FAIR VALUE MEASUREMENT - Adverse Selection & Moral Hazard ...
FAIR VALUE MEASUREMENT - Adverse Selection & Moral Hazard - Qualitative Characteristics: fundamental & enhancing - Measurement: attribute & phenomenon - Definition of FV Measurement - Framework for measuring FV - Principal & most advantageous market - FV – adjust for transaction cost but not transportation costs - Valuation techniques: market, cost, income approach - Valuation inputs: level 1, 2 & 3 - Hick’s definition of economic income - Income measurement under ideal conditions with certainty: future cash flows & interest rate known publicly with certainty - Implications of SFP reflecting 100% of entity’s market value: completely relevant, faithfully represented, simplified reporting, no judgment required - B/S sufficient to determine economic profit - Trade-off between good P/L & B/S - Computing economic depreciation, economic income Income statement, PV firm end – PV firm start, discount rate*PV(net assets @ start) - Amortization schedule - Other comprehensive income, reclassification adjustment - Financial capital maintenance in nominal dollars - Current asset definition - Proposed new asset definition LEASE ACCOUNTING - Recognition principle of Finance Lease - BPO, BRO, Lease term, MLP, ALP - Residual Value from Lessor/Lessee point of view - Discount rate to use: lessor’s unless implicit in the lease arrangement - Initial Direct Cost – amortised over lease term - Finance-lease classification: 5 criteria & 3 indicators - Initial Direct Cost & Depreciation in Finance Lease by lessee - Underlying principle in FRS17 (ownership) VS Conceptual Framework (control) - FRS17:36 – lessor to record lease receivable as net investment, in practice it is recorded at gross & I recorded separately - Lessor use higher of estimated RV & GRV in computing ALP - IP criteria for Finance Lease: earn rental + use FV model - Lessor’s Business Model: direct financing VS retailing & financing -
Sale-Type lease (Lessor): Gross Profit & Interest Income Artificially low interest-rate: adjust gross profit discounted by normal market interest rate
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Sale & Leaseback (Lessee): accounting treatment for operating & finance lease Why lessee undergo S&LB transaction
FINANCIAL ASSETS - What is a Financial Asset & its classifications - FVTPL: 3 types, selling in near term, evidence of short-term profit-taking, mark-tomarket - What is a derivative instrument - Embedded derivatives: separately recognize if conditions fulfilled, holder of FA to FV derivative portion & residual goes to host contract - HTM: intention & ability to hold to maturity, assessment to be done at initial recognition & each subsequent B/S date, amortised costs - Tainting rule for HTM: 2 circumstances & consequences, exceptions - AFS: residual category, mark-to-market (reserve) - HFT Bonds - HTM Bonds - AFS Bonds: amortization schedule don’t change bond balance to FV, otherwise table will never come close, but use FV and amortised cost to find mark-to-market changes - Accrued coupon payments/receivables - Impairment test: at each reporting date for all FA except FVTPL - Reversal of IL for AFS instrument: allowed for debt but not equity instrument, excess of reversal (if any) goes to FVR - Reversal of IL for HTM instrument: allowed but cannot exceed amount that would have been with the impairment i.e. capped at CA - Reversal of IL for L&R instrument: not allowed to be reversed -
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Impairment & Reversal of IL on AFS bonds – use quoted price (FV) to determine new EIR, or use market interest rate as new EIR and compute new CA to find impairment (interest rate is revised) Impairment & Reversal of IL on HTM Bonds – use terms of impaired bond to come up with new CA using original EIR Reversal of impairment loss: AFS equity/debt, L&R/HTM @ amortised costs, FA @ cost De-recognition of FA New IFRS 9 FA Classification of debt instruments (based on business model): amortised cost, FVTOCI, otherwise FVTPL New IFRS 9 FA Classification of equity instruments: FVTPL or FVTOCI (election made, no impairment & subsequent recycling upon de-recognition)
FINANCIAL LIABILITIES - 2 categories: FVTPL (HFT, designated) & Others (FV adjusted for transaction cost, amortised cost @ EIR) - De-recognition of FL when it is extinguished - Recognize at Fair Value - Substantial change in terms of FL (>=10%), extinguishment of current FL and recognition of new FL at FV (for FL @ amortised costs), difference in CA goes to P/L - No substantial change in terms of FL ( taxable income = deferred Tax Liability - Adjusted accounting profit < taxable income = deferred Tax Asset - Income Statement Deferral Approach - DTL/DTA cumulative account - Reason for Deferred Tax: accrual accounting & matching principle - Permanent Difference = different definitions of revenue & expenses between accounting standards & tax rules - Temporary Difference = difference between CA & TB of an asset/liability (timing difference!) - TB of Asset (FRS12:7) – amount deductible for tax purposes against taxable economic benefits that will flow to an entity when it recovers the asset’s CA // economic benefits not taxable, TB deemed equal to CA - TB of Liability (FRS12:8) – CA less any amount deductible for tax purposes WRT that liability in future periods // revenue received in advance, TB = CA less any amount of revenue that will not be taxable in future periods CA > TB Taxable TD DTL Increases future taxable profit when CA of asset is recovered/settled CA < TB Deductible TD DTA Decreases future taxable profit when CA of asset is ASSET recovered/settled provided it is probably that future taxable profit will be available for utilization of DTD (FRS12:5b) CA > TB Deductible TD DTA Decreases future taxable profit when CA of liability is recovered/settled provided it is probably that future taxable profit LIABILITY will be available for utilization of DTD (FRS12:5b) CA < TB Taxable TD DTL Increases future taxable profit when CA of liability is recovered/settled -
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1st Principle: DTA/DTL exist if recovery of an asset/settlement of a liability in the future period will make future tax payments larger/smaller than they would if the recovery were to have no tax consequence 2nd Principle: effects of DT are dealt with according to the underlying transaction/events Similarity/Differences between Income Statement Deferral Approach & Balance Sheet Liability Approach DTA/DTL strictly not assets nor liabilities, contingent assets or liabilities recognized under FRS12, not FRS34 Sources of TD from B/S items – PPE, Investments, Accrued Expenses/Warranty Provisions, Unearned Revenue Non-B/S item resulting in TD – R&D Expense, ESO Change in accounting policy/correction of error – retrospective method under FRS8 (cumulative effect, adjust against BRE) Loss Carry Forward/Carry-Back Unrecognized DTA – reassessed at each reporting date for probable recovery
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Considerations of whether future taxable profit is probable: sufficient taxable TD, taxable profit probably before C/F expire, identifiable causes of tax losses unlikely to recur, tax planning opportunities exist for creating taxable profit 3 scenarios: future taxable profit not probable (recognize in year of realization), future taxable profit probable (recognize in year of loss), sufficient taxable TD (recognize to extent of TTD) FRS12:35 – existence of unused tax loss = strong evidence that future taxable profits may not be available Measurement of DTA – reviewed at each reporting period for probably recovery, not discounted Current tax – based on current tax rate enacted/substantively enacted by end of reporting period Deferred tax – future tax rate enacted/substantively enacted by end of reporting period FRS12:51 – measurement of DTA/DTL shall reflect tax consequences that would follow from the manner in which the entity expects at the end of the reporting period, to recover or settle the CA of its assets/liabilities FRS12:51B – DTA of freehold land shall be recovered through sale (not use) FRS12:51C – DTA of leasehold land, freehold/leasehold building has a rebuttable presumption that they shall be recovered through sale (if rebutted, then reflect the recovery through use) Tax Liability & Tax Asset may be set off if: legal right to do so + intention to settle on a net basis/simultaneously Disclosure: unrecognized DTA relating to DTD, tax losses & credits + reconciliation of tax expense to accounting profit (in $/%) includes the following: PD, unrecognized tax losses, utilization/recognition of previously unrecognized tax losses, changes in tax rate over time Analytical Check: Total tax expense = [Current tax rate*(Accounting profit adjusted for permanent differences)]+[Current tax rate*Unrecognised tax losses in the year of origination]-[Current tax rate*Utilization/recognition of previously unrecognized tax losses in the year of utilization/recognition]+/- [Adjustments to applicable temporary differences due to change in tax rate] Impairment of AFS Shares: need to transfer out DTA from FVR to P/L under 2nd principle
REVENUE - Sale of goods, rendering of services, use by other entity assets yielding interest, royalties & dividends - Gross inflow of economic benefits - Timing of recording revenues affects matching principle - “Earned” – entity has substantially accomplish what it must do to be entitled the benefit represented by the revenue i.e. earnings process is complete/substantially complete, remaining act yet to be done is insignificant - “Realised” – cash/claims to cash - “Realisable” – assets received in exchange readily convertible to cash -
FRS18: 5 conditions for sale of goods “Transfer of significant risks & rewards of ownership” “Probable economic benefits can be measured reliably” “Costs incurred or to be incurred can be measured reliably” liability?
