CA FINAL- FINANCIAL REPORTING

INTRODUCTION TO AS AND IND AS

Accounting Standards (ASs) are written policy documents issued by the Government with the support of
other regulatory bodies covering the aspects of
• Recognition,
• Measurement,
• Presentation and
• Disclosure
of accounting transactions in the financial statements.

Objectives of Accounting Standards

• Eliminate the non-comparability of financial statements and thereby improving the reliability of
financial statements and
• Provide a set of standard accounting policies, valuation norms and disclosure requirements.

Applicability of Accounting Standards

Accounting Standards in India

For Companies For Non-corporate entities

Governed by Companies Act, 2013 Standards issued by ASB of ICAI is

Section 133 read with Rule 7 of applicable. Compliance is ensured
Companies (Accounts) Rules, 2014 through its members

Accounting Standards
(issued by ICAI) are
Companies governed by applicable. Total 27
Companies (Indian Companies governed by standards in force
Accounting Standards) Companies (Accounting
Rules, 2015 Standards) Rules, 2006

These two sets of standards

For larger Companies. IFRS For smaller Companies. are similar and there are no
Converged Indian Accounting Standards are differences.
Accounting Standards are applicable. Total 27
applicable. Total 39 standards in force
standards in force

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What is IFRS?

IFRS is a single set of high quality, easily understandable, enforceable and globally accepted financial
reporting standards based upon clearly articulated principles. It is also known as “Principle based” set
of standards which are easy to understand and apply. The IFRS consists of 5 elements;

1. The Conceptual Framework for the Financial Reporting

2. International Accounting Standards (issued by IASC and adopted by IASB)
3. SIC (Standing Interpretation Committee) Interpretations
4. International Financial Reporting Standards (issued by IASB)
5. IFRIC (International Financial Reporting Interpretation Committee) Interpretations.

Adoption vis-à-vis Convergence

The Government of India in consultation with ICAI decided to converge and not to adopt IFRSs issued
by the IASB.

• Adoption of IFRS means that the country is implementing the IFRS verbatim as issued by
IASB.
• Convergence with IFRS means that the national accounting standards are made in line with
IFRS. In case of convergence, the Accounting Standards Board of the country would work
together with IASB to develop high quality accounting standards which are suitable for the
economic conditions of the respective country and make such changes as deems fit after
considering the views and suggestions from various stakeholders.

What is Ind AS?

• Indian Accounting standards (Ind AS) is a set of accounting standards which are converged with
International Financial Reporting Standards to improve transparency in accounting and
harmonize the accounting standards currently being used with the global standards.
• These accounting standards are formulated by ASB of ICAI.
• The Ind AS are named and numbered in the same way as the corresponding IFRS.
• IAS 1-41 is numbered as Ind AS 1-41 and IFRS 1-16 is numbered as Ind AS 101-116.
• While framing the Ind AS, ASB has followed the same paragraph numbering of IFRS also to
improve the comparability of these standards with IFRS.

Roadmap for implementation of Ind AS

Voluntary Adoption

Every company not being a Banking, NBFCs or Insurance Companies, can voluntarily adopt IFRS
converged Ind AS from the financial year beginning on or after April 1, 2015.

Mandatory Adoption

Following companies are required to adopt Ind AS mandatorily as per the roadmap provided in the
Companies (Indian Accounting Standards) Rules, 2015 and Companies (Indian Accounting Standards)
Amendment Rules, 2016.

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• Companies which are listed/ in the process of listing (other than in SME exchanges) in India or outside
India having net worth more than or equal to ` 500 crores
From April • Unlisted companies having net worth more than or equal to ` 500 crores and
1, 2016 • Parent, Subsidiary, Associate and Joint venture of the above

• All companies which are listed/ in the process of listing (other than in SME exchanges) in India or outside
India
From April • Unlisted companies having net worth more than or equal to ` 250 crores and
1, 2017 • Parent, Subsidiary, Associate and Joint venture of the above

• Scheduled Commercial Banks (excluding RRBs’s)

• NBFCs (whether listed or unlisted) having net worth more than or equal to ` 500 crores and
From April • Holding, Subsidiary, Joint Venture and Associate Companies of the above
1, 2018

