- 20 Marks
Question
(1) KutuKutu Plc. has a policy in place to pay its employees a performance bonus. This bonus is to be paid in cash and is unrelated to the movement in its share price. KutuKutu Plc. has the choice of settling the bonus in cash or in equity shares to the value of the cash bonus. Based on bonuses paid in prior years, KutuKutu Plc. has always settled the bonuses of qualified employees in shares.
(2) KutuKutu Plc. grants one share option to each of its 50 employees on January 1, 2016. The share options will vest at the end of 2 years provided that:
- The employees remain in KutuKutu Plc.’s employment at that date; and
- The Earnings before Interest, Tax, Depreciation, and Amortisation (EBITDA) of KutuKutu Plc. for the second year achieves a specified target.
At the grant date, each recipient is required to make a non-refundable cash payment of N2,000 to KutuKutu Plc. This payment is based on the estimated fair value (FV) of the share option which reflects the probability that the target EBITDA will be achieved in the second year. FV of each option would be N250 (excluding the effect of the EBITDA condition).
If KutuKutu Plc. does not achieve the target EBITDA or if an employee leaves the employment of KutuKutu Plc., no shares will be issued, and the employee will not be entitled to a repayment. Accordingly, both service and non-market vesting conditions are deemed to be substantive.
Required:
a. Do the transactions entered into in (1) above meet the definition of equity-settled share-based payment transactions within the scope of IFRS 2? (8 Marks)
b. How should the transaction in (2) above be accounted for? (12 Marks)
Answer
a. As regards KutuKutu Plc, the bonus is not cash-settled due to the facts that:
- The performance bonus is to be paid in cash, but the bonus payment is unrelated to the movement in its share price.
Therefore, it must be mentioned that the transactions entered into in (1) do not meet the definition of equity-settled share-based payment transactions within the scope of IFRS 2.
b. According to IFRS 2, share-based payment transactions should be measured at the fair value of the goods or services received. If the fair value of goods and services cannot be measured reliably, then the entity should measure the transaction at the fair value of the equity instruments granted.
This transaction should be accounted for as an equity-settled share-based payment arrangement and falls within the scope of IFRS 2. The postings in the books of KutuKutu Plc will be as follows:
Kutukutu Plc
Statement of financial position as at December 31,
Assumptions:
No employees left the organization (Kutukutu Plc) during the two years in question. Fair value (FV) of each option (N250) is considered constant at the grant date (i.e. date of agreement between employees and Kutukutu Plc)
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