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Rendering of services – Percentage of Completion method (FRS18:20) 4 conditions for rendering of services Stage of completion method (FRS18:24) – survey of works performed; services performed to date as a percentage of total services to be performed; proportion that costs incurred to date bear to the estimated total cost of the transaction Outcome of transaction cannot be estimated – recognise revenue to extent that expenses recognised are recoverable i.e. no profits Issue of separate earnings stream?
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Interest – time proportion basis, based on EIR method Royalty – accrual basis in accordance with the substance of the relevant agreement Dividends – right to receive payment is established
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Revenue measurement – FV of consideration received or receivable Deferred inflow compute present value In exchange for dissimilar goods or services – regarded as transaction that generates revenue, revenue measured at FV of goods or services received, otherwise FV of goods or services given up if the former cannot be measured reliably Principal-agent issue: recognise gross or net revenue GST Credit card sales: credit card expenses/credit card discount
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INT FRS 113 – Scope of customer loyalty award credits: entity grants customers as part of sales transaction; and can redeem in future for free/discounted goods &/or services Split full sale value received from initial sales transaction; defer some of the revenue to be recognized as & when the entity provides the free/discounted goods and/or services By reference to their FV using residual method (FV awards portion), or relative fair value method Principal: has exposure to significant risks & rewards associated with the sale of goods/rendering of services, otherwise agent New revenue standard core principle: transfer of promised goods or services to customers in an amount that reflects the consideration which the entity expects to be entitled in exchange for those goods & services
CONSTRUCTION CONTRACTS - Fixed price contract: percentage of completion method IF outcome can be measured reliably Total contract revenue can be measured reliably Probable inflow of economic benefits Costs to complete & stage of completion can be measured reliably Costs attributable to construction can be clearly identified & reliably measured - Cost plus contract: percentage of completion method IF outcome can be measured reliably Probably inflow of economic benefits Costs attributable to construction can be clearly identified & reliably measured - Construction contract costs Costs that relate directly to the specific contract Costs attributable to contract activity in general & can be allocated to contract Such other costs that are specifically chargeable under contract terms - 3 possible scenarios a) Outcome can be reliably estimated, current estimates indicate overall net profit recognize revenue progressively based on stage of completion b) Outcome can be reliably estimated, current estimates indicate overall net loss entire loss is to be recognized immediately c) Outcome cannot be estimated reliably recognize revenue to extent of cost incurred - Construction-in-Progress: all construction costs incurred + progressive gross profit or total net loss recognized on project to-date (“mark-to-market”) - Progress billing: contra-asset account - CIP > PB = under-billing, CIP < PB = overbilling - If outcome cannot be reliably estimated & it is not probable that incurred costs can be recovered = use Completed Contract Method - Total profit to be