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58 views5 pages

Seminar Outline 24

This document outlines the topics and learning objectives for Seminar 24 on share-based payment accounting and employee benefits accounting. It includes a presentation question with two parts analyzing share option and share appreciation rights plans. It also provides three illustrations on accounting for short-term paid absences, profit-sharing bonuses, and employer CPF contributions. Students are required to calculate expenses, prepare journal entries, and address issues related to accounting for share-based compensation and employee benefits.

Uploaded by

cccq
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Nanyang Technological University

Nanyang Business School

AC2101 – Accounting Recognition and Measurement


Semester 1, 2017-18

Outline for Seminar 24: Share-Based Payment III and Employee


Benefits
Learning objectives:

 Analyse and apply share-based payments accounting under FRS 102


 Examine and apply employee benefits accounting under FRS 19
 Review topics covered in AC2101

Required readings:
 Per Seminar 23
 FRS 19 (excluding paras related to defined benefit post-employment plans)
 Picker Chap 10

Presentation Question:

Presentation Question – Project Team 10

PART I

i) On 2 January 20x1, Starina Limited (“SL”) approved the Employee Share Option
Scheme (“ESOS”) that granted 1,000 share options to each of its 420 employees
with the following terms and conditions:

(1) The employee must remain in service for 3 years unless the “good leavers”
clause as stated in (5) below applies.
(2) Profits of SL must increase by at least 5% per annum during the vesting
period.
(3) The exercise price of the share options is fixed at $28 per share.
(4) The options shall vest on 31 December 20x3 if all the conditions are met
and the options shall expire 3 years after date of vesting.
(5) If an employee becomes eligible for retirement before the end of the
service period, the share options issued shall vest on retirement provided
the profit target is achieved in the preceding year(s). For example, if an
employee retires in August 20x3, the profit target must be met for the
financial years ended 31 December 20x1 and 20x2.
The Chief Human Resource Officer (“CHRO”) has determined that 20 of its
employees who are eligible for the above ESOS will retire on 30 June 20x2. No
attrition is expected for this group of employees.

1
For the other employees who are not due to retire during the vesting period, the
CHRO has advised that an annual attrition of 20 staff would be a reasonable
estimate. The actual number of staff who left SL in 20x1 and 20x2 is 22 and 23
respectively.

SL estimates each option’s fair value on grant date to be $9 without considering


the probability of meeting the profit target and $8 after taking into account the
probability of meeting the profit target. It is presumed that there is no material
difference in the fair value of the options granted to the staff nearing retirement.
SL is confident of meeting the profit target and as expected, the profits during the
vesting period exceeded the target. Profits of SL are $29 million, $32 million, $36
million and $39 million for the financial years ended 31 December 20x0, 20x1,
20x2 and 20x3 respectively.

SL has a 31 December financial year end and it complies with the relevant
Singapore Financial Reporting Standards including FRS 102 Share-based
Payment.

Required

(a) Determine the share option expense to be recognized by SL for the years
ended 31 December 20x1 and 20x2.

(b) Prepare the necessary journal entries to account for the share option
expense for the years ended 31 December 20x1 and 20x2.

(c) Discuss briefly whether a separate fair value should be determined for the
options granted to the staff nearing retirement.

(d) “The effect of employee share option plans is that the existing
shareholders transfer some of their ownership interests to the employees
and that the entity is not a party to this transaction.” Discuss whether you
agree with the statement and the corresponding implications for the
employee share option plans accordingly.

ii) During 20x3, the Chief Executive Officer (“CEO”) of SL is contemplating the
termination of 10 employees due to their poor performance. The CEO argues that
the ESOS should be accounted for as a forfeiture as services were not fully
received from these 10 employees. The CHRO argues that the ESOS should be
accounted for as a cancellation as it is SL who is precluding the services from
being provided. The CEO and CHRO have come to your office to seek your
advice.

Required

(a) Advise the CEO and CHRO on the appropriate treatment of the share-
based payment for these terminated staff.

