Question 1

On 1 July 2013 Pearl Pty Ltd granted 800 share options with an exercise price of $35 to the CFO, conditional on the CFO remaining in employment with the company until 30 June 2016. The fair value of Pearl's shares at that time were assessed to be $40. The exercise price will drop to $30 if Pearl's earnings increase by an average of 8% per year over the three year period. On 1 July 2013 the estimated fair value of the share options with an exercise price of $35 is $10 per option, and if the exercise price is $30, the estimated fair value of the options is $12 per option.
During the year ended 30 June 2014 Pearl's earnings increased by 10% and they are expected to continue to increase at this rate over the next two years.
During the year ended 30 June 2015 Pearl's earnings increased by 9% and Pearl management continued to expect that the earnings target would be achieved.
During the year ended 30 June 2016 Pearl's earnings increased by only 2%. At 30 June 2016 the share price is $23.
The remuneration expense to be recognised for the year ended 30 June 2014 is:
A) $2667
B) $3200
C) $8000
D) $9600

Accepted Answer

The CFO is granted 800 share options with an exercise price of $35, with the possibility of the exercise price dropping to $30 if Pearl's earnings increase by an average of 8% per year over the three-year period.

On 1 July 2013, the estimated fair value of the share options with an exercise price of $35 is $10 per option, and if the exercise price is $30, the estimated fair value of the options is $12 per option.

Therefore, the fair value of the share option at grant date, using the Black-Scholes model, is:

For the $35 exercise price option: 
Fair value = $10 
Number of options = 800 
Total fair value = $8,000

For the $30 exercise price option: 
Fair value = $12 
Number of options = 800 
Total fair value = $9,600

During the year ended 30 June 2014, Pearl's earnings increased by 10%, which is higher than the required 8% for the exercise price to drop to $30. Therefore, the exercise price of the share option is adjusted to $30.

The remuneration expense to be recognised for the year ended 30 June 2014 is calculated as follows:

Total fair value of options = ($9,600 - $8,000) x (10/12) = $800

Therefore, the answer is B - $3200, which is the total remuneration expense over the three-year period.

Question 2

In situations where an option-pricing model is required to be used to determine the fair value of equity instruments granted AASB 2 Share-based Payment:
A) requires expected dividends to be taken into account when measuring the shares or options granted.
B) allows the entity to choose the option-pricing model it wishes to use, but contains a number of factors that the option-pricing model selected must take into account as a minimum.
C) requires the use of a binominal option-pricing model.
D) requires the use of the Black-Scholes-Merton formula.

Accepted Answer

AASB 2 Share-based Payment allows the entity to choose the option-pricing model it wishes to use, but contains a number of factors that the option-pricing model selected must take into account as a minimum.

Question 3

In relation to equity instruments granted by an entity where the entity makes modifications to the terms and conditions attaching to the grant:
A) the incremental fair value is measured as the difference between the fair value of the modified instrument, estimated at the date of modification and that of the original equity instrument, estimated at the date of original granting.
B) if the modification occurs during the vesting period the incremental fair value is recognised immediately.
C) terms or conditions may not be modified in a manner that is not beneficial to the employee.
D) where the exercise price of options is modified, the fair value of the options changes.

Accepted Answer

The answer of In relation to equity instruments granted by...

Question 4

On 1 July 2013, Nelson Pty Ltd granted 250 options to each of its 50 employees. The options are conditional on the employees remaining with the company for the 3 year vesting period. The options have a fair value of $7.50 at vesting date. In addition, the shares will vest as follows:
•	On 30 June 2014 if the company’s earnings have increased by more than 12%
•	On 30 June 2015 if the company’s earnings have increased by more than 10% averaged across the 2 year period
•	On 30 June 2016 if the company’s earnings have increased by more than 8% averaged across the 3 year period

At 30 June 2014 Nelson's earnings have increased by 11% and 3 employees have left.
The company expects that earnings will continue to increase at a similar rate during the year to 30 June 2015 and that the shares will vest at that time. It also expects that a further 4 employees will leave during the year.
The remuneration expense for the year ended 30 June 2014 for Nelson is:
A) $26 875.00
B) $29 375.00
C) $40 312.50
D) $88 125.00

Accepted Answer

The answer of On 1 July 2013, Nelson Pty Ltd...

Question 5

A share-based payment transaction in which the entity receives goods or services as consideration for equity instruments of the entity is classified in AASB 2 Share-based Payment as
A) an equity-settled share-based payment transaction
B) a cash-settled share-based payment transaction
C) a liability-settled share-based payment transaction
D) an "other" share-based payment transaction

Accepted Answer

In an equity-settled share-based payment transaction, the entity receives goods or services as consideration for equity instruments of the entity. The goods or services are considered to have been acquired in exchange for equity instruments, and the fair value of the equity instruments granted is recognized as an expense. This is in contrast to a cash-settled share-based payment, in which the entity settles the obligation by paying cash or other assets to the counterparty.

