Question 3b
(b) Delta prepares financial statements to 31 March each year. The information in note 1 and 2 is relevant for the year ended 31 March 20X7.
Note 1 – Granting of options to sales staff
On 1 April 20X5, Delta granted share options to 100 sales staff. The options are due to vest on 31 March 20X8.
The granting of the options was subject to two conditions:
– The staff member remains employed by Delta on 31 March 20X8.
– The sales revenue of Delta grows by a cumulative amount of at least 40% in the three-year period ending on 31 March 20X8 (see the table below).
| Cumulative growth in revenue in the three-year period | Number of options each employee is entitled to (subject to satisfying other vesting conditions) |
|---|---|
| Between 40% and 50% | 200 |
| Over 50% | 250 |
On 1 April 20X5, the fair value of a share option was $4·20. This had increased to $4·50 by 31 March 20X6 and to $4·80 by 31 March 20X7.
During the two years ended 31 March 20X7, expectations of revenue growth and employee retention in the three-year period ending on 31 March 20X8 changed as follows:
| Growth in revenue | Employees leaving | |||
|---|---|---|---|---|
| Year ended 31 March | In the year | Expected cumulative growth in the three-year period | In the year | Expected FUTURE departures in the three-year vesting period |
| 20X6 | 12% | 42% | 10 | 20 |
| 20X7 | 18% | 54% | 5 | 9 |
You can assume that this transaction was correctly accounted for by Delta in its financial statements for the year ended 31 March 20X6. (6 marks)
Note 2 – Granting of share appreciation rights to senior executives
On 1 October 20X5, Delta granted 500 share appreciation rights to 20 senior executives. The rights are redeemable in cash on 30 September 20X9 provided the executives remain employed by Delta until at least 30 September 20X9.
On 1 October 20X5, Delta estimated that two of the 20 executives would leave in the period from 1 October 20X5
to 30 September 20X9 and this estimate remained unchanged at 31 March 20X6.
During the year ended 31 March 20X7, one executive left Delta and on that date Delta estimated that the other 19 executives would remain in employment until 30 September 20X9 and so be entitled to the share appreciation rights.
On 1 October 20X5, the fair value of a share appreciation right was estimated to be $6. The fair value of a right had increased to $6·20 by 31 March 20X6 and to $6·40 by 31 March 20X7.
You can assume that this transaction was correctly accounted for by Delta in its financial statements for the year ended 31 March 20X6. (5 marks)
Required:
Briefly explain and show how the transactions described in notes 1 and 2 would be reported in the financial statements of Delta for the year ended 31 March 20X7.
Note: The mark allocation is shown against each of the two notes above.