• NBFCs whose equity and/or debt securities are listed or are in the process of listing on any stock
exchange in India or outside India
From April • Unlisted NBFCs having net worth more than or equal to ` 250 crores and
1, 2019 • Holding, Subsidiary, Joint Venture and Associate Companies of the above

• Insurance Companies/ insurers

From April • Holding, Subsidiary, Joint Venture and Associate Companies of the above
1, 2021

• Once Ind AS is applicable, the company is required to follow Ind AS for all subsequent financial
statements.
• Networth criteria to be checked from the March 31, 2014 onwards and any subsequent reduction will not
relieve the entity from the requirement to follow Ind AS.
• The holding-subsidiary relationship etc. to be checked from each applicability dates.
• Even though Ind AS is not applicable for unlisted companies having net worth less than ₹ 250 crores,
they can voluntarily adopt Ind AS from April 1, 2015.
• NBFCs having net worth less than ₹ 250 crores are outside the purview of Ind AS since voluntary
adoption is not permitted for Banking, NBFCs and Insurance Companies.
• Urban Cooperative Banks (UCBs) and Regional Rural Banks (RRBs) are not required to apply Ind
AS.

Changes made to IFRS while converging

Due to the economic conditions and suggestions received from various stakeholders, India has adopted various
changes to the IFRSs in order to adapt with the conditions in India. While considering the nature and effect of the
changes, we can classify them as two;

• Changes which resulting in carve outs/ carve ins

Those changes which results in non-compliance of IFRS, i.e., change made to the standard is in deviation
to the treatment prescribed under IFRS.
E.g.: Option to continue the carrying amount of PPE as per AS as deemed cost while adopting Ind AS.
• Changes which not resulting in carve outs
Though change is made to IFRS, there is no non-compliance of IFRS.
E.g.: Change in terminology, Reduction of permitted options etc.

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Difference between AS and Ind AS

Even though the analysis of Ind AS shows various changes and different treatments as compared to the AS, we
can conclude that all these differences can be classified into 3 broad categories:

1. Focus on substance over legal form

Substance over form is a well-accepted accounting principle which provides for the transactions and
events are to be accounted for based on the substance and economic reality of the transaction and not
merely their legal form. Even though this concept was there in the old set of standards, Ind AS gives a
higher emphasis on this concept. Few examples are as follows:
a. Standards relating to Financial Instruments provides that financial instruments shall classify the
instrument, or its component parts, on initial recognition as a financial liability, a financial asset or an
equity instrument in accordance with the substance of the contractual arrangement.
b. Specific guidance regarding revenue recognition in case the entity is under any obligation to provide
free or discounted goods or services or award credits to its customers due to any customer loyalty
programme.
c. Guidance on accounting treatment in case of inflationary and hyper inflationary situations

2. Importance on fair value concept

Like substance over form, Ind AS give higher emphasis on fair value also. As per Ind AS 113, fair value
means the price that would be received to sell an asset or paid to transfer a liability in the ordinary
transaction between market participants at the measurement date. Fair value is a market-based
measurement and not an entity-specific measurement. The major changes due to more emphasis on fair
value includes:
a. Presentation of financial instruments at fair value
b. Allowance of discounting model for provisions in the financial statements
c. Mandatory impairment test for intangible assets with indefinite useful life and goodwill arising on
business combination

3. More disclosure requirements

Since Ind AS is based on IFRS which is principle-based, there are various disclosure requirements under
Ind AS also. Additional disclosure requirements include:
a. Explicit statement of compliance with Indian Accounting Standards
b. Disclosure of assumptions and judgements made by management in applying the accounting policies
c. Additional comparative statements at the time of first-time adoption and change in accounting policies
d. Prohibition on presentation of items as extra-ordinary items and prior period items
e. More disclosure relating to related parties, investments, investment property etc.

Note: Differences between each standard will be covered along with respective standards.

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PREPARATION OF FINANCIAL STATEMENTS UNDER IND AS

UNDERLYING ASSUMPTIONS (FRAMEWORK)

1. Accrual basis
• The effects of transactions and other events are recognised when they occur (and not as
cash or its equivalent is received or paid) and they are recorded in the accounting records and
reported in the financial statements of the periods to which they relate.

