Your document headline

Playful has ordered an amount of inventory from a supplier on July 1, 20X5. The supplier has said that the goods will be shipped and delivered on
September 1, 20X5. The goods were actually received on September 30, 20X5. The supplier has agreed to accept 2,000 shares in Playful as payment for
the inventory. Playful has received an invoice for $50,000. This invoice is only for accounting purposes as the fair value of the goods is difficult to
determine because of the highly specialized nature of the inventory. The shares vest immediately in the supplier as soon as they are received.
The directors of the entity are unsure as to the effect that a movement in the entity’s share price will have on equity-settled share-based payments.
Prior to the applicable date in IFRS 2, Playful had granted share options to each of its directors. On January 1, 20X6, Playful decided to reprice the options
at a new exercise price.
Playful has also granted share appreciation rights to the members of a middle management committee. The share appreciation rights provide these
employees with the right to receive cash equal to the appreciation in the entity’s share price since the grant date, which was January 1, 20X6. All of the
rights vest on December 31, 20X7, and they can be exercised during 20X8. It is anticipated that 5% of the middle management personnel will leave during
the period to December 31, 20X7.
Required
The entity wishes to know what the implications of the above issuance of shares and share options are for the financial statements of Playful and its
subsidiary. Ignore the deferred taxation effects.
Solution
Under IFRS 2, the date at which the value of the shares is measured will be the date at which Playful obtains the goods; therefore, this date will be
September 30, 20X5. Because the fair value of the goods cannot be determined reliably and the invoice value of $50,000 is purely cosmetic, the fair value
of the shares should be used for accounting purposes. The market price of the shares on September 30 multiplied by the shares issued will give the amount
that should be expensed and treated as the assets’ value.
A change in the entity’s share price has no effect on the valuation of equity-settled share-based payments. Obviously, in the case of the inventory, its value
will be determined by the market price of the share in this instance. Normally the amount recognized as the remuneration expense will be determined at the
grant date and is based on the number of shares that will eventually vest. However, for cash-settled share-based payment, these liabilities are remeasured at
the end of each reporting period. Therefore, a change in the price of the share of an entity can affect the liability that is recognized.
Playful is not required to apply IFRS 2 to the original grant of share options as the instruments were granted prior to the applicable date for IFRS 2.
However, it is required to apply IFRS 2 to the modification as the repricing occurred after January 1, 20X5. The total compensation expense will be
calculated by initially calculating the incremental value of the repriced award. This is the difference between the fair value of the re-priced award and the
fair value of the original award. This incremental value of each share option will be multiplied by the number of share options that are expected to vest and
would give a total compensation expense. This expense will be spread over the vesting period and will also take into account any revised estimates of
directors who may be expected to leave.
At the grant date, Playful will need to estimate the fair value of each share appreciation right. A calculation of the expense and the liability will be carried
out as of December 31, 20X6. This will be the number of employees who will be eligible for the share appreciation rights multiplied by the number of
share appreciation rights that they would each receive multiplied by the fair value multiplied by one year divided by two years, as the share appreciation
rights vest over the two-year period. A similar calculation would be carried out in the year to December 31, 20X7, where the expense for 20X7 is
calculated as the difference between the fair value of the liability at December 31, 20X6, and December 31, 20X7. If one assumes that all of the share
appreciation rights will be exercised on December 31, 20X8, then the value of the cash payment to the employees will be recalculated using the fair value
of the share appreciation rights at the date on which they are exercised, that is, December 31, 20X8. Any increase in the anticipated liability at December
31, 20X7, will be expensed also.
Facts
CASE STUDY 9
Mack, a public limited company, grants 5,000 share options each to its 20 executives on June 1, 20X5, on these vesting conditions:
• The executives must remain in the company’s employment during the vesting period.
• The share price must reach $10 a share before the share options vest.
• The company’s earnings must increase cumulatively by more than 5% in the first year, 10% in second year, and 16% in the third year after the grant
date for the options to vest in that year.
The company has calculated that the fair value of each option at the grant date is $5. The exercise price of the option is $3, and the exercise date is August