DipIFR Syllabus B. Elements of financial statements - SBP - Equity Settled - Past Papers ^{2 / 7}

You are the financial controller of Omega, a listed entity which prepares consolidated financial statements in accordance with International Financial Reporting Standards (IFRS). One of your assistants, a trainee accountant, is involved in the preparation of the consolidated financial statements for the year ended 31 March 2017. She is also involved in the preparation of the individual financial statements for the entities in the group. She has sent you an email with the following queries:

Query Three
I’m not sure whether we need to make any entries in respect of the equity settled share-based payment scheme we started on 1 April 2016. I believe we granted options to 1,000 employees to purchase 100 shares in Omega for a fixed price. The options vest on 31 March 2021 subject to two conditions. The first vesting condition is that the employees remain employed by Omega throughout the five-year period up to the date of vesting. Best estimates are that 900 of the 1,000 will stay for that period – only 25 left in the year ended 31 March 2017. The other condition is that the Omega share price on 31 March 2021 should be at least $10. The share price on 31 March 2017 was only $8·50 so it doesn’t look like this condition is satisfied yet. I’ve also noticed that the fair value of one share option was $1 on 1 April 2016, rising to $1·05 on 31 March 2017. Do we need any accounting entries and, if so, what should they be? (7 marks)

Required:
Provide answers to the three queries raised by the trainee accountant. Your answers should refer to relevant provisions of International Financial Reporting Standards.

Note: The split of the mark allocation is shown against each of the items above.

You are the financial controller of Omega, a listed entity which prepares consolidated financial statements in accordance with International Financial Reporting Standards (IFRS). The managing director, who is not an accountant, has recently attended a business seminar at which financial reporting issues were discussed. Following the seminar, she reviewed the financial statements of Omega for the year ended 31 March 2016. Based on this review she has prepared a series of queries relating to those statements:

Query Three
‘During a break-out session I heard someone talking about accounting policies and accounting estimates. He said that when there’s a change of these items sometimes the change is made retrospectively and sometimes it’s made prospectively. Please explain the difference between an accounting policy and an accounting estimate and give me an example of each. Please also explain the difference between retrospective and prospective adjustments and how this applies to accounting policies and accounting estimates.’ (7 marks)

Required:
Provide answers to the three questions raised by the managing director. Your answers should refer to relevant provisions of International Financial Reporting Standards.

Note: The mark allocation is shown against each of the three issues above.

Kappa prepares financial statements to 31 March each year. The following share-based payment arrangements were in force during the year ended 31 March 2015:

(i) On 1 April 2013, Kappa granted options to 500 employees to subscribe for 400 shares each in Kappa on 31 March 2017, providing the employees still worked for Kappa at that time. On 1 April 2013, the fair value of each option was $1·50.

In the year ended 31 March 2014, ten of these employees left Kappa and at 31 March 2014, Kappa expected that 20 more would leave in the three-year period from 1 April 2014 to 31 March 2017. Kappa’s results for the year ended 31 March 2014 were below expectations and at 31 March 2014 the fair value of each option had fallen to 25 cents. Therefore, on 1 April 2014 Kappa amended the exercise price of the original options. This amendment caused the fair value of these options to rise from 25 cents to $1·45.

During the year ended 31 March 2015, five of the employees left and at 31 March 2015, Kappa expected that ten more would leave in the two-year period from 1 April 2015 to 31 March 2017. The results of Kappa for the year ended 31 March 2015 were much improved and at 31 March 2015, the fair value of a re-priced option was $1·60. (9 marks)

Required:
Show how and where transactions (i) and (ii) would be reported in the financial statements of Kappa for the year ended 31 March 2015.

Note: The mark allocation is shown against both of the two transactions above.
Ignore deferred tax.

On 1 October 2011 Omega granted share options to 200 senior executives. The options will vest on 30 September 2014 subject to the following conditions:

– Each executive will be entitled to 1,000 options if the cumulative profit in the three-year period from 1 October 2011 to 30 September 2014 exceeds $30 million. If the cumulative profit for this period is between $35 million and $40 million, then 1,500 options will vest. If the cumulative profit for the period exceeds $40 million, then 2,000 options will vest.

– If an executive leaves during the three-year vesting period, then that executive would forfeit any rights to share options.

– Notwithstanding the above, no options will vest unless the share price at 30 September 2014 exceeds $5.

Details of the fair values of the shares and share options at relevant dates are as follows:

On 1 October 2011, none of the relevant executives were expected to leave in the three-year period from 1 October 2011 to 30 September 2014 and none left in the year ended 30 September 2012. However, 10 executives left unexpectedly on 30 June 2013. None of the other executives are expected to leave before 30 September 2014.

Omega correctly reflected this arrangement in its financial statements for the year ended 30 September 2012.

Required: 
Prepare relevant extracts from the statement of financial position of Omega at 30 September 2013 and its statement of profit or loss and other comprehensive income for the year ended 30 September 2013. You should give appropriate explanations to support your extracts. (6 marks)