On 1 January 2023, a company which prepares accounts to 31 December grants share appreciation rights to
Question:
On 1 January 2023, a company which prepares accounts to 31 December grants "share appreciation rights" to thirty of its employees. By virtue of these rights, the employees concerned will become entitled to a cash payment on 31 December 2025 on condition that they are still employees of the company at that date. The amount of this cash payment will depend upon the overall increase in the company's share price over the three years between 1 January 2023 and 31 December 2025.
On 31 December 2023, the company estimates that 29 of the employees will remain with the company until 31 December 2025. The fair value of the share appreciation rights at 31 December 2023 is £2,400 per employee.
On 31 December 2024, the company estimates that 26 of the employees will remain with the company until 31 December 2025. The fair value of the share appreciation rights at 31 December 2024 is £3,000 per employee.
On 31 December 2025, 24 of the employees are still employed by the company. The fair value of the share appreciation rights on that date is £2,150 per employee. Show how these transactions should be treated in the company's financial statements.
Step by Step Answer:
The company should recognize the share appreciation rights as a liability in its financial statements as the employees have a conditional right to receive cash payment in the future based on the companys share price On 1 January 2023 no entry is required as the rights are granted on this date On 31 December 2023 the company estimates that 29 of the employees will remain with the company until 31 December 2025 Therefore the liability for the share appreciation rights should be recognized as follows Dr Share Appreciation Rights Expense 69600 29 employees x 2400Cr Share Appreciation Rights Liability 69600 On 31 December 2024 the company estimates that 26 of the employees will remain with the company until 31 December 2025 Therefore the liability for the share appreciation rights should be updated as follows Dr Share Appreciation Rights Expense 78000 26 employees x 3000 69600 recognized in 2023Cr Share Appreciation Rights Liability 78000 On 31 December 2025 24 of the employees are still employed by the company Therefore the liability for the share appreciation rights should be updated as follows Dr Share Appreciation Rights Expense 60000 24 employees x 2150 78000 recognized in 2024Cr Share Appreciation Rights Liability 60000 The final liability for the share appreciation rights will be 60000 which represents the fair value of the rights at 31 December 2025 based on the number of employees who are still employed by the company The company should recognize a corresponding expense in its income statement ...View the full answer
International Financial Reporting a practical guide
ISBN: 9781292439426
8th Edition
Authors: Alan Melville