2. Going Concern
• The financial statements are normally prepared on the assumption that an entity is a going
concern and will continue in operation for the foreseeable future.
• It is assumed that the entity has neither the intention nor the need to liquidate or curtail
materially the scale of its operations.
• If such an intention or need exists, the financial statements may have to be prepared on a
different basis and, if so, the basis used is disclosed.
ELEMENTS OF FINANCIAL STATEMENTS (FRAMEWORK)
Basically, there are five elements in the financial statements which are as follows:
1. ASSET
• An asset is a resource controlled by the entity as a result of past events and from which
future economic benefits are expected to flow to the entity.
• An item will be recognized as an asset in the Balance sheet when it is probable that the future
economic benefit will flow to the entity and the asset has a cost or value that can be
measured reliably.

2. LIABILITY
• A liability is a present obligation of the entity arising from past events, the settlement of which
is expected to result in an outflow from the entity of resources embodying economic
benefits.
• A liability is recognised in the balance sheet when it is probable that an outflow of resources
embodying economic benefits will result from the settlement of a present obligation and the
amount at which the settlement will take place can be measured reliably.
3. EQUITY
• Equity is the residual interest in the assets of the entity after deducting all its liabilities.
4. INCOME
• Income is increases in economic benefits during the accounting period in the form of inflows
or enhancements of assets or decreases of liabilities that result in increases in equity,
other than those relating to contributions from equity participants.
• The definition of income encompasses both revenue and gains. Revenue arises in the
course of the ordinary activities of an entity. Gains represent other items that meet the definition
of income and may, or may not, arise in the course of the ordinary activities of an entity. Gains
are often reported net of related expenses.
• Income is recognised in the statement of profit and loss when an increase in future economic
benefits related to an increase in an asset or a decrease of a liability has arisen that can be
measured reliably.

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5. EXPENSE
• Expenses are decreases in economic benefits during the accounting period in the form of
outflows or depletions of assets or incurrences of liabilities that result in decreases in
equity, other than those relating to distributions to equity participants.
• The definition of expenses encompasses losses as well as those expenses that arise in the
course of the ordinary activities of the entity. Expenses that arise in the course of the ordinary
activities of the entity. Losses represent other items that meet the definition of expenses and
may, or may not, arise in the course of the ordinary activities of the entity.
• Expenses are recognized in the statement of profit and loss when a decrease in future
economic benefits related to a decrease in an asset or an increase of a liability has arisen that
can be measured reliably.

COMPONENTS OF FINANCIAL STATEMENTS (IND AS 1)

1. Balance Sheet as at the end of the period
2. Statement of Profit and Loss for the period (including other comprehensive income)
3. Statement of Changes in Equity for the period
4. Statement of Cash Flows for the period
5. Notes, comprising significant accounting policies and other explanatory information
6. Comparative information in respect of the preceding period and
7. Balance Sheet as at the beginning of the preceding period when:
a. an entity applies an accounting policy retrospectively or
b. makes a retrospective restatement of items in its financial statements, or
c. when it reclassifies items in its financial statements.

CURRENT AND NON-CURRENT CLASSIFICATION

1. CRITERIA FOR ASSETS
An Asset shall be classified as Current when it satisfies any of the following criteria:
a) It is expected to be realized in, or is intended for sale or consumption in the Company’s normal
Operating Cycle,
b) It is held primarily for the purpose of being traded,
c) It is expected to be realized within 12 months after the Reporting Date/ Period,
d) It is cash or cash equivalent unless it is restricted from being exchanged or used to settle a
Liability for at least 12 months after the Reporting Date.
All other Assets shall be classified as Non-Current.
2. CRITERIA FOR LIABILITIES
An entity shall classify a liability as current when:
a) it expects to settle the liability in its normal operating cycle;
b) it holds the liability primarily for the purpose of trading;
c) the liability is due to be settled within twelve months after the reporting period; or
d) it does not have an unconditional right to defer settlement of the liability for at least twelve months
after the reporting period. Terms of a liability that could, at the option of the counterparty, result
in its settlement by the issue of equity instruments do not affect its classification.
An entity shall classify all other liabilities as non-current.

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IND AS 102- SHARE-BASED PAYMENTS

What is share-based payment?
It is an agreement between the entity and another party (including an employee) that entitles the
other party to receive -
a) cash or other assets of the entity for amounts that are based on the price (or value) of
equity instruments (including shares or share options) of the entity or another group entity, or
b) equity instruments (including shares or share options) of the entity or another group entity,
provided the specified vesting conditions, if any, are met.

