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IFRS 2Case studies (Step 3 of 5)

Case study

Step 3 of 5
Practical caseIFRS 2L4 · Expert

Settlement alternatives, group plans, tax withholding, deferred tax and replacement awards: one group, eight situations

8 documents21 tasks≈ 150 min
0 / 26 items completed
Standards
IFRS 2 — Share-based Payment
Assistance levelFree workspace · autonomous situation
  • Method: withdrawn
  • Checklist: withdrawn
  • Hints: withdrawn
  • Step-by-step work: withdrawn

Case brief

Situation

Hesperia Holding SA (fictitious entity), the parent company, and its subsidiary Hesperia Services SAS close their accounts on 31 December 20X6. Several share-based plans each call for a different treatment: a choice of the counterparty, two choices of the entity, a plan for the employees of the subsidiary, a net settlement for the tax withholding, a deferred tax and replacement awards following the acquisition of Lumora SA. You prepare the treatment note and the entries of the parent company.

Your assignment

The case is handled in four independent parts, then a synthesis. Part A, settlement alternatives (plans K, L1 and L2): say how the award with a choice of the counterparty is accounted for, compute the fair value of each alternative and the equity component, assess the present obligation to settle in cash, classify each plan and compute the liability of plan L2. Part B, group plan (plan M): say how the subsidiary accounts for it in its separate financial statements. Part C, tax (plans N and P): compute the withholding and the balance delivered, the deferred tax asset, the excess deduction, the tax effect taken to equity and the part in profit or loss. Part D, business combination (Lumora): split the fair value of the replacement award. Synthesis: say what the effect is on diluted earnings and on IAS 32, judge the valuation inputs of plan P, record the six entries, present their cumulative effect and conclude. One document is not useful.

Work on this file as you would in practice: read the situation, open the documents, sort the useful information, then carry out the work requested. The solution is revealed once you submit.

Autonomous professional situation

As on a real engagement: no method, no checklist and no hints. You identify the issues yourself, organise the work and defend your conclusion.

  • Organise the work
  • Document each point
  • Argue the conclusion

Documents

File documents

8 documents: open each one to read it.

Document 1Memo

Group profile and case conventions

Hesperia Holding SA (fictitious entity) and its subsidiary Hesperia Services SAS close their accounts on 31 December 20X6; their functional currency is the euro. Case conventions: amounts in EUR; the fair values, the elapsed shares, the rates and the shares of pre-combination service are case data; case convention (pedagogical assumption, not attributed to IFRS 2): the equity component of an award with a choice of the counterparty is the difference between the fair values of the two alternatives, and the cash settlement chosen by the entity equals the fair value of the shares that would have been delivered; the entries are illustrative.

Data

Key data from the documents

The figures of the documents, gathered for your work.

ItemValueFound in
Shares of the share alternative2,000 units
Reference shares of the cash alternative1,800 units
Share price at the grant date€24.00
Cash payment of plan L1€30,000.00
Total expected fair value of plan L2€60,000.00
Elapsed share of the vesting period of plan L240%
Value of the shares to be delivered on exercise€100,000.00
Rate of the statutory withholding40%
Expected tax deduction of plan P€90,000.00
Cumulative expense of plan P€60,000.00
Tax rate25%
Fair value of the replacement award€120,000.00
Share of service before the combination55%
Audit fees€22,000.00

Sorting the information

Not every document matters: identify those that affect the accounting treatment.

Part 1 · Classification · Analysis

Sort each document: does it affect the accounting treatment?

Drag each item into its category, or tap the category under the item.

To sort8

  • Group profile and case conventions

  • Plan K: chief financial officer

  • Plans L1 and L2: settlement at the choice of the entity

  • Plan M: employees of the subsidiary

  • Plan N: exercise with net settlement

  • Plan P: deferred tax and valuation

  • Acquisition of Lumora SA

  • Audit fees

Relevant to the treatment0

    No effect0

      Workspace

      Work programme

      Organise your work freely: deal with each point, then argue your conclusion.