2
(b) The 10 employees were terminated in September 20x3. In addition, 20
staff voluntarily resigned from SL in 20x3. Calculate the share option
expense to be recognized by SL for the year ended 31 December 20x3. No
journal entry is required.

PART II

On 1 January 20x4, 30 outstanding senior managers were granted a share appreciation


rights (SARs) plan by Steady Corporation. Under this plan, each manager is granted
15,000 SARs which vest on 31 December 20x6.
One of the terms set upon was that the managers must remain as Steady Corporation’s
employees during the vesting period from 1 January 20x4 to 31 December 20x6. The
SARs are exercisable from 1 January 20x7 to 31 December 20x8. At exercise date, if
the share price of Steady Corporation had appreciated, each grantee will receive for
each SAR a cash amount equal to the difference between the share price on exercise
date and the share price on grant date (i.e., intrinsic value). Steady Corporation also
estimated that the forfeiture rate will be set at 5%. This estimated forfeiture rate is
maintained throughout the vesting period.
The fair value and intrinsic value of the SARs can be summarized in the following
table:

Date Estimated Fair Value Intrinsic Value


1 January 20x4 $7.00
31 December 20x4 $8.00 $7.20
31 December 20x5 $7.50 $7.10
31 December 20x6 $8.50 $8.00
31 December 20x7 $8.20 $7.90
31 December 20x8 $8.30 $8.30

In 20x6, five managers left the company and 15 managers exercised the SARs at 31
December 20x7. The remaining managers exercised the SARs at 31 December 20x8.
Steady Corporation has a 31 December financial year end and the applicable tax rate
is 20%.
The company complies with the relevant Singapore Financial Reporting Standards
including FRS 102 Share-based Payment.

Required:

(a) Calculate the remuneration expense for the years 20x4 to 20x8, and prepare
journal entries relating to the share appreciation rights plan for the period 20x4 to
20x8.

3
(b) A shareholder at the company’s 20x4 Annual General Meeting (AGM)
commented that the company does not have a liability in respect of its SARs until
they are vested because the company does not have a present obligation to pay
cash to the employees until the employees fulfil the conditions to become
unconditionally entitled to the cash. The shareholder is of the view that there is
only a contingent liability between the grant date and vesting date.

You are required to present brief arguments to refute the shareholder’s view.

Write-ups and illustrations:


The following illustrations are adapted from illustrative examples from FRS 19.

Illustration 1: Short-term Paid Absences


FB Limited is in its first year of operation and has 100 employees, who are each
entitled to 20 days of paid annual leave each year. Unused annual leave may be
carried forward for one calendar year. Paid leave is first taken out of the prior year’s
entitlement carried forward before using the current year’s entitlement. As at
31/12/20x1, the average unused entitlement is 2 days per employee (i.e. a total of 200
days).
Therefore, the entity recognises a liability equal to 200 days of paid leave. Assuming
each day of paid leave costs the entity $100, the entity will pass the following journal
entry for the year ending 31/12/20x1:

Dr Staff Costs $20,000


Cr Provision for short-term paid absences $20,000

Illustration 2: Profit-sharing and Bonus Plans


The employment contracts that FB Limited (which has 31 December accounting year-
ends) entered into with its employees contain a clause that requires FB Limited to pay
its employees a 13th month bonus amounting to $1,000 in January the following year.
In this case, FB Limited has a legal obligation to pay the 13th month bonus. Therefore,
at each year-end, FB Limited will have to make a provision for the 13th month bonus.

Dr Staff Costs $1,000


Cr Bonus Payable $1,000

4
Illustration 3: CPF Contributions by Employer
ABC Limited (which has 31 December accounting year-ends) contributes 17% of its
employees’ salaries to the Central Provident Fund (CPF) on a monthly basis. The
employees have a total monthly salary of $10,000. As of 31/12/20x1, the company
makes the following provision for its December CPF contribution to be paid in
January.

Dr Staff Costs $1,700


Cr CPF Payable $1,700

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