SHARE-BASED PAYMENTS

Equity-settled share-based Equity settled payment with Cash

Cash-settled share-based
payment Alternatives
payment
Measure the goods and services Terms of the arrangement provide
Measure the goods or services
at the fair value of goods and with the choice of whether the
acquired and the liability incurred at
services received. entity settles the transaction in
the fair value of the liability.
cash (or other assets) or by
If fair value of goods and services issuing equity instruments.
Until the liability is settled, the
cannot be measured reliably,
entity shall remeasure the fair
value to be measured based on To extent of probability of cash
value of the liability at the end of
the fair value of equity payment, to be accounted for in
each reporting period and at the
instruments granted. accordance with cash-settled plan
date of settlement, with any
and additional liability if equity
Once valued, no remeasurement changes in fair value recognized in
option is chosen, to be accounted
subsequently. profit or loss for the period.
for based on equity-settled plan.

What are the transactions not covered under the Standard?

• Transactions with shareholders as a whole, i.e., when the shareholders act solely in their capacity
as shareholders.
• Acquisition as part of business combinations, or contribution for Joint ventures.
• Financial instruments issued to buy/sell non-financial items which can be settled at net.
RECOGNTION OF SHARE-BASED PAYMENTS
• All goods/ services which are being received will be recognized when such goods are
received, or services are obtained.
• The recognition will depend on vesting conditions, if any (in certain cases there will not
be any vesting condition).
• Recognition will be based on the best estimate of the expected vesting value of such
share-based payments.

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What you mean by Grant date, vest, vesting period, vesting conditions and intrinsic value?
1. Grant date:

The date at which the entity and another party (including an employee) agree to a share-
based payment arrangement, being when the entity and the counterparty have a shared
understanding of the terms and conditions of the arrangement.
If that agreement is subject to an approval process, grant date is the date when that
approval is obtained.

2. Vest:

To become an entitlement.
If there is no vesting condition – vested immediately
If there is any vesting condition – vested upon satisfaction of condition

3. Vesting conditions:

A condition that determine whether the entity receives the services that entitle the
counterparty to receive cash, other assets or equity instruments of the entity, under a share-
based payment arrangement.
VESTING CONDITIONS

Service condition Performance condition

When share based payment is If an employee is granted share

dependent upon the minimum term to options conditional upon the
be served in order to be eligible for achievement of a performance
employees share based payment, it condition and remaining in the entity’s
is called service condition. employment until that performance
condition is satisfied

Market related condition Non-market related condition

When one of the conditions is to When the parameter is not market
achieve target price/ value of the driven but linked with some internal
share by an entity, it is called as performance/ operations or activities
market-related performance of the entity, it will be considered as
condition. non-market related conditions.

4. Vesting period:

The period during which all the specified vesting conditions of a share-based payment
arrangement are to be satisfied.
In case of service conditions- Vesting period can be identified directly
In case of performance conditions- Assumptions regarding future performance is required to
determine the vesting period.
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5. Intrinsic value:

The difference between the fair value of the shares to which the counterparty has the (conditional
or unconditional) right to subscribe or which it has the right to receive, and the price (if any) the
counterparty is (or will be) required to pay for those shares.

6. Measurement date:

The date at which the fair value of the equity instruments granted is measured for the
purposes of this Ind AS.
For transactions with employees and others providing similar services- grant date.
For transactions with parties other than employees- date the entity obtains the goods or the
counterparty renders service.

STEPS IN SOLVING THE PROBLEM

1. Identify the type of share-based payment
2. Identify the Measurement date (grant date)
3. Identify the type of vesting condition and vesting period
4. Compute the intrinsic value/ fair value of option
5. Prepare the statement for recognition
6. Pass the journal entries
EQUITY-SETTLED SHARE-BASED PAYMENT
• All goods or services which are received by an entity should be valued at its fair value.
• In the absence of reliable information to arrive at the fair value of goods & services received,
the fair value of equity instrument issued will be used.
• In case of EMPLOYEES, it is required by the standard to use fair value of equity granted
because it is practically not possible to identify the fair value of the services rendered by the
employees.
• In case of awards to non-employees, there is a rebuttable presumption that the fair value of
goods/services received from any external supplier can be estimated.
• No remeasurement of fair value of equity instrument at the end of each reporting period.
Modification of equity-settled plan
• Continue the recognition of expense as per original plan
• Account the modification like a separate equity settled plan over the remaining vesting period.
Cancellation or settlement of equity-settled plan
• Recognise the entire unrecognised expenses which will vest over the vesting period immediately.
• Any payment made to the employee on the cancellation or settlement of the grant shall be
accounted for as the repurchase of an equity interest, i.e., reduce from equity. Any excess
compensation to be accounted for as expense