recognized is lesser than total profit recognized to-date: adjust under FRS 8 as change in accounting estimates - Unused construction materials excluded from costs incurred to-date, included in costs to be incurred to compute completion stage based on costs - Deferred Tax: CIP attracts DTL (tax on profits of construction project when completed) - Operating lease of equipment in construction projects: capitalize rental expense to CIP - Finance lease of equipment in construction projects: capitalize interest expense & depreciation to CIP BORROWING COSTS - Interest & other costs incurred in connection with borrowing of funds, exclude cost of equity capital & other internal funds - Calculated using EIRM - Incurred directly in respect of acquisition, construction or production of a qualifying asset should be capitalized as part of cost of that asset, otherwise expense off - Qualifying asset = asset that necessarily takes a substantial period of time to get ready for its intended use or sale (inventories, manufacturing plants, power generation facilities, intangible assets, investment properties, construction projects)
EXPENSES - Definition, matching principle - Expense recognition method & treatments (order of consideration) SHARE-BASED PAYMENTS - ESO: right to purchase a specific number of shares of the firm in future, at specific price over a specified period of time - Grant/measurement date, vesting period, vesting date, exercise period, expiration date - Vesting conditions: conditions that determine whether entity receives services that entitle counterparty to receive cash, other assets or equity instruments of the entity under a SBPT Service condition Service + Performance condition - market & non-market - Non-vesting conditions: conditions other than vesting conditions - Intrinsic value & time-value of ESO (slide 26) -
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Equity-Settled share-based payment transaction 1. With parties other than employees, measure based on FV of goods/services received 2. With parties other than employees, measure based on FV of equity if FV of goods & services cannot be measured reliably 3. With employees, measure based on FV of equity instruments granted on grant/measurement date (difficult to measure FV of services rendered!) On grant/measurement date, FV of equity instrument takes into account market conditions & non-vesting conditions Non-market conditions & service conditions are taken into account by adjusting the number of equity instruments to be vested (accounting estimates) Upon exercise of ESO, optional to reclassify SBPR to General Reserve ESO granted by issuing new shares no DT (not deductible) ESO granted using treasury shares DT (deductible on net cost incurred in acquiring shares) [(share price on exercise date – strike price) x number of options expected to be vested x ratio of years to be vested]
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Cash-settled share-based payment transaction Measured based on FV of liability, which are based on the price or value of equity instruments & re-measure at each reporting date (recognise changes in P&L) Cancellation (entity/counterparty chooses not to meet the non-vesting condition) – accounted for as acceleration of vesting, recognise expense immediately Payment made to employees should be accounted for as a share buyback transaction If payment exceed FV of equity instrument granted, recognise excess as expense
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Why do firms offer ESOP to their employees? Does ESO pose any risk to employees?
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Group SBPT: obligation to settle? Using what form of settlement?
