Applying Ifrs Standards 4th Edition Picker Test Bank

Applying IFRS Standards 4th Edition
Picker Test Bank

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Testbank
to accompany
®
Applying IFRS
Standards 4e
Ruth Picker, Kerry Clark, John Dunn, David Kolitz, Gilad
Livne, Janice Loftus, Leo van der Tas
Prepared by
John Sweeting, Emma Holmes and
Elisabetta Barone
John Wiley & Sons, Ltd 2016

Chapter 8 Share-based payment
CHAPTER 8
Share-based payment
Learning Objectives
8.1 Explain the objective and scope of IFRS 2
8.2 Distinguish between cash-settled and equity-settled share-based payment transactions
8.3 Demonstrate how equity-settled and cash settled share-based payment transactions are
recognised
8.4 Explain how equity-settled share-based payment transactions are measured
8.5 Explain the concept of vesting through differentiating between vesting and non-vesting
conditions
8.6 Explain the concept of a share option reload feature
8.7 Explain how modifications to granted equity instruments are treated
8.8 Demonstrate how cash-settled share-based payment transactions are measured
8.9 Describe and apply the disclosure requirements of IFRS 2.
© John Wiley & Sons, Ltd 2016 8.2

Test Bank to accompany Applying IFRS Standards 4e
Multiple Choice Questions
1. Which of the following is NOT within the scope of IFRS 2?

Learning Objective 8.1 Explain the objective and scope of IFRS 2
*a. Transactions in which the entity receives or acquires goods or services as part of
the net assets acquired in a business combination to which IFRS 3 Business
Combinations applies.
b. Equity instruments granted to employees of the acquiree in a business
combination in their capacity as an employee.
c. Cancellation, replacement or other modification of share-based payment
arrangements because of a business combination.
d. Cancellation, replacement or other modification of share-based payment
arrangements because of other equity restructuring.
2. A share–based payment transaction in which the entity acquires goods or services by

incurring liabilities to the supplier for amounts that are based on the value of the entity’s
shares or other equity instruments of the entity is classified in IFRS 2 as:
Learning Objective 8.2 Distinguish between cash-settled and equity-settled share-based
payment transactions
a. an equity-settled share-based payment transaction
*b. a cash-settled share-based payment transaction
c. a liability-settled share-based payment transaction
d. an “other” share-based payment transaction
3. A share–based payment transaction in which the entity receives goods or services as

consideration for equity instruments of the entity is classified in IFRS 2 Share-based
Payment as
*a. an equity-settled share-based payment transaction
b. a cash-settled share-based payment transaction
4. Reload features are accounted for as follows:

Learning Objective 8.6 Explain the concept of a share option reload feature
a. included in the fair value of the initial options granted at measurement date
*b. separately from the initial options granted
c. as a market condition
d. as a modification to the initial terms and conditions of the initial options granted

5. On 1 July 2015 Pepper Limited granted 500 share options to each of its 100 employees.
Each grant is conditional on the employee working for the company for the next two
years. The fair value of each option is estimated to be €3.00. Pepper estimates that 8%
of its employees will leave during the two year period and therefore forfeit their rights to
the share options.
During the year ended 30 June 2016 five employees left. At this time the company
revised its estimate of total employee departures over the full two-year period to 10%.
During the year ended 30 June 2017 a further 4 employees left.
The amount to be recognised as an expense by Pepper for the year ended 30 June
2016 is:
Learning Objective 8.5 Explain the concept of vesting through differentiating between
vesting and non-vesting conditions
*a. €67 500
b. €69 000
c. €71 250
d. €135 000
6. On 1 July 2013, Leo Limited granted 250 options to each of its 50 employees. The
options are conditional on the employees remaining with the company for the 2 year
vesting period. The options have a fair value of €10 at vesting date. In addition, the
shares will vest as follows:
• On 30 June 2014 if the company’s earnings have increased by more than 15%
• On 30 June 2015 if the company’s earnings have increased by more than 12%
averaged across the 2 year period
At 30 June 2014 Leo’s earnings have increased by 12% and 3 employees have left.
The company expects that earnings will continue to increase at a similar rate during the
year to 30 June 2015 and that the shares will vest at that time. It also expects that a
further 4 employees will leave during the year.
The remuneration expense for the year ended 30 June 2014 for Leo is:
a. €35 833
*b. €53 750
c. €58 750
d. €117 500

