Question

RED Corp. granted options for 20,000 common shares to certain executives on January 1, 2019, when the market price was $52 per share. The option price is $44 per share and the options must be exercised between January 1, 2021, and December 31, 2023, after which time they expire. The options state that the related service period is January 1, 2019 to December 31, 2020. An options pricing model determined that, at the date of grant, the estimated fair value of these options was $1,000,000. Assume that RED Corp. follows IFRS.

REQUIRED:

(a) Calculate total compensation expense, consistent with IFRS.

(b) Explain when compensation expense should be recognized, consistent with IFRS. Is this reasonable? Explain.

(c) Prepare journal entries for the following, consistent with IFRS (items 3 and 4 are independent assumptions). :

1. To record the issuance of the options (grant of options) on January 1, 2019.

2. To record the compensation expense, if any. Date the entry(ies). Assume all employees remain employed by RED Corp.

3. To record the exercise of the options, assuming all of the options were exercised on the earliest possible date, January 1, 2021.

4. To record the expiration of the options, assuming all of the options were not exercised because the market price fell below the exercise price before January 1, 2021 and stayed below the exercise price for the balance of the option period.

Answer 1

a.Total Compensation expense:

20000*(52-44)=160000

b.The issuance of fully vested shares, or rights to shares, is presumed to relate to past service, requiring the full amount of the grant-date fair value to be expensed immediately. The issuance of shares to employees with, say, a three-year vesting period is considered to relate to services over the vesting period. Therefore, the fair value of the share-based payment, determined at the grant date, should be expensed over the vesting period.

As a general principle, the total expense related to equity-settled share-based payments will equal the multiple of the total instruments that vest and the grant-date fair value of those instruments. In short, there is truing up to reflect what happens during the vesting period. However, if the equity-settled share-based payment has a market related performance condition, the expense would still be recognised if all other vesting conditions are met. The following example provides an illustration of a typical equity-settled share-based payment.

c.

1.No entry is passed when stocks are granted to employees.Hence no entry is passed on January 1, 2019.

2.On 31.12.2020.

Employee compensation expense account DR 53333

To Employee stock option outstanding account 53333

Profit & loss account DR 53333

To Employee compensation expense account 53333

On 31.12.2021.  

Employee compensation expense account DR 53333

To Employee stock option outstanding account 53333

Profit & loss account DR 53333

To Employee compensation expense account 53333

   On 31.12.2022.

Employee compensation expense account DR 53333

To Employee stock option outstanding account 53333

Profit & loss account DR 53333

To Employee compensation expense account 53333

4.Bank account A/C DR (20000*44) 88000

TO Equity share capital A/C (20000*10)    20000

TO Securities Premium A/C    68000

   Employee stock option outstanding account (20000*8) 160000

TO Securities Premium A/C 160000

5. The options gets lapsed.