      1. Task 1Analysis

        Plan K: how is the award accounted for, and what is the fair value of each alternative?

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Plan K: how is the award accounted for, and what is the fair value of each alternative?

        1. €
        2. €

        Checks

        • 0 / 2 steps entered
        • Amounts readable

        Result: Fair value of the cash alternative (1,800 × 24)

      2. Task 2Calculation

        Plan K: compute the equity component.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Plan K: compute the equity component.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      3. Task 3Professional judgement

        Plans L1 and L2: does Hesperia have a present obligation to settle in cash? How is each plan classified?

      4. Task 4Analysis

        Plan L2: compute the liability at 31 December 20X6.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Plan L2: compute the liability at 31 December 20X6.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      5. Task 5Professional judgement

        Plan M: how does the subsidiary account for it in its separate financial statements?

      6. Task 6Calculation

        Plan N: compute the tax withholding and the balance delivered.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Plan N: compute the tax withholding and the balance delivered.

        1. €
        2. €

        Checks

        • 0 / 2 steps entered
        • Amounts readable

        Result: Balance delivered to the beneficiary (100,000 − 40,000)

      7. Task 7Calculation

        Plan P: compute the deferred tax asset.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Plan P: compute the deferred tax asset.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      8. Task 8Calculation

        Plan P: compute the excess of the expected deduction over the cumulative expense.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Plan P: compute the excess of the expected deduction over the cumulative expense.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      9. Task 9Calculation

        Plan P: compute the tax effect taken to equity.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Plan P: compute the tax effect taken to equity.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      10. Task 10Analysis

        Plan P: what part of the deferred tax asset is recognised in profit or loss?

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Plan P: what part of the deferred tax asset is recognised in profit or loss?

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      11. Task 11Calculation

        Lumora: split the fair value of the replacement award.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Lumora: split the fair value of the replacement award.

        1. €
        2. €

        Checks

        • 0 / 2 steps entered
        • Amounts readable

        Result: Post-combination expense (120,000 − 66,000)

      12. Task 12Analysis

        What is the effect of plans L1, L2 and P on diluted earnings, and what is the place of IAS 32?

      13. Task 13Professional judgement

        Plan P: are the valuation inputs sufficiently supported, and what is to be presented?

      14. Task 14Journal entries

        Plan K: record the liability component.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 1

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      15. Task 15Journal entries

        Plan K: record the equity component.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 1

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      16. Task 16Journal entries

        Plan L1: record the cash settlement chosen by the entity.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 1

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      17. Task 17Journal entries

        Plan N: record the payment of the withholding to the tax authority.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 1

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      18. Task 18Journal entries

        Plan P: record the deferred tax asset taken to profit or loss.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 1

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      19. Task 19Journal entries

        Plan P: record the deferred tax asset taken to equity.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 1

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      20. Task 20Effects on the financial statements

        What is the cumulative effect of the six entries on the financial statements?

        Part 1 · Classification · Analysis

        State the direction of the effect on each financial statement aggregate.

        1. Financial position (balance sheet)

        2. Profit or loss

        3. Other comprehensive income

        4. Equity

        Calculator

        Click in an answer field to be able to insert the result.

        Part 2 · Calculation · Analysis

        Quantify the effect on the aggregates concerned.

        1. €
        2. €
        3. €

        Checks

        • 0 / 3 steps entered
        • Amounts readable

        Result: Amount of the effect — Equity

      21. Task 21Conclusion

        Write the conclusion.

      Your working draft for this file: points noted, leads, intermediate calculations.

      Saved on this device only; never graded.

      Conclusion

      Submission and solution

      Complete every item of the file to submit it (0 / 26).

      Document this file

      These working papers use the data and results of this case.

      Normative references

      • IFRS 2 §34
      • IFRS 2 §35
      • IFRS 2 §41
      • IFRS 2 §43A
      • IFRS 2 §47