Davies Ltd has seen its profit drop considerably over the past few days due to

a challenging business environment. In a bid to improve its bottom-line, the companys senior

management wants to motivate its staff to increase its sales. On 1 January 20x1, Davies

granted 50,000 Share Appreciation Rights (SARs) to its twelve key account managers.

Under the SAR plan, each account manager is entitled to a cash payment that is equal to the increase in share price over the exercise price of $21 at settlement date. The SARs would vest

conditional upon the account managers working for the company until 31 December 20x4. The

SARs expire after five years and will be forfeited if the account manager leave the company

during the service period. On grant date, Davies expects ten of the account managers to remain

with the company on 31 December 20x4.

Actual and forecast staff movement with regards to the account managers for next four

financial years ended 31 December are as follows:

20x1

Two account managers left the company and Davies estimates that one more manager will

resign before 31 December 20x4.

20x2

Business prospects for Davies worsened and three account managers left the company during

the year. The company revises its estimate and feels that only 5 account managers will remain

with Davies by the end of financial year 20x4.

20x3

Another account manager resigned and the company expects two more managers to leave

within the service period.

20x4

All of the remaining account managers as at the end of 20x3 stayed with the company and a

third of them exercised all the SARs granted to them as at 31 December 20x4.

The share prices and fair value of SARs over the service period are as follows:

Date Share price ($) Fair value of SAR ($)

31 December 20x1 31 14

31 December 20x2 36 18

31 December 20x3 42 25

31 December 20x4 37 20

On 31 December 20x5, the remaining account managers exercised their SARs when Davies's

share price was $44.

Required:

(a) Applying SFRS(I) 2 Share-Based Payments, prepare the relevant journal entries for the

financial years 20x1 to 20x5 with respect to Revivals Share Appreciation Rights (SAR)

plan. Narrations are not required.

(18 marks)

(b) On 1 January 20x6, Davies decided to enhance staff productivity by granting its 500

employees the right to choose either a cash payment equivalent to the value of 10,000

shares in the company or 54,000 share options with an exercise price of $45. The grant

is conditional upon the completion of three years service by the employees. The market

price of Davies shares on 1 January 20x6 was $45, with subsequent share prices on the

relevant dates as follows:

Date Share price ($)

31 December 20x6 48

31 December 20x7 54

31 December 20x8 56

The fair value of the share options on grant date was valued at $14 using the Black-

Scholes pricing model. All eligible employees remained in Davies during the vesting

period and as at the vesting date of 31 December 20x8.

Based on the information above, prepare the relevant journal entries for the years ended

31 December 20x6, 20x7 and 20x8. Assume that employees will select the alternative

most beneficial to them upon settlement on vesting date.

(14 marks)

(c) Although Davies's managing director acknowledged the value of share-based

payments in motivating its employees, he lamented their high costs and negative impact

on the companys bottom line. He suggested that the costs be reduced during the vesting

period by reducing the total fair value of the share-based arrangement. If possible, the

managing director was of the opinion that Davies should cancel the share-based

arrangements to avoid recognising any expenses in its financial statements.

Comment on the managing directors comments with reference to SFRS(I) 2 Share-

based Payment.

(8 marks)