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Employee benefits: all forms of consideration given by an entity in exchange for service rendered by employees, or for the termination of employment
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Sale-Type lease (Lessor): Gross Profit & Interest Income Artificially low interest-rate: adjust gross profit discounted by normal market interest rate
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Sale & Leaseback (Lessee): accounting treatment for operating & finance lease Why lessee undergo S&LB transaction
FINANCIAL ASSETS - What is a Financial Asset & its classifications - FVTPL: 3 types, selling in near term, evidence of short-term profit-taking, mark-tomarket - What is a derivative instrument - Embedded derivatives: separately recognize if conditions fulfilled, holder of FA to FV derivative portion & residual goes to host contract - HTM: intention & ability to hold to maturity, assessment to be done at initial recognition & each subsequent B/S date, amortised costs - Tainting rule for HTM: 2 circumstances & consequences, exceptions - AFS: residual category, mark-to-market (reserve) - HFT Bonds - HTM Bonds - AFS Bonds: amortization schedule don’t change bond balance to FV, otherwise table will never come close, but use FV and amortised cost to find mark-to-market changes - Accrued coupon payments/receivables - Impairment test: at each reporting date for all FA except FVTPL - Reversal of IL for AFS instrument: allowed for debt but not equity instrument, excess of reversal (if any) goes to FVR - Reversal of IL for HTM instrument: allowed but cannot exceed amount that would have been with the impairment i.e. capped at CA - Reversal of IL for L&R instrument: not allowed to be reversed -
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Impairment & Reversal of IL on AFS bonds – use quoted price (FV) to determine new EIR, or use market interest rate as new EIR and compute new CA to find impairment (interest rate is revised) Impairment & Reversal of IL on HTM Bonds – use terms of impaired bond to come up with new CA using original EIR Reversal of impairment loss: AFS equity/debt, L&R/HTM @ amortised costs, FA @ cost De-recognition of FA New IFRS 9 FA Classification of debt instruments (based on business model): amortised cost, FVTOCI, otherwise FVTPL New IFRS 9 FA Classification of equity instruments: FVTPL or FVTOCI (election made, no impairment & subsequent recycling upon de-recognition)
FINANCIAL LIABILITIES - 2 categories: FVTPL (HFT, designated) & Others (FV adjusted for transaction cost, amortised cost @ EIR) - De-recognition of FL when it is extinguished - Recognize at Fair Value - Substantial change in terms of FL (>=10%), extinguishment of current FL and recognition of new FL at FV (for FL @ amortised costs), difference in CA goes to P/L - No substantial change in terms of FL ( taxable income = deferred Tax Liability - Adjusted accounting profit < taxable income = deferred Tax Asset - Income Statement Deferral Approach - DTL/DTA cumulative account - Reason for Deferred Tax: accrual accounting & matching principle - Permanent Difference = different definitions of revenue & expenses between accounting standards & tax rules - Temporary Difference = difference between CA & TB of an asset/liability (timing difference!) - TB of Asset (FRS12:7) – amount deductible for tax purposes against taxable economic benefits that will flow to an entity when it recovers the asset’s CA // economic benefits not taxable, TB deemed equal to CA - TB of Liability (FRS12:8) – CA less any amount deductible for tax purposes WRT that liability in future periods // revenue received in advance, TB = CA less any amount of revenue that will not be taxable in future periods CA > TB Taxable TD DTL Increases future taxable profit when CA of asset is recovered/settled CA < TB Deductible TD DTA Decreases future taxable profit when CA of asset is ASSET recovered/settled provided it is probably that future taxable profit will be available for utilization of DTD (FRS12:5b) CA > TB Deductible TD DTA Decreases future taxable profit when CA of liability is recovered/settled provided it is probably that future taxable profit LIABILITY will be available for utilization of DTD (FRS12:5b) CA < TB Taxable TD DTL Increases future taxable profit when CA of liability is recovered/settled -
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1st Principle: DTA/DTL exist if recovery of an asset/settlement of a liability in the future period will make future tax payments larger/smaller than they would if the recovery were to have no tax consequence 2nd Principle: effects of DT are dealt with according to the underlying transaction/events Similarity/Differences between Income Statement Deferral Approach & Balance Sheet Liability Approach DTA/DTL strictly not assets nor liabilities, contingent assets or liabilities recognized under FRS12, not FRS34 Sources of TD from B/S items – PPE, Investments, Accrued Expenses/Warranty Provisions, Unearned Revenue Non-B/S item resulting in TD – R&D Expense, ESO Change in accounting policy/correction of error – retrospective method under FRS8 (cumulative effect, adjust against BRE) Loss Carry Forward/Carry-Back Unrecognized DTA – reassessed at each reporting date for probable recovery
