- 10 Marks
Question
(i) Share-Based Payment
Pee Manka PLC (PM), a hyper-growing firm in Ghana, prepares its financial statements on 31 December.
The following information is relevant:
- The financial statements are authorised for issue on 31 March. On 31 December 2021, PM issued share options to seven (7) of its senior executives, giving each executive the option to purchase 2 million shares at GH¢6.50 per share. The fair value of each option at that date was GH¢4.00. The exercise of the share options was conditional on the completion of two-years’ service from 31 December 2021.
The company’s share price on subsequent dates was as follows:
| Date | Share Price (GH¢) |
|---|---|
| 31 December 2022 | 13.50 |
| 31 December 2023 | 17.50 |
- On 31 March 2023, after the 2022 financial statements were authorised for issue, PM’s Chief Finance Officer, one of the seven executives, unexpectedly resigned from her position in the company.
- On 30 April 2023 another executive, Mrs. Torsah, was dismissed.
- The five remaining executives exercised their options on 31 December 2023.
Required:
In line with IFRS 2: Share-Based Payment, recommend how the above scenario would have been dealt with in the financial statements of PM for the year ended 31 December 2023. (6 marks)
(ii) Contingent Liabilities and Share-Based Payment
- Mrs. Torsah, who was dismissed, immediately instigated legal proceedings against PM, and it was probable, on the 28 February 2024, that she would be deemed to have completed the two-year qualifying period of her share option agreement.
- Legal advice at that time was that she was also likely to be awarded GH¢3.5 million in compensation, and that it was possible that this could rise to GH¢5.8 million.
Required:
In line with IFRS 2: Share-Based Payment and IAS 37: Provisions, Contingent Liabilities and Contingent Assets, explain how the above scenario would impact your results in (i) above.
Answer
(i) Accounting for the Share-Based Payment
Step 1: Determine Total Fair Value of Share Options
| Description | Calculation | Amount (GH¢) |
|---|---|---|
| Total options per executive | 2,000,000 × 7 | 14,000,000 |
| Fair value per option | GH¢4.00 | – |
| Total fair value | 14,000,000 × 4 | 56,000,000 |
| Annual expense (2-year vesting) | 56,000,000 ÷ 2 | 28,000,000 |
- In 2022, an expense of GH¢28 million was recognized.
- In 2023, adjustments must be made for the executives who left.
Step 2: Adjust for Resignation and Dismissal
| Description | Calculation | Amount (GH¢) |
|---|---|---|
| Remaining eligible executives | 5 | – |
| Revised total options | 2,000,000 × 5 | 10,000,000 |
| Revised total fair value | 10,000,000 × 4 | 40,000,000 |
| Cumulative expense required | 40,000,000 | – |
| Less: Prior year expense (2022) | (28,000,000) | – |
| Expense for 2023 | GH¢12,000,000 | – |
Journal Entries for 2023
| Date | Account | Debit (GH¢’000) | Credit (GH¢’000) |
|---|---|---|---|
| 31 Dec 2023 | Share-Based Payment Expense | 12,000 | – |
| Share Options Reserve | – | 12,000 |
| Date | Account | Debit (GH¢’000) | Credit (GH¢’000) |
|---|---|---|---|
| 31 Dec 2023 | Cash (2m × GH¢6.50 × 5) | 65,000 | – |
| Share Option Reserve | 40,000 | – | |
| Share Capital | – | 65,000 | |
| Retained Earnings | – | 40,000 |
(ii) Impact of Legal Case on Financial Statements
- Provision for Compensation:
- Since it is probable that Mrs. Torsah will receive GH¢3.5 million, a provision must be recognized.
- The additional GH¢2.3 million (5.8m – 3.5m) is disclosed as a contingent liability.
Journal Entries for Compensation Provision
| Date | Account | Debit (GH¢’000) | Credit (GH¢’000) |
|---|---|---|---|
| 28 Feb 2024 | Compensation Expense | 3,500 | – |
| Provision for Compensation | – | 3,500 |
- Impact on Share Option Reserve:
- If the court rules in favor of Mrs. Torsah, she would still be entitled to 2 million shares.
- This means GH¢8 million (2M × GH¢4) must be added to the share option reserve.
Journal Entry for Share-Based Payment Adjustment
| Date | Account | Debit (GH¢’000) | Credit (GH¢’000) |
|---|---|---|---|
| 28 Feb 2024 | Share-Based Payment Expense | 8,000 | – |
| Share Options Reserve | – | 8,000 |
Impact on Financial Statements
(a) Profit & Loss Statement (Extract) for 2023
| Item | GH¢ Million |
|---|---|
| Share-Based Payment Expense | (20.0) |
| Compensation Expense | (3.5) |
(b) Statement of Financial Position (Extract) at 31 Dec 2023
| Item | GH¢ Million |
|---|---|
| Share Option Reserve | 48.0 |
| Provision for Compensation | 3.5 |
Conclusion
- Total share-based payment expense for 2023 = GH¢20 million.
- Provision for legal claim = GH¢3.5 million, with an additional GH¢2.3 million as a contingent liability.
- Share option reserve increases to GH¢48 million if Mrs. Torsah’s claim is upheld.
- Proper classification and disclosures ensure compliance with IFRS 2 and IAS 37.
- Tags: Contingent Liabilities, Employee Benefits, IAS 37, IFRS 2, Legal claims, Share Options
- Level: Level 3
- Uploader: Salamat Hamid