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CASH-SETTLED SHARE-BASED PAYMENTS

• Entity issues rights to its employees/ suppliers where employees/ suppliers will be entitled for a
cash payment in future based on equity share prices of the entity / or equity prices of the Group.
• In some cases, right to increase in equity prices is also provided which is known as Share
Appreciation Rights (SAR).
• The goods/ services received against share-based payment plan to be settled in cash are
measured at fair value of the liability and the liability continues to re-measured at every reporting
date until it is actually paid off.
• There could be some cases where no vesting period/ condition is required to be fulfilled, in those
cases, cash settled share-based payment can be recognized in full at initial recognition itself.
SHARE-BASED PAYMENTS WITH CASH ALTERNATIVE
When counterparty has choice of settlement
• When counterparty has a choice of settlement for such share based payments, then this will be
treated as compound instrument which has debt and equity components.
• For transactions with parties other than employees:
o Fair value of goods/ services is measured directly
o difference between fair value of such goods/ services and the fair value of debt
component will be the value of equity component
• For transactions with employees
o Measure the fair value of the debt component, if entire employees opt for cash option
o Measure the fair value of the equity component, if entire employees opt for equity
o Difference between Equity component and debt component is positive, such portion will
be treated as equity and account for as equity-settled plan (no remeasurement of fair
value)
o Balance debt component will be accounted for as cash-settled (remeasurement of fair
value at each reporting date)
When the entity has choice of settlement
• Whole amount will be accounted for as cash-settled or equity settled, based on:
o Present obligation to settle cash exists (evident from past practise, stated policy etc.)-
Cash settled treatment
o No present obligation to settle in cash – Equity settled treatment.
GROUP SHARE BASED PAYMENTS
Scenario In the books of parent In the books of subsidiary
Parent issues its own shares for the Investment in subsidiary Dr Employee Cost Dr
plan issued by its subsidiary Equity Cr Capital by parent Cr
Subsidiary provides rights to its Employee cost Dr Dividend distribution Dr.
employees to get equity Dividend income Cr Equity Cr.
instruments of its parent
Parent settles the transaction by Investment in subsidiary Dr. Employee Cost Dr.
paying cash value for share based Bank Cr. Equity Cr.
payment plan issued by its (Consider as equity-settled)
subsidiary

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QUESTIONS- IND AS 102- SHARE-BASED PAYMENTS

1. State whether following transactions will be covered under Ind AS 102 and state the reasons
thereof:
a. Entity A grants share warrants and its own equity to its external consultants. The
warrants become exercisable once an initial public offering (IPO) is made and on
condition that the consultants continue to provide agreed services to Entity A until the
date the IPO is made. Whether the transaction is covered under Ind AS 102?

b. Entity B buys back some of its own shares from employees in their capacity as
shareholders for the market value of those shares.

c. Entity C buys back some of its own shares but pays an amount in excess of their market
value only to shareholders who are employees.

d. Entity D enters into a contract to buy a commodity for use in its business for cash, at a
price equal to the value of 1,000 shares of Entity D at the date the commodity is
delivered. Although Entity D can settle the contract net, it does not intend to do so, nor
does it have a past practice of doing so.

2. Entity A has been paying Entity B, a corporate finance consultancy, in cash at the rate of ₹600
per hour for advice. Entity B is proposing to increase its fees by 5% per annum. Entity A is
experiencing cash flow pressures, so it has persuaded Entity B to accept payment in the form of
shares with effect from 1 July 20X5. The initial arrangement is for two years with Entity A agreeing
to issue 6,000 of its shares to Entity B every six months in exchange for Entity B providing 300
hours of advice evenly over the six-month period. What is the expense in profit or loss and the
corresponding increase in equity?

