QUESTION FIVE: SHARE-BASED PAYMENTS

Al-Janabi Limited is a New Zealand company which purchases raw materials in the United Kingdom. It has a balance date of 31 December.

On 1 October 2017 Al-Janabi Limited granted 15,000 share options to its chief executive. All services had been performed by the managing director at that date. The entity reliably estimated the fair value of each option at $1.50.

In December 2017 Al-Janabi Limited negotiated the purchase of a shipment of raw materials from its longstanding UK supplier, Vere Limited, with which it has a close relationship. In this case Al-Janabi Limited negotiated to settle the purchase transaction with 15,000 shares in Al- Janabi Limited. The inventory was received on 31 December 2017, is considered to have a fair value of $90,000 and the fair value of Al-Janabi Limited shares on 31 December 2017 was $7.

Required:

(a) Calculate the remuneration expense which will be reported in the financial statements of Al-Janabi Limited for the year to 31 December 2017 for services received from the chief executive as consideration for the share options granted.

(b) Provide the journal entry to record the purchase of the inventory by Al-Janabi Limited on 31 December 2017.

(c) Share options such as those granted to the chief executive of Al-Janabi Limited are often argued to align the interests of management with shareholders. Discuss the extent to which you consider share options are likely to align those interests.

(d) Accounting for share-based payments has been a controversial and politicised topic over recent decades. Explain why requirements such as those in NZ IFRS 2 have attracted debate and describe some of the criticisms of the requirements of the standard.