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Considerations of whether future taxable profit is probable: sufficient taxable TD, taxable profit probably before C/F expire, identifiable causes of tax losses unlikely to recur, tax planning opportunities exist for creating taxable profit 3 scenarios: future taxable profit not probable (recognize in year of realization), future taxable profit probable (recognize in year of loss), sufficient taxable TD (recognize to extent of TTD) FRS12:35 – existence of unused tax loss = strong evidence that future taxable profits may not be available Measurement of DTA – reviewed at each reporting period for probably recovery, not discounted Current tax – based on current tax rate enacted/substantively enacted by end of reporting period Deferred tax – future tax rate enacted/substantively enacted by end of reporting period FRS12:51 – measurement of DTA/DTL shall reflect tax consequences that would follow from the manner in which the entity expects at the end of the reporting period, to recover or settle the CA of its assets/liabilities FRS12:51B – DTA of freehold land shall be recovered through sale (not use) FRS12:51C – DTA of leasehold land, freehold/leasehold building has a rebuttable presumption that they shall be recovered through sale (if rebutted, then reflect the recovery through use) Tax Liability & Tax Asset may be set off if: legal right to do so + intention to settle on a net basis/simultaneously Disclosure: unrecognized DTA relating to DTD, tax losses & credits + reconciliation of tax expense to accounting profit (in $/%) includes the following: PD, unrecognized tax losses, utilization/recognition of previously unrecognized tax losses, changes in tax rate over time Analytical Check: Total tax expense = [Current tax rate*(Accounting profit adjusted for permanent differences)]+[Current tax rate*Unrecognised tax losses in the year of origination]-[Current tax rate*Utilization/recognition of previously unrecognized tax losses in the year of utilization/recognition]+/- [Adjustments to applicable temporary differences due to change in tax rate] Impairment of AFS Shares: need to transfer out DTA from FVR to P/L under 2nd principle
REVENUE - Sale of goods, rendering of services, use by other entity assets yielding interest, royalties & dividends - Gross inflow of economic benefits - Timing of recording revenues affects matching principle - “Earned” – entity has substantially accomplish what it must do to be entitled the benefit represented by the revenue i.e. earnings process is complete/substantially complete, remaining act yet to be done is insignificant - “Realised” – cash/claims to cash - “Realisable” – assets received in exchange readily convertible to cash -
FRS18: 5 conditions for sale of goods “Transfer of significant risks & rewards of ownership” “Probable economic benefits can be measured reliably” “Costs incurred or to be incurred can be measured reliably” liability?
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Rendering of services – Percentage of Completion method (FRS18:20) 4 conditions for rendering of services Stage of completion method (FRS18:24) – survey of works performed; services performed to date as a percentage of total services to be performed; proportion that costs incurred to date bear to the estimated total cost of the transaction Outcome of transaction cannot be estimated – recognise revenue to extent that expenses recognised are recoverable i.e. no profits Issue of separate earnings stream?
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Interest – time proportion basis, based on EIR method Royalty – accrual basis in accordance with the substance of the relevant agreement Dividends – right to receive payment is established
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Revenue measurement – FV of consideration received or receivable Deferred inflow compute present value In exchange for dissimilar goods or services – regarded as transaction that generates revenue, revenue measured at FV of goods or services received, otherwise FV of goods or services given up if the former cannot be measured reliably Principal-agent issue: recognise gross or net revenue GST Credit card sales: credit card expenses/credit card discount
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INT FRS 113 – Scope of customer loyalty award credits: entity grants customers as part of sales transaction; and can redeem in future for free/discounted goods &/or services Split full sale value received from initial sales transaction; defer some of the revenue to be recognized as & when the entity provides the free/discounted goods and/or services By reference to their FV using residual method (FV awards portion), or relative fair value method Principal: has exposure to significant risks & rewards associated with the sale of goods/rendering of services, otherwise agent New revenue standard core principle: transfer of promised goods or services to customers in an amount that reflects the consideration which the entity expects to be entitled in exchange for those goods & services