7. Which of the following statements in relation to modifications to the terms and conditions
on which equity instruments were granted as part of an employee share scheme is
correct?
Learning Objective 8.7 Explain how modifications to granted equity instruments are
treated
a. a reduction in the exercise price of options will reduce the fair value of the share
options
b. a reduction in a performance hurdle relating to profitability targets will reduce the
fair value of the options
*c. a shortening of the vesting period will increase the fair value of the share options.
d. an increase in the number of equity instruments granted is not an example of a
modification
8. On 1 July 2013 Diamond Ltd granted 800 share options with an exercise price of €35 to
the CFO, conditional on the CFO remaining in employment with the company until 30
June 2016. The exercise price will drop to €30 if Diamond’s earnings increase by an
average of 8% per year over the three year period. On 1 July 2013 the estimated fair
value of the share options with an exercise price of €35 is €10 per option, and if the
exercise price is €30, the estimated fair value of the options is €12 per option.
During the year ended 30 June 2014 Diamond’s earnings increased by 10% and they
are expected to continue to increase at this rate over the next two years.
During the year ended 30 June 2015 Diamond’s earnings increased by 5% and Diamond
management expected that the earnings target would be achieved.
During the year ended 30 June 2016 Diamond’s earnings increased by 11%.
When calculating the remuneration expense to be recognised for the year ended 30
June 2015 which of the following dollar values should be included in the calculation?
*a. €10
b. €12
c. €30
d. €35

The following information relates to questions 9 and 10
On 1 July 2013 Fantasy Ltd granted 200 options to each of its 100 employees. The share
options will vest on 30 June 2015 if the employees remain employed with the company on that
date. The share options have a life of four years. The exercise price is $5, which is also
Fantasy’s share price at the grant date. Fantasy is unable to reliably estimate the fair value of
the share options at the grant date.
Fantasy’s share price and the number of options exercised are set out below. Share options
may only be exercised at year end.
Year ended Share price Number of options

at year end exercised at year end
30 June 2014 $6 -
30 June 2015 $7 -
30 June 2016 $8 7 800
30 June 2017 $9 10 000
9. The cumulative remuneration expense to be recognised by Fantasy as at 30 June 2015

is:
a. $7800
b. $17 800
*c. $35 600
d. $124 600
10. The formula to calculate the remuneration expense for the year ended 30 June 2016 is:
a. 7800 x ($8-$7)
b. 7800 x $8
c. (7800 + 10 000) x ($8-$5)
*d. (7800 + 10 000) x ($8-$7)

The following information relates to questions 11 to 13
On 1 July 2013 Watson Pty Ltd granted 100 share appreciation rights (SARS) to each of its 50
employees, conditional on the employee not leaving the company in the next three years. The
company estimates the fair value of the SARS at the end of each year in which a liability exists
as shown in the table below. The intrinsic values of the SARS at the date of exercise at 30 June
2016, 2017 and 2018 are also shown. All SARS held by employees at 30 June 2016 vest.
Year ended Fair value Intrinsic value

30 June 2014 $14.40
30 June 2015 $15.50
30 June 2016 $18.20 $15.00
30 June 2017 $21.40 $20.00
30 June 2018 $25.00
By 30 June 2016 nine employees have left and 15 employees have exercised their SARS.
11. The amount recognised as an expense for the year ended 30 June 2016 is:
Learning Objective 8.8 Demonstrate how cash-settled share-based payment
transactions are measured
a. $5987
b. $22 500
*c. $28 487
d. $47 320
12. The liability recorded at 30 June 2015 is:

a. $19 680
b. $21 653
*c. $41 333
d. $47 320
13. This is an example of:

a. an equity-settled share-based payment transaction
*b. a cash-settled share-based payment transaction
c. a share-based payment transaction where the counterparty has the settlement
choice
d. a share-based payment transaction where the entity has the settlement choice

