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ACCA Strategic Professional · Strategic Business Reporting (International) · Share-based payment

Fenwick plc modified a cash-settled share appreciation rights scheme by converting it to an equity-settled scheme in Year 3, before vesting. At the modification date the liability recorded was CU420,000, and the fair value of the equity instruments granted was CU500,000, with 1 year of the 3-year service period remaining and 2 years complete. Which is the correct accounting at the modification date?

Derecognise the CU420,000 liability and recognise equity of CU333,333, which is the modification-date fair value of CU500,000 multiplied by 2/3 of service completed. The CU86,667 difference goes immediately to profit or loss, and the remaining equity cost is spread over the final year.

  1. ADerecognise the liability of CU420,000 and recognise equity at CU500,000 x 2/3 = CU333,333, with the difference through profit or loss immediatelyCorrect
  2. BDerecognise the liability of CU420,000 and recognise equity of CU500,000 x 2/3 = CU333,333, with the difference of CU86,667 recognised in equity; the remaining expense is spread over the remaining period
  3. CKeep the liability unchanged and recognise the new instruments only when exercised
  4. DDerecognise the liability of CU420,000 and recognise equity of CU500,000 immediately in full

Explanation

On modification from cash-settled to equity-settled, the equity award is measured at modification-date fair value and recognised in equity to the extent services have been received: CU500,000 x 2/3 = CU333,333. The liability of CU420,000 is derecognised, and the difference of CU86,667 is recognised immediately in profit or loss as a credit. The remainder of the equity award is then recognised over the remaining period. Taking the difference to equity is wrong, as the gain on extinguishing the liability does not belong there.

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