AC2101: Staff cost must be adjusted during the service period to reflect changes in the fair value of options caused by changes in the market price of the underlying shares: Accounting Recognition & Measurement, NTU, Singapore

PART I

Explain clearly with sumfortinp reasons why each of the following statements is TRUE or FALSE.

(I) Staff cost must be adjusted during the service period to reflect changes in the fair value of options caused by changes in the market price of the underlying shares.

(2) The fair value of share appreciation rights (SAR) settled in cash is estimated at the date of grant and expensed over the service period for which the compensation is provided.

(3) If a grant of equity instruments is cancelled by the issuing entity during the vesting period, the entity shall continue to recognise the expense over the remainder of the vesting period.

(4) If an employee is granted share options conditional upon the achievement of a performance condition and remaining in the entity’s employ until that performance condition is satisfied, and the length of the vesting period varies depending on when that performance condition is satisfied, the entity shall presume that the services to be rendered by the employee as consideration for the share options will be received in the figure, over the expected vesting period, which should be estimated on the grant date based on the most likely outcome of the performance condition.

PART II

Watch out Ltd (“Watchout”) is a Singapore-listed company specializing in the distribution of watches designed based on popular movies and TV series. Its financial year-end is 31 December and Watchout prepares its financial statements in accordance with Singapore Financial Reporting Standards (International). To provide incentives to its 20 sales managers, Watchout set up an employee remuneration scheme. All sales managers joined the remuneration scheme.

• The scheme granted each sales manager 2,000 options on 1 January 2017.

Each vested option allowed a sales manager to purchase one share in the company. The exercise price payable by a manager for the exercise of each option was $2.

The scheme required a sales manager to stay with Watchout from 1 January 2017 to 31 December 2019 in order for the options to vest.

On 1 January 2017, Watchout expected two managers to leave each year between 2017 and 2019. In 2017, one sales manager left and Watchout continued to expect two sales managers to leave in 2018 and also in 2019.

In 2018, another sales manager left and Watchout expected two sales managers to leave in 2019. Three sales managers left in 2019. The remaining sales managers could exercise their vested options on or before 30 June 2021. Eight sales managers exercised all of their vested options on 1 August 2020. Watch out transferred its share-based payment reserve to retained earnings after the sales managers had exercised their options.

To facilitate the implementation of the scheme, Watchout purchased 12,000 of its shares on 15 January 2017, 10,000 of its shares on 30 June 2017 and 10,000 of its shares on 15 August 2017. Watch out intended to transfer treasury shares to its sales managers under the scheme in order to take advantage of the tax deduction allowed.

This tax deduction is the difference between the cost to acquire the shares issued to the employees and the amount paid by the employees under the scheme. The tax deduction will be allowed upon exercise of the options by employees.

The statutory tax rate is 20% throughout all years. It was probable that Watch out would generate sufficient taxable profits for the utilization of any deferred tax assets. Watch out adopts the “first-in-first-out” method for determining the cost of treasury shares and also for tax deduction purposes.
Additional information for Watchout is as follows:

Required

(a) Prepare the necessary journal entries for Watchout in years 2017, 2018, and 2019 to account for the transactions related to the employee remuneration scheme. Round dollar values to the nearest dollar. State clearly the dates of journal entries.

(b) Prepare the necessary journal entries for Watchout in the year 2020 to account for the transactions related to the employee remuneration scheme. Round dollar values to the nearest dollar. State clearly the dates of journal entries.

(c) “The fair value of an employee share option is, at times, based on a theoretical valuation model that may introduce measurement errors and judgment. Expensing these share options will then incorporate an unreliable measure of cost into a company’s earnings.”

Discuss briefly whether you agree with the above statement and its implications.

PART Ill

In equity-settled share-based payment transactions, the vesting conditions comprise service and performance conditions.

(a) If the service condition is not met after the grant date and during the vesting period, the accounting treatment is forfeiture.

(b) If the performance condition is not met after the grant date and during the vesting period, the accounting treatment is either forfeiture or no change to the accounting.

Required

Based on the relevant SFRS(I)s, discuss the possible reasons for the difference in accounting treatments listed above.

PART IV

Mr Edward Tay is an employee of Golden Lion Ltd, a Singapore garment trading company. Management of Golden Lion Ltd decided to terminate Mr Tay’s employment contract on 31 December 20×6. The following tablesets out key terms of Mr Tay’s employment and profile:

Age 40
Commencement date 2 January 20x 1
Basic salary
Annual paid leave
CPF Scheme

$8,000 per month. Paid on the last day of each month. 12 months per year. 10 working days per year. A maximum of 5 days untaken annual leave can be carried forward for one calendar year only. Paid leave is first taken out of the balance brought forward from the previous year and then out of the current year’s entitlement (a FIFO basis).

15 days untaken annual leave as at 31 December 20×6, out of which 5 days carried forward from 20×5 and 10 days entitlement from 20×6.

Monthly contribution of 17% and 20% of monthly salary (subject to a salary ceiling of $6,000) to be made by the employer and employee respectively.

Long-service payment

According to the standard employment contract between Golden Lion Ltd and its employees, Golden Lion Ltd would make a long service payment (“LSP”) to employees who have been employed for not less than 5 years before they are dismissed. The long-service payment is determined by multiplying the number of years of service by two-thirds of the last full month of salary (cap at $4,000).

Required:

By drawing reference from the relevant SFRS(I)s, for each of the items mentioned above:

(a) identify and discuss the accounting treatment of employee benefits in relation to Mr Tay’s employment.

(b) Calculate the amount of employee benefits in relation to Mr Tay’s employment that Golden Lion Ltd should recognize as an expense in its financial statements for the year ended 31 December 20×6.