3. company provides each of 10 key employees with 1,000 share options on 1 January 20X7. Each
option has a fair value of ₹9 at the grant date, ₹11 on 1 January 20X8, ₹14 on 1 January 20X9
and ₹12 on 31 December 20X9. The options do not vest until 31 December 20X9 and are
dependent on continued employment. All 10 employees are expected to remain with the
company. What are the accounting entries to be recorded in each of the years 20X7, 20X8 and
20X9?

4. An entity provides each of its employees with 10 share options at 1 July 20X5, but the options
do not vest until 30 June 20X7. The share options may be exercised after vesting date provided
that the employees remain in the entity's employment. The fair value of the share options is ₹20
on grant date and there are 1,500 employees in the entity's employment at 1 July 20X5. How
should the entity account for the transaction if all employees remain in the entity's employment?

5. An entity issues 10 share options to each of its employees on 1 July 20X5. The share options
vest immediately and there is a two-year period over which the employees may exercise the
share options. Employees are entitled to exercise the options regardless of whether or not they
remain in the entity's employment during the period of exercise. The fair value of the share
options is ₹10 on grant date and there are 1,500 employees in the entity's employment at 1 July
20X5.

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6. On 1 January 20X1 an entity grants 100 share options to each of its 400 employees. Each grant
is conditional upon the employee working for the entity until 31 December 20X3. The fair value
of each share option at the grant date is ₹20.
During 20X1 20 employees leave and the entity estimates that a total of 20% of the employees
will leave during the three-year period.
During 20X2 a further 25 employees leave and the entity now estimates that 25% of its
employees will leave during the three-year period.
During 20X3 a further 10 employees leave.

Calculate the remuneration expense that will be recognised in respect of the share-based
payment transaction for each of the three years ended 31 December 20X3.

7. On 1 January 20X3 an entity grants 500 share options to each of its 400 employees. The only
condition attached to the grant is that the employees should continue to work for the entity until
31 December 20X6. 10 employees leave during the year, and it is expected that a further 10 will
leave each year. The market price of each option was ₹10 at 1 January 20X3 and ₹12 at 31
December 20X3.

8. On 1 January 20X4 an entity granted options over 10,000 of its shares to Sally, one of its senior
employees. One of the conditions of the share option scheme was that Sally must work for the
entity for three years. Sally continued to be employed by the entity during 20X4, 20X5 and 20X6.
A second condition for vesting is that the costs for which Sally is responsible should reduce by
10% per annum compound over the three-year period. At the date of grant, the fair value of each
share option was estimated at ₹21.
At 31 December 20X4 Sally's costs had reduced by 15% and therefore it was estimated that the
performance condition would be achieved.
Due to a particularly tough year of trading for the year ended 31 December 20X5 Sally had only
reduced costs by 3% and it was thought at that time that she would not meet the cost reduction
target by 31 December 20X6.
At 31 December 20X6, the end of the performance period, Sally did meet the overall cost
reduction target of 10% per annum compound.

How should the transaction be recognised?

9. On 1 January 20X4 an entity granted options over 10,000 of its shares to Jeremy, one of its
senior employees. One of the conditions of the share option scheme was that Jeremy must work
for the entity for three years. Jeremy continued to be employed by the entity during 20X4, 20X5
and 20X6. A second condition for vesting is that the share price increases at 25% per annum
compound over the three-year period. At the date of grant the fair value of each share option
was estimated at ₹18 taking into account the estimated probability that the necessary share price
growth would be achieved at 25%.
During the year ended 31 December 20X4 the share price rose by 30% and by 26% per annum
compound over the two years to 31 December 20X5. For the three years to 31 December 20X6
the increase was 24% per annum compound.

How should the transaction be recognised?

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10. Company B issued 100 share options to certain employees, that will vest once revenues reach
₹1 billion and its share price equals ₹50. The employee will have to be employed with Company
B at the time the share options vest in order to receive the options. The share options had a fair
value of ₹20 at the grant date and will expire in 10 years.

How should the expense be recorded under each of the following different scenarios?
a. All options vest.
b. Revenues have reached ₹1 billion; all employees are still employed, and the share price
is ₹49.
c. The share price has reached ₹50, all employees are still employed but revenues have
not yet reached ₹1 billion.
d. Revenues have reached ₹1 billion; the share price has reached ₹50 and half the
employees who received options left the company before the vesting date.

