Chapter 16 Homework Treasury shares that could be repurchased with proceeds

PROFESSIONAL SIMULATION (Continued)

Schedule A

*Computation of weighted-average number of shares adjusted for dilutive

securities

Average number of shares under options outstanding …………… 140,000

IFRS CONCEPTS AND APPLICATION

IFRS16-1

The primary IFRS reporting standards related to financial instruments,

including dilutive securities is IAS 39 “Financial Instruments: Recognition and

IFRS16-2

IFRS and U.S. GAAP are substantially the same in the accounting for dilutive

securities, stock-based compensation, and earnings per share. For example,

The main differences concern (1) the accounting for convertible debt. Under

U.S. GAAP all of the proceeds of convertible debt are recorded as long term

debt. Under IFRS, convertible bonds are “bifurcated”, or separated into the

equity component—the value of the conversion option—of the bond issue and

IFRS16-3

(a) Norman makes the following entry to record the issuance under U.S. GAAP.

Cash …………………………………………………………

400,000

Bonds Payable ………………………………….

400,000

IFRS16-3 (Continued)

(b) Under IFRS, Norman must “bifurcate” (split out) the equity component—the

value of the conversion option—of the bond issue. Under IFRS, the

convertible bond issue is recorded as follows.

IFRS16-4

The FASB has been working on a standard that will likely converge to IFRS in

the accounting for convertible debt. Similar to the FASB, the IASB is examining

IFRS16-5

(a) From the point of view of the issuer, the conversion feature of convertible

debt results in a lower cash interest cost than in the case of non-

convertible debt. In addition, the issuer in planning its long-range

IFRS16-5 (Continued)

(b) The purchaser obtains an option to receive either the face amount of the

debt upon maturity or the specified number of shares upon conversion. If

IFRS16-6

The view that separate accounting recognition should be accorded the

conversion feature of convertible debt is based on the premise that there is an

economic value inherent in the conversion feature or call on the ordinary

shares and that the value of this feature should be recognized for accounting

purposes by the issuer. It may be argued that the call is not significantly

different in nature from the call contained in an option or warrant and its issue

relied upon to govern the conclusion.

IFRS16-7

The book value method used by the company to record the exchange of

convertible debentures for ordinary shares can be supported on the grounds

that when the company issued the convertible debentures, the proceeds could

IFRS16-7 (Continued)

On the other hand, recording the issue of the ordinary shares at the book

value of the debentures is open to question. It may be argued that the

exchange of the shares for the debentures completes the transaction cycle for

IFRS16-8

Cordero would account for the discount as a reduction of the cash proceeds

and an increase in compensation expense. The IASB concluded that this

benefit represents employee compensation.

IFRS16-9

IFRS16–10

Share Premium—Conversion Equity …………………… 20,000

Bonds Payable …………………………………………………… 1,950,000

IFRS16-11

(a) Present Value of Principal:

($2,000,000 X .79383) ……………………………….. $1,587,660

Present Value of Interest Payments:

($120,000 X 2.57710) ………………………………… 309,252

Present Value of the Liability Component ……. $1,896,912

IFRS16–12

(a) Carrying Value of Bonds, 1-1-11

(from Ex. 16–1(a)) …………………………………….. $1,896,912

Discount Amortized in 2011

[($1,896,912 X .08) – $120,000)] …………………. 31,753

Carrying Value of Bonds, 1-1-12 ………………….. $1,928,665

IFRS16-12 (Continued)

(c) Share Premium—Conversion Equity ……………. 40,000*

Bonds Payable …………………………………………… 1,928,665

Cash …………………………..……………………….. 1,940,000

Gain on Repurchase …………………………….. 28,665**

IFRS16–13

(a) 1/1/12 No entry

12/31/12 Compensation Expense ($6 X 5,000 ÷ 5) …… 6,000

Share Premium—Share Options ……….. 6,000

(c) No change for part (a), unless the fair value of the options change.

For part (b):

1/10/12 Unearned Compensation ($45 X 700)……….. 31,500

Share Capital—Ordinary ($1 X 700) ….. 700

Share Premium—Ordinary ………………. 30,800

IFRS16-13 (Continued)

(d) Employee share-purchase plans generally permit all employees to pur–

chase shares at a discounted price. When employees purchase the

IFRS16–14

(a) IFRS 2 addresses the accounting for share-based payment compensation

plans.

(c) When the goods or services received or acquired in a share-based payment

transaction do not qualify for recognition as assets, they shall be recog–

nised as expenses (par.8).

IFRS16-14 (Continued)

To apply the requirements of paragraph 10 to transactions with employees

and others providing similar services,† the entity shall measure the fair

value of the services received by reference to the fair value of the equity

Typically, shares, share options or other equity instruments are granted

to employees as part of their remuneration package, in addition to a cash

salary and other employment benefits. Usually, it is not possible to

measure directly the services received for particular components of the

employee’s remuneration package. It might also not be possible to

measure the fair value of the total remuneration package independently,

IFRS16–15

(a) (1) Under M&S’s share-based compensation plan no options were granted

during 2010.

(2) At April 3, 2010, 6,397,261 options were exercisable by eligible

managers.

IFRS16-15 (Continued)

(5) The accounts to which the proceeds from these option exercises are

credited are Share Capital and Share Premium.

(6) The number of outstanding options at April 3, 2010, is 6,397,261 at an

average exercise price of 336.8p.