(b) On 31 May 2007, Leigh purchased property, plant and equipment for $4 million. The supp

Question

(b) On 31 May 2007, Leigh purchased property, plant and equipment for $4 million. The supplier has agreed to

accept payment for the property, plant and equipment either in cash or in shares. The supplier can either choose

1·5 million shares of the company to be issued in six months time or to receive a cash payment in three months

time equivalent to the market value of 1·3 million shares. It is estimated that the share price will be $3·50 in

three months time and $4 in six months time.

Additionally, at 31 May 2007, one of the directors recently appointed to the board has been granted the right to

choose either 50,000 shares of Leigh or receive a cash payment equal to the current value of 40,000 shares at

the settlement date. This right has been granted because of the performance of the director during the year and

is unconditional at 31 May 2007. The settlement date is 1 July 2008 and the company estimates the fair value

of the share alternative is $2·50 per share at 31 May 2007. The share price of Leigh at 31 May 2007 is $3 per

share, and if the director chooses the share alternative, they must be kept for a period of four years. (9 marks)

Required:

Discuss with suitable computations how the above share based transactions should be accounted for in the

financial statements of Leigh for the year ended 31 May 2007.

Answer 1

正确答案：

(b) Transactions that allow choice of settlement are accounted for as cash-settled to the extent that the entity has incurred a
liability (IFRS2 para 34). The share based transaction is treated as the issuance of a compound financial instrument. IFRS2
applies similar measurement principles to determine the value of the constituent parts of a compound instrument as that
required by IAS32 ‘Financial Instruments: Disclosure and Presentation’. The purchase of the property, plant and equipment
(PPE) and the grant to the director, both fall under this section of IFRS2 as the supplier and the director have a choice of
settlement. The fair value of the goods can be measured directly as regards the purchase of the PPE and therefore this fact
determines that the transaction is treated in a certain way. In the case of the director, the fair value of the service rendered
will be determined by the fair value of the equity instruments given and IFRS2 says that this type of share based transaction
should be dealt with in a certain way. Under IFRS2, if the fair value of the goods or services received can be measured directly
and easily then the equity element is determined by taking the fair value of the goods or services less the fair value of the
debt element of this instrument. The debt element is essentially the cash payment that will occur. If the fair value of the goods
or services is measured by reference to the fair value of the equity instruments given then the whole of the compound
instrument should be fair valued. The equity element becomes the difference between the fair value of the equity instruments
granted less the fair value of the debt component. It should take into account the fact that the counterparty must forfeit its
right to receive cash in order to receive the equity instrument.
When Leigh received the property, plant and equipment it should have recorded a liability of $4 million and an increase in
equity of $0·55 million being the difference between the value of the property, plant and equipment and the fair value of theliability. The fair value of the liability is the cash payment of $3·50 x 1·3 million shares, i.e. $4·55 million.
The accounting entry would be: