2 The directors of Vident, a public limited company, are reviewing the impact of IFRS2 ‘Share-based Payment’ on the
financial statements for the year ended 31 May 2005 as they wish to adopt the IFRS early. However, the directors of
Vident are unhappy about having to apply the standard and have put forward the following arguments as to why they
should not recognise an expense for share-based payments:
i. they feel that share options have no cost to their company and, therefore, there should be no expense charged
in the income statement.
ii. they do not feel that the expense arising from share options under IFRS2 actually meets the definition of an
expense under the ‘Framework’ document.
iii. the directors are worried about the dual impact of the IFRS on earnings per share, as an expense is shown in
the income statement and the impact of share options is recognised in the diluted earnings per share calculation.
iv. they feel that accounting for share-based payment may have an adverse effect on their company and may
discourage it from introducing new share option plans.
The following share option schemes were in existence at 31 May 2005:
The price of the company’s shares at 31 May 2005 is $12 per share and at 31 May 2004 was $12·50 per share.
The performance conditions which apply to the exercise of executive share options are as follows:
Performance Condition A
The share options do not vest if the growth in the company’s earnings per share (EpS) for the year is less than 4%.
The rate of growth of EpS was 4·5% (2003), 4·1% (2004), 4·2% (2005). The directors must still work for the
company on the vesting date.
Performance Condition B
The share options do not vest until the share price has increased from its value of $12·50 at the grant date (1 June
2004) to above $13·50. The director must still work for the company on the vesting date.
No directors have left the company since the issue of the share options and none are expected to leave before June
2007. The shares vest and can be exercised on the first day of the due month.
The directors are unsure as to whether the share options granted to Van Heflin on 1 June 2002 should be accounted
for using IFRS2 as they were granted prior to the publication of the original Exposure Draft (7 November 2002).
Additionally the directors are also uncertain about the deferred tax implications of adopting IFRS2. Vident operates in
a country where a tax allowance will not arise until the options are exercised and the tax allowance will be based on
the option’s intrinsic value at the exercise date.
Assume a tax rate of 30%.
Required:
Draft a report to the directors of Vident setting out:
(a) the reasons why share-based payments should be recognised in financial statements and why the directors’
arguments are unacceptable; (9 marks)