Luangwa, a public limited company, is assessing the accounting treatment of the following transaction for the year ended 31 May 2016.

On 1 June 2014, Luangwa had granted share appreciation rights to 200 senior executives. Each executive will receive 2,000 rights on 31 May 2017 provided he or she continues to be employed by Luangwa at that date. On 1 June 2014, the directors estimated that all the executives would remain employed by Luangwa for the three-year period ending on 31 May 2017. However, 10 executives left in the year ended 31 May 2015 and at 31 May 2015 the directors believed that a further 10 executives would leave in the following two years. Five executives actually left in the year ended 31 May 2016 and the directors now believe that seven more directors will leave in the year ended 31 May 2017. Since 1 June 2014, the fair value of the share appreciation rights has fluctuated as follows:

Date Fair value of one right

K

1 June 2014 160

31 May 2015 180

31 May 2016 174

Required:

Discuss the accounting treatment of the above item in the financial statements for the year ended 31 May 2016. (8 marks)

b) An entity grants 100 share options on its $1 shares to each of its 500 employees on 1 January

20X5. Each grant is conditional upon the employee working for the entity over the next three years.

The fair value of each share option as at 1 January 20X5 is $15.

On the basis of a weighted average probability, the entity estimates on 1 January that 20% of

employees will leave during the three-year period and therefore forfeit their rights to share options.

Required

Show the accounting entries which will be required over the three-year period in the event of the following:

20 employees leave during 20X5 and the estimate of total employee departures over the three year period is revised to 15% (75 employees)

22 employees leave during 20X6 and the estimate of total employee departures over the three-year period is revised to 12% (60 employees)

15 employees leave during 20X7, so a total of 57 employees left and forfeited their rights to

share options. A total of 44,300 share options (443 employees x 100 options) are vested at the end of 20X7.