The following information relates to questions 14 to 16
Viola Ltd has granted each of its 10 senior executives a choice between receiving a cash
payment equivalent to 1000 shares or receiving 1200 share. The grant is conditional on the
completion of three years’ service with the company. If the share alternative is chosen, the
shares must be held for two years after vesting date. At grant date the company’s share price is
£25 per share. At the end of years 1, 2 and 3 the share price is £27, £28 and £30 respectively.
The company does not expect to pay dividends in the next three years. After taking into
account the effect of post-vesting transfer restrictions the company estimates the grant-date fair
value of the share alternative is £24 per share.
14. What is the fair value of the cash alternative?

a. £240 000
*b. £250 000
c. £288 000
d. £300 000
15. What is the fair value of the equity alternative?

a. £240 000
b. £250 000
*c. £288 000
d. £300 000
16. What is the liability component at the end of year 1?

a. £83 333
*b. £90 000
c. £100 000
d. £108 000

17. On 1 July 2014 Luca Ltd grants 200 options to each of its 75 employees conditional on
the employee remaining in service over the next two years. The fair value of each option
is estimated to be $7. Luca estimates that 8 employees will leave over the two year
vesting period.
By 30 June 2015 four employees have left and the entity estimates that a further five
employees will leave over the next year.
On 30 June 2015 Luca decided to reprice its share options, due to a fall in its share price
over the last 12 months. The repriced share options will vest on 30 June 2016. At the
date of repricing Luca estimates that the fair value of each original option is $1.50 and
the fair value of each repriced option is $3.
During the year ended 30 June 2016 four employees left.
The remuneration expense for the year ended 30 June 2015 is:
treated
*a. $34 650
b. $35 175
c. $46 200
d. $46 900
18. In a share based payment transaction where the entity has settlement choice:
a. where a present obligation does not exist the entity has a choice of classification
as an equity or cash settled share based payment transaction.
*b. the entity has a present obligation to settle in cash where it has a past practice or
stated policy of settling in cash
c. the entity must settle in equity unless there is no commercial substance to the
transaction.
d. if an entity elects to settle in cash the settlement is accounted for as an expense.
19. Which of the following statements in relation to disclosures required under IFRS 2
Share-based Payment is NOT correct?
Learning Objective 8.9 Describe and apply the disclosure requirements of IFRS 2
a. For arrangements that were modified during the year, the incremental fair value
granted as a result.
b. The weighted average price at the date of exercise for options exercised during
the period.
c. A description of the plan, including the general terms and conditions, vesting
requirements, maximum term of options granted and method of settlement must
be disclosed.
*d. For liabilities arising from share-based payment transactions, the total intrinsic
value at the end of the period for liabilities where the counter party’s right had not
yet vested.

20. A share–based payment transaction in which the entity receives goods or services as
consideration for equity instruments of the entity is classified in IFRS 2 Share-based
Payment as
*a. an equity-settled share-based payment transaction
b. a cash-settled share-based payment transaction
21. Salt Limited grants 1000 share options to each of its 100 employees. Each grant is
conditional on the employee working for the company for the next two years. The fair
value of each option is estimated to be €5.00 at grant date and €7.50 at vesting date.
The amount to be recognised as an expense by Salt in year 2 is:
Learning Objective 8.4 Explain how equity-settled share-based payment transactions are
measured:
*a. €250 000
b. €375 000
c. €500 000
d. €750 000
22. Pepper Limited grants 500 share options to each of its 30 employees. Each grant is
conditional on the employee working for the company for the next three years. The fair
value of each option is estimated to be €5.00 at grant date and €7.50 at vesting date.
The amount to be recognised as an expense by Pepper in year 2 is:
measured:
*a. €25 000
b. €37 500
c. €50 000
d. €75 000
23. In situations where an option-pricing model is required to be used to determine the fair
value of equity instruments granted IFRS 2 Share-based Payment:
measured:
a. requires expected dividends to be taken into account when measuring the shares
or options granted.
*b. allows the entity to choose the option-pricing model it wishes to use, but contains
a number of factors that the option-pricing model selected must take into
account as a minimum.
c. requires the use of a binominal option-pricing model.
d. requires the use of the Black-Scholes-Merton formula.