11. At the beginning of Year 1, Kingsley grants 100 shares each to 500 employees, conditional upon
the employees remaining in the entity's employ during the vesting period. The shares will vest at
the end of Year 1 if the entity's earnings increase by more than 18%; at the end of Year 2 if the
entity's earnings increase by more than an average of 13% per year over the two-year period;
and at the end of Year 3 if the entity's earnings increase by more than an average of 10% per
year over the three-year period. The shares have a fair value of ₹30 per share at the start of
Year 1, which equals the share price at grant date. No dividends are expected to be paid over
the year period.
By the end of Year 1, the entity's earnings have increased by 14%, and 30 employees have left.
The entity expects that earnings will continue to increase at a similar rate in Year 2, and therefore
expects that the shares will vest at the end of Year 2. The entity expects, on the basis of a
weighted average probability, that a further 30 employees will leave during Year 2, and therefore
expects that 440 employees will vest in 100 shares at the end of Year 2.
By the end of Year 2, the entity's earnings have increased by only 10% and therefore the shares
do not vest at the end of Year 2. 28 employees have left during the year. The entity expects that
a further 25 employees will leave during Year 3, and that the entity's earnings will increase by
more than 6%, thereby achieving the average of 10% per year.
By the end of Year 3, 23 employees have left, and the entity's earnings had increased by 8%,
resulting in an average increase of 10.64% per year. Therefore 419 employees received 100
shares at the end of Year 3.

Show the expense and equity figures which will appear in the financial statements in each of the
three years.

12. An entity granted 1,000 share options at an exercise price of ₹50 to each of its 30 key
management personnel on 1 January 20X4. The options only vest if the managers were still
employed on 31 December 20X7. The fair value of the share options was estimated at ₹20 and
the entity estimated that the options would vest with 20 managers. This estimate was confirmed
on 31 December 20X4.
The entity's share price collapsed early in 20X5. On 1 July 20X5 the entity modified the share
options scheme by reducing the exercise price to ₹15. It estimated that the fair value of an option
was ₹2 immediately before the price reduction and ₹11 immediately after. It retained its estimate
that options would vest with 20 managers.

How should the modification be recognised?

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CA FINAL- FINANCIAL REPORTING

13. Anara Fertilisers Limited issued 2000 share options to its 10 directors for an exercise price of
₹ [Link] directors are required to stay with the company for next 3 years.
Fair value of the option estimated ₹ 130
Expected no of Directors to vest the option 8
During the year 2, there was a crisis in the company and Management decided to cancel the
such scheme immediately. It was estimated further as below-
Fair value of option at the time of cancellation was ₹ 90
Market price of the share at the cancellation date was ₹ 99
There was a compensation which was paid to directors and only 9 directors were currently in
employment. At the time of cancellation of such scheme, it was agreed to pay an amount of ₹
95 per option to each of 9 directors. How the cancellation would be recorded?

14. On 1 January 20X1 an entity grants 100 cash SARs to each of its 500 employees, on condition
that the employees continue to work for the entity until 31 December 20X3.
During 20X1 35 employees leave. The entity estimates that a further 60 will leave during 20X2
and 20X3.
During 20X2 40 employees leave and the entity estimates that a further 25 will leave during 20X3.
During 20X3 22 employees leave.
At 31 December 20X3 150 employees exercise their SARs. Another 140 employees exercise
their SARs at 31 December 20X4 and the remaining 113 employees exercise their SARs at the
end of 20X5.
The fair values of the SARs for each year in which a liability exists are shown below, together
with the intrinsic values at the dates of exercise.

Year Fair value Intrinsic value

20X1 14.40
20X2 15.50
20X3 18.20 15.00
20X4 21.40 20.00
20X5 25.00

Calculate the amount to be recognised in profit or loss for each of the five years ended 31
December 20X5 and the liability to be recognised in the statement of financial position at 31
December for each of the five years.

15. On 1 January 20X4 an entity grants an employee a right under which she can, if she is still
employed on 31 December 20X6, elect to receive either 8,000 shares or cash to the value, on
that date, of 7,000 shares.
The market price of the entity's shares is ₹21 at the date of grant, ₹27 at the end of 20X4, ₹33
at the end of 20X5 and ₹42 at the end of 20X6, at which time the employee elects to receive the
shares. The entity estimates the fair value of the share route to be ₹19. Show the accounting
treatment.

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