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Subject:

Corporate Financial Reporting (P 18)

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 CMA FINAL COURSE

CORPORATE FINANCIAL REPORTING (P18)

SHARE BASED PAYMENT

Question 1:-Softex Ltd. announced a stock Appreciation Right (SAR) on 01-04-07for each of its
employees. The scheme gives the employees the right to claim cash payment equivalent to an
excess of market price of company shares on exercise date over the exercise Price of Rs. 125
per share in respect of 100 shares, Subject to a condition of continuous employment of 3 years.
The SAR is exercisable after 31-03-2010 but before 30-06-10.

The fair value of SAR was Rs. 21 in 2007-28, Rs in 2008-09 and Rs. 24 in 2009-10. In 2007-18 the
company estimated that 2% of its employees shall leave the company annually. This was
revised to 3% in 2008-09. And 8 left in 2009-10. The SAR therefore actually vested in 492
employees on 30-06-2010; when SAR was exercised the intrinsic value was Rs. 25 per share.

Show the provision for SAR account by fair value method. Is this provision a liability or equity?

Answer:

Provision of SARs Account in the books of Softex Ltd.

Date Particulars Amt(Rs) Date Particulars Amt (Rs)

Year To Balance c/d 3,45,891 Year By Employees’ 3,45,891
2007-08 2007-08
3,45,891 3,45,891
Year To balance c/d 7,35,785 Year By Balance b/d 3,45,891
2008-09 2008-09
By Employees’ 3,89,894
compensation A/c
7,35,785 7,35,785

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 Year To Balance c/d 11,80,800 Year By Balance b/d 7,35,785
2009-10 2009-10
By Employees’ 4,45,015
compensation A/c
11,80,800 11,80,800
To Bank A/c 12,30,000 By Balance b/d 11,80,800
By Employees’ 49,200
Compensation A/c
12,30,000 12,30,000
Note: The Provision for Stock Appreciation Rights (SARs) is a liability. Therefore SARs are settled
through cash payment equivalent to an excess of market price of company’s shares over the
exercise price on exercise price on exercise date.

Working Note:

Year 2007-08

Number of employees to whom SARs were announced (492+52+10+8) = 525 employees

Number of SARs expected to vest = (525 x 0.98 x 0.98 x 0.98) x 100 = 49,413* SARs. expected to
lies years 2007-08 and 2008-09. It can also be worked out by rounding off the number of
employees.

Fair value of SARs = 49,413 SARs x 21 = 10, 37,673

Vesting Period = 3 years

Value of SARs recognised as expense in year 2007-08 = 10, 37,673/3 years = 3, 45,891.

Question 2:- On 1st April, 2010, A company offered 100 shares to each of its 500 employees at
Rs. 50 per share. The employee are given a month to decide whether or not to accept the offer.

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 The shares issued under the plan (ESPP) shall be subject to lock-in on transfers for three years
from grant date. The market price of shares of the company on the grant date is Rs. 60 per
share. Due to post-vesting restrictions on transfer, the fair value of shares purchased. Nominal
value of each share is Rs. 10.

Record the issue of shares in the book of the company under the aforesaid plan.

Answer:

Fair value of an ESPP = Rs 56 – Rs. 50 = Rs. 6

Number of shares issued = 400 employees x 100 shares/employee = 40,000 shares

Fair value of ESPP which will be recognized as expense in the year 2010-11 = 40,000

Shares x Rs. 6 = Rs. 2, 40,000

Vesting period = 1 month

Expenses recognized in 2010-11 = Rs. 2, 40,000

Date Particulars Rs. Rs.

30.04.2010 Bank (40,000 shares x Rs. 50) 20,00,000
Dr.
Employees compensation expense A/c 2,40,000
Dr.
To Share Capital (40,000 shares x Rs. 10) 4,00,000
To Securities Premium 18,40,000
(40,000 shares x Rs. 46)

Question 3:- Diamond Ltd. grants 50 stock options to each of its 1,000 employees on 1.4.2011
for Rs. 20, depending upon the employees at the time of vesting options. The market price of

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 the share is Rs. 50. These options will vest at the end of year 1, if the earning of Diamond Ltd. is
16% or it will vest at the end of the year 2, if the average earning of two years is 13%, or lastly it
will vest at the end of the third year, if the average earning of 3 years will be 10%. 2,500
invested options lapsed on 31.03.2012. 2,000 unvested options lapsed on 31.03.2013 and
finally 1,750 unvested options lapsed on 31.03.2014.

Following is earning of Diamond Ltd.:

Year ended on Earning

31.03.2012 14%

31.03.2013 10%

31.03.2014 7%

850 employees exercised their vested options within a year and remaining options were un-
exercised at the end of the contractual life. Pass journal entries with proper narrations for the
above transactions.

Answer:

Journal Entries

Date Particulars Rs. Rs.