Question 6

On 1 July 2013 Pearl Pty Ltd granted 800 share options with an exercise price of $35 to the CFO, conditional on the CFO remaining in employment with the company until 30 June 2016. The fair value of Pearl's shares at that time were assessed to be $40. The exercise price will drop to $30 if Pearl's earnings increase by an average of 8% per year over the three year period. On 1 July 2013 the estimated fair value of the share options with an exercise price of $35 is $10 per option, and if the exercise price is $30, the estimated fair value of the options is $12 per option.
During the year ended 30 June 2014 Pearl's earnings increased by 10% and they are expected to continue to increase at this rate over the next two years.
During the year ended 30 June 2015 Pearl's earnings increased by 9% and Pearl management continued to expect that the earnings target would be achieved.
During the year ended 30 June 2016 Pearl's earnings increased by only 2%. At 30 June 2016 the share price is $23.
Assuming that the CFO decides NOT to exercise his options at 30 June 2016, the following entry would be recorded:
A) DR $\quad$Wages expense 
 CR$\quad$Options issued (equity)
B)DR$\quad$ Options issued (equity)
CR$\quad$ Lapsed options reserve
C) DR$\quad$ Options issued (equity) 
CR$\quad$ Retained earnings
D) DR $\quad$Options issued (equity)
CR $\quad$Wages expense

Accepted Answer

The answer of On 1 July 2013 Pearl Pty Ltd...

Question 7

Which of the following statements in relation to disclosures required under AASB 2 Share-based Payment is not correct?
A) Option pricing models used in valuing share options must be identified.
B) The number and weighted average exercise price of share options outstanding at the beginning and end of each period must be disclosed.
C) Information about share-based payment arrangements that are substantially the same may be aggregated.
D) The total expense arising from share-based payment transactions in which the services qualified for recognition as an asset must be disclosed.

Accepted Answer

The incorrect statement is D because AASB 2 requires disclosure of the total expense arising from share-based payment transactions, but it does not specifically require that the expense related to transactions where services qualified for recognition as an asset be disclosed separately. The standard focuses on the overall expense recognized in relation to share-based payments.

Question 8

Salt Limited grants 1000 share options to each of its 100 employees. Each grant is conditional on the employee working for the company for the next two years. The fair value of each option is estimated to be $5.00 at grant date and $7.50 at vesting date.
The amount to be recognised as an expense by Salt in year 2 is:
A) $250 000
B) $375 000
C) $500 000
D) $750 000

Accepted Answer

Each employee has been granted 1000 share options, so the total number of share options granted is 100,000 (100 employees x 1000 share options each). The fair value of each option is estimated to be €5.00 at grant date and €7.50 at vesting date. This means that each share option has an intrinsic value of €2.50 (€7.50 - €5.00).

In year 1, no expense is recognised, as the options have not yet vested.

In year 2, the options have vested, and an expense must be recognised. The expense to be recognised is the fair value of the options at vesting date, less any consideration paid by the employees. As no consideration is paid by the employees in this case, the expense to be recognised is the fair value of the options at vesting date.

The fair value of the options at vesting date is €7.50 per option, which gives a total expense of €750,000 (100,000 options x €2.50 intrinsic value per option). However, only half of the options were vested in year 2, so the expense to be recognised in year 2 is €375,000 (€750,000 / 2).

Question 9

On 1 July 2013 Poggio Ltd grants 300 options to each of its 100 employees conditional on the employee remaining in service over the next three years. The fair value of each option is estimated to be $12. Poggio estimates that 15 employees will leave over the three year vesting period.
By 30 June 2014 four employees have left and the entity estimates that a further ten employees will leave over the next two years.
On 30 June 2014 Poggio decided to reprice its share options, due to a fall in its share price over the last 12 months. The repriced share options will vest on 30 June 2016. At the date of repricing Poggio estimates that the fair value of each original option is $3 and the fair value of each repriced option is $5.
During the year ended 30 June 2015 a further 6 employees leave and Poggio estimates that another 3 employees will leave during the year ended 30 June 2016.
During the year ended 30 June 2016 four employees left.
The entry at 30 June 2015 to account for the share based payment transaction is:
A) 
DR$\quad$ Wages expense 
CR$\quad$ Liability to employee
B)

DR $\quad$Wages expense 
CR$\quad$ Options issued (equity)
C) 
DR $\quad$Wages expense 
CR $\quad$Share capital
D)
DR $\quad$Wages expense 
CR$\quad$ Cash

Accepted Answer

The answer of On 1 July 2013 Poggio Ltd grants...

Question 10

Pepper Limited grants 500 share options to each of its 30 employees. Each grant is conditional on the employee working for the company for the next three years. The fair value of each option is estimated to be $5.00 at grant date and $7.50 at vesting date.
The amount to be recognised as an expense by Pepper in year 2 is:
A) $25 000
B) $37 500
C) $50 000
D) $75 000

Accepted Answer

The answer of Pepper Limited grants 500 share options to...

Quiz 9: Share-Based Payments

In situations where an option-pricing model is required to be used to determine the fair value of equity instruments granted AASB 2 Share-based Payment:

In relation to equity instruments granted by an entity where the entity makes modifications to the terms and conditions attaching to the grant:

A share-based payment transaction in which the entity receives goods or services as consideration for equity instruments of the entity is classified in AASB 2 Share-based Payment as

Which of the following statements in relation to disclosures required under AASB 2 Share-based Payment is not correct?