CONSTRUCTION CONTRACTS - Fixed price contract: percentage of completion method IF outcome can be measured reliably Total contract revenue can be measured reliably Probable inflow of economic benefits Costs to complete & stage of completion can be measured reliably Costs attributable to construction can be clearly identified & reliably measured - Cost plus contract: percentage of completion method IF outcome can be measured reliably Probably inflow of economic benefits Costs attributable to construction can be clearly identified & reliably measured - Construction contract costs Costs that relate directly to the specific contract Costs attributable to contract activity in general & can be allocated to contract Such other costs that are specifically chargeable under contract terms - 3 possible scenarios a) Outcome can be reliably estimated, current estimates indicate overall net profit recognize revenue progressively based on stage of completion b) Outcome can be reliably estimated, current estimates indicate overall net loss entire loss is to be recognized immediately c) Outcome cannot be estimated reliably recognize revenue to extent of cost incurred - Construction-in-Progress: all construction costs incurred + progressive gross profit or total net loss recognized on project to-date (“mark-to-market”) - Progress billing: contra-asset account - CIP > PB = under-billing, CIP < PB = overbilling - If outcome cannot be reliably estimated & it is not probable that incurred costs can be recovered = use Completed Contract Method - Total profit to be recognized is lesser than total profit recognized to-date: adjust under FRS 8 as change in accounting estimates - Unused construction materials excluded from costs incurred to-date, included in costs to be incurred to compute completion stage based on costs - Deferred Tax: CIP attracts DTL (tax on profits of construction project when completed) - Operating lease of equipment in construction projects: capitalize rental expense to CIP - Finance lease of equipment in construction projects: capitalize interest expense & depreciation to CIP BORROWING COSTS - Interest & other costs incurred in connection with borrowing of funds, exclude cost of equity capital & other internal funds - Calculated using EIRM - Incurred directly in respect of acquisition, construction or production of a qualifying asset should be capitalized as part of cost of that asset, otherwise expense off - Qualifying asset = asset that necessarily takes a substantial period of time to get ready for its intended use or sale (inventories, manufacturing plants, power generation facilities, intangible assets, investment properties, construction projects)
EXPENSES - Definition, matching principle - Expense recognition method & treatments (order of consideration) SHARE-BASED PAYMENTS - ESO: right to purchase a specific number of shares of the firm in future, at specific price over a specified period of time - Grant/measurement date, vesting period, vesting date, exercise period, expiration date - Vesting conditions: conditions that determine whether entity receives services that entitle counterparty to receive cash, other assets or equity instruments of the entity under a SBPT Service condition Service + Performance condition - market & non-market - Non-vesting conditions: conditions other than vesting conditions - Intrinsic value & time-value of ESO (slide 26) -
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Equity-Settled share-based payment transaction 1. With parties other than employees, measure based on FV of goods/services received 2. With parties other than employees, measure based on FV of equity if FV of goods & services cannot be measured reliably 3. With employees, measure based on FV of equity instruments granted on grant/measurement date (difficult to measure FV of services rendered!) On grant/measurement date, FV of equity instrument takes into account market conditions & non-vesting conditions Non-market conditions & service conditions are taken into account by adjusting the number of equity instruments to be vested (accounting estimates) Upon exercise of ESO, optional to reclassify SBPR to General Reserve ESO granted by issuing new shares no DT (not deductible) ESO granted using treasury shares DT (deductible on net cost incurred in acquiring shares) [(share price on exercise date – strike price) x number of options expected to be vested x ratio of years to be vested]
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Cash-settled share-based payment transaction Measured based on FV of liability, which are based on the price or value of equity instruments & re-measure at each reporting date (recognise changes in P&L) Cancellation (entity/counterparty chooses not to meet the non-vesting condition) – accounted for as acceleration of vesting, recognise expense immediately Payment made to employees should be accounted for as a share buyback transaction If payment exceed FV of equity instrument granted, recognise excess as expense
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Why do firms offer ESOP to their employees? Does ESO pose any risk to employees?
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Group SBPT: obligation to settle? Using what form of settlement?
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Employee benefits: all forms of consideration given by an entity in exchange for service rendered by employees, or for the termination of employment
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