The Examiner's Answers – F2 - Financial Management Some of the answers that follow are fuller and more comprehensive than would be expected from a well-prepared candidate. They have been written in this way to aid teaching, study and revision for tutors and candidates alike.
SECTION A Answer to Question One (a) 2010 equity balance required: (600-20 – 25 – 15 - 20)= 520 employees eligible Total expected equivalent value = 520 x 500 options x $1.48 = $384,800 $384,800 x 3/4 years = $288,600 Previously recognised to 30 September 2009: (600 – 20 – 25 - 40) = 515 employees eligible 515 employees x 500 options x $1.48 = $381,100 $381,100 x 2/4 years = $190,550 Amount to be recognised in the income statement in 2010 = $98,050 ($288,600 – $190,550) Recorded in 2010 financial statements: Dr Income statement – staff costs Cr Equity – other reserves
$98,050 $98,050
(b) The sales director is incorrect, despite no cash changing hands, the share options are issued in exchange for employees providing services to LBP. Possibly the options have been given as a reward for service provided or in lieu of a pay rise or bonus which would otherwise have been paid in cash. As there is no direct wage cost, we instead must calculate an equivalent cost of receiving staff services and match this with the revenue that the staff helps to generate. We do this by estimating the value inherent in the options and allocating that over the period in which employees must remain with LBP, in this case 4 years. The amount chargeable to the income statement is based on the fair value of the share options at the grant date. This is not subsequently remeasured as these share options represent an equity-settled share-based payment. The equivalent cost will be updated each
Financial Management
1
November 2010