Page 22 - MCS August Day 2 Suggested Solutions

CIMA AUGUST 2018 – MANAGEMENT CASE STUDY

Employee Share Option Scheme

IFRS 2 Share‐based Payments (IFRS “) deals with the accounting requirements for share‐based
payment schemes, of which a share option scheme is one example.

Such a scheme requires the following formalities to be complied with:

 it must be clear who is eligible to join the scheme
 the duration of the scheme (the vesting period), with the start date referred to as the grant
date, and the final day referred to as the vesting date
 to benefit from the scheme, participants must be in the scheme on the grant date and at
the vesting date. If an individual ceases to be employed by Montel for any reason during
the vesting period, they lose eligibility to participate in the scheme

Throughout the vesting period, employees in the scheme provide work and services to Montel in
exchange for the right to exercise share options at the end of the vesting period at a pre‐
determined price specified in the scheme documentation.

The provision of work and services by employees meets the definition of an expense in that it is
consuming economic resources in an accounting period. Therefore an annual expense must be
recognised throughout each year of the vesting period. The annual expense calculated is based
upon an estimate of how many of the employees in the scheme are expected to be employed at
the vesting date. This is multiplied by the fair value of the option at the grant date and the
number of options expected to vest.

The expense matched by the recognition of an equity component in the statement of financial
position, which increases each year until the vesting date. It is not a liability as it will not result in
a future outflow of economic benefits. The accumulated equity component is then used as part of
the consideration received (along with the option exercise price paid by the eligible scheme
members) in exchange for the issue of shares. If employees choose not to exercise their share
option, the options lapse and no further accounting treatment is necessary.

The use of share option schemes can encourage employee loyalty and commitment during the
vesting period as staff may remain with their employer to obtain the benefit of exercising their
share options at the vesting date. However, it is possible that, upon exercise of share options at
the end of the vesting period, employees may choose to leave.

Financial Manager

106 KAPLAN PUBLISHING