Question

Alpha Ltd operates a share option plan for its officers, employees and consultants for up to 10% of its outstanding shares. Under this plan, the exercise price of each option equals the closing market price of the shares on the day before the grant. Each option has a term of 5 years and vests one-third on each of the 3 years following grant date. Before this financial period, Alpha Ltd has accounted for its share option plan on settlement date and no expense has been recognised.

Prepare an appropriate memorandum outlining the disclosures that will need to be made in
Alpha Ltd’s financial statements following the adoption of AASB 2 ‘Share-based Payment’

Answer 1

AASB 2 defines a share-based payment arrangement as “An agreement between the entity (or another group entity or any shareholder of any group entity) and another party (including an employee) that entitles the other party to receive:
(a)   cash or other assets of the entity for amounts that are based on the price (or value) of equity instruments (including shares or share options) of the entity or another group entity; or
(b)   equity instruments (including shares or share options) of the entity, or another group entity,

Recognition of expense as per AASB 2

An entity shall recognise the goods or services received or acquired in a share-based payment transaction when it obtains the goods or as the services are received. The entity shall recognise acorresponding increase in equity if the goods or services were received in an equity-settled share-based payment transaction, or a liability if the goods or services were acquiredin a cash-settledshare-based payment transaction.

When the goods or services received or acquired in a share-basedpayment transaction do not qualify for recognition as assets, they shall be recognised as expenses provided the specified vesting conditions, if any, are met.

Thus in the given case the company shall recognise the cash received as asset and increase the equity of the company. Balance if any, shall be recognised in the capital surplus account or securities premium account.