31.03.2012 Employees compensation expense A/c Dr. 7,12,500
To ESOS outstanding A/c 7,12,500
(Being compensation expense recognized in
respect of the ESOO i.e. 50 options each
granted to 1,000 employees at a discount of Rs.
30 each, amortized on straight line basis over
the vesting years.)
31.03.2012 Profit and Loss A/c Dr. 7,12,500
To Employee compensation expenses A/c 7,12,500

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 (Being compensation expense charged to Profit
and Loss A/c. )
31.03.2013 Employee compensation expense A/c Dr. 1,97,500
To ESOS outstanding A/c 1,97,500
(Being compensation expense charged to Profit
and Loss A/c.)
31.03.2014 Employee compensation expense A/c Dr. 4,02,500
To ESOS outstanding A/c 4,02,500
(Being compensation expense recognized in
respect of the ESOP.)
31.03.2014 Bank A/c (850 x 50 x 20) Dr. 8,50,000

ESOS outstanding A/c 12,75,000

[(13,12,500/43,750) x 42,500]
To Equity Share Capital (42,500 x 10) 4,25,000
To Securities Premium A/c (42,500 x 40) 17,00,00
(Being 42,500 options exercised at an exercise
price of Rs. 50 each)
31.03.2014 Profit and Loss A/c Dr. 4,02,500
To Employee compensation expense A/c 4,02,500
(Being compensation expense charged to Profit
and Loss A/c.)
31.03.2014 ESOS outstanding A/c Dr. 37,500
To General Reserve A/c 37,500
(Being ESOS outstanding A/c on lapse of 1,250
options at the end of exercise of option period
transferred to General Reserve A/c.)
Working Note:

Statement showing compensation expenses to be recognized

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 Particulars Year 1 Year 2 Year 3
(31.03.2012) (31.03.2013) (31.03.2014)
Expected vesting period (at the end of the Ist year IInd Year IIIrd Year
year)
Number of options expected to vest 47,500 45,500 43,750
Options Options Options
Total Compensation expenses accrued @ 14,25,000 13,65,000 13,12,500
30 (i.e. 50-20)
Compensation Expenses of the year 14,25,000 x ½ 13,65,000 x 2/3 13,12,500
Less: Compensation Expenses recognized = 7,12,500 = 9,10,000
previously NIl 7,12,500 9,10,000
Compensation expenses to be recognized Rs. 7,12,500 1,97,500 4,02,500
for the year

Question 4:- A company has its share capital divided into shares of Rs. 10 each. On 1 st April,
2016 it granted 10,000 employees’ stock options (ESOP) at Rs. 40, when the market price was
Rs. 130. The options were to be exercised their options for 9,500 shares only; the remaining
options lapsed. The company closes its books on 31st March every year. Show Journal entries up
to the Year ended 31.03.2017.

Answer:

Date Particulars Dr. Rs Cr. Rs.

2016 Employee Compensation Expense Dr. 9,00,000
April. 1
To Employees Stock Option Outstanding A/c 9,00,000
(Being grant of 10,000 stock options to
employees at Rs. 40 when market price is Rs.

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 130)
Dec, 16 Bank A/c Dr. 3,80,000
to 15 –
Mar- 17
Employee Stock Option Outstanding A/C Dr. 8,55,000
To Share Capital A/c 95,000
To Securities Premium 11,40,000
(Being allotment to employees of 9,500 equity
shares of Rs. 10 each at a premium of Rs. 120
per share in exercise of stock options by
employees)
2017 Employee Stock Option Outstanding A/c Dr. 45,000
Mar. 16
To Employee Compensation Expense 45,000
(Being entry for lapse of stock options for 500
shares)
Profit & Loss A/c Dr. 8,55,000
To Employee Compensation Expense 8,55,000
(Being transfer of employees compensation
expense to profit and loss account)

Question 5:- A company has its share capital divided into shares of Rs. 10 each. On 1 st April,
2017 it granted 10000 employees’ stock options (ESOP) at Rs. 40, when the market price was
Rs. 130. The options were to be exercised between 16th December, 2017 and 15th March, 2018.
The employees exercised their options for 9500 shares only; the remaining options lapsed. The
company closes its books on 31st March every year. Show Journal entries up to the year ended
31.03.2018.

Answer:

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 Journal Entries

Date Particulars Dr. Rs. Cr. Rs.

2017 Employee Compensation Expense A/c Dr. 9,00,000
April, 1
To Employees Stock Option Outstanding 9,00,000
A/c
(Being grant of 10,000 stock options to
employees at Rs. 40 when market price is
Rs. 130)
Dec, 16 to Bank A/c Dr. 3,80,000
15-Mar-18
Employee Stock Option Outstanding A/c Dr. 8,55,000
To Share Capital A/c 95,000
To Securities Premium A/c 11,40,000
(Being allotment to employees of 9,500
equity shares of Rs. 10 each at a premium
of Rs. 120 per share in exercise of stock
options by employees)
2018 Employee Stock Option Outstanding A/c Dr. 45,000
Mar, 16
To Employee Compensation Expense A/c 45,000
(Being entry for lapse of stock options for
500 shares)
Profit & Loss A/c Dr. 8,55,000
To Employee Compensation Expense A/c 8,55,000
(Being employees Stock Options expenses
transferred)

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