24. On 1 July 2013, Nelson Pty Ltd granted 250 options to each of its 50 employees. The
options are conditional on the employees remaining with the company for the 3 year
vesting period. The options have a fair value of €7.50 at vesting date. In addition, the
shares will vest as follows:
o On 30 June 2014 if the company’s earnings have increased by more than 12%
At 30 June 2014 Nelson’s earnings have increased by 11% and 3 employees have left.
The company expects that earnings will continue to increase at a similar rate during the
year to 30 June 2015 and that the shares will vest at that time. It also expects that a
further 4 employees will leave during the year.
The remuneration expense for the year ended 30 June 2014 for Nelson is:
a. €26 875.00
b. €29 375.00
*c. €40 312.50
d. €88 125.00
25. On 1 July 2013 Pearl Pty Ltd granted 800 share options with an exercise price of €35 to
June 2016. The fair value of Pearl’s shares at that time was assessed to be €40. The
exercise price will drop to €30 if Pearl’s earnings increase by an average of 8% per year
over the three year period. On 1 July 2013 the estimated fair value of the share options
with an exercise price of €35 is €10 per option, and if the exercise price is €30, the
estimated fair value of the options is €12 per option. During the year ended 30 June
2014 Pearl’s earnings increased by 10% and they are expected to continue to increase
at this rate over the next two years. During the year ended 30 June 2015 Pearl’s
earnings increased by 9% and Pearl management continued to expect that the earnings
target would be achieved. During the year ended 30 June 2016 Pearl’s earnings
increased by only 2%. At 30 June 2016 the share price is €23.
The remuneration expense to be recognised for the year ended 30 June 2014 is:
vesting and non-vesting conditions:
a. €2667
*b. €3200
c. €8000
d. €9600

26. On 1 July 2013 Pearl Pty Ltd granted 800 share options with an exercise price of $35 to
June 2016. The fair value of Pearl’s shares at that time was assessed to be $40. The
exercise price will drop to $30 if Pearl’s earnings increase by an average of 8% per year
over the three year period. On 1 July 2013 the estimated fair value of the share options
with an exercise price of $35 is $10 per option, and if the exercise price is $30, the
estimated fair value of the options is $12 per option. During the year ended 30 June
2014 Pearl’s earnings increased by 10% and they are expected to continue to increase
at this rate over the next two years. During the year ended 30 June 2015 Pearl’s
earnings increased by 9% and Pearl management continued to expect that the earnings
target would be achieved. During the year ended 30 June 2016 Pearl’s earnings
increased by only 2%. At 30 June 2016 the share price is $23.
Assuming that the CFO decides NOT to exercise his options at 30 June 2016, the
following entry would be recorded:
Learning Objective 8.6 Explain the concept of a share option reload feature:
a. DR Wages expense
CR Options issued (equity)
b. DR Options issued (equity)
CR Lapsed options reserve
c. DR Options issued (equity)
CR Retained earnings
*d. DR Options issued (equity)
CR Wages expense
27. In relation to equity instruments granted by an entity where the entity makes
modifications to the terms and conditions attaching to the grant,
treated:
a. the incremental fair value is measured as the difference between the fair value of
the modified instrument, estimated at the date of modification and that of the
original equity instrument, estimated at the date of original granting.
b. if the modification occurs during the vesting period the incremental fair value is
recognised immediately.
c. terms or conditions may not be modified in a manner that is not beneficial to the
employee.
*d. where the exercise price of options is modified, the fair value of the options
changes.

28. On 1 July 2013 Poggio Ltd grants 300 options to each of its 100 employees conditional
on the employee remaining in service over the next three years. The fair value of each
option is estimated to be $12. Poggio estimates that 15 employees will leave over the
three year vesting period. By 30 June 2014 four employees have left and the entity
estimates that a further ten employees will leave over the next two years. On 30 June
2014 Poggio decided to reprice its share options, due to a fall in its share price over the
last 12 months. The repriced share options will vest on 30 June 2016. At the date of
repricing Poggio estimates that the fair value of each original option is $3 and the fair
value of each repriced option is $5. During the year ended 30 June 2015 a further 6
employees leave and Poggio estimates that another 3 employees will leave during the
year ended 30 June 2016. During the year ended 30 June 2016 four employees left.
The entry at 30 June 2015 to account for the share based payment transaction is:
treated:
a. DR Wages expense
CR Liability to employee
*b. DR Wages expense
CR Options issued (equity)
c. DR Wages expense
CR Share capital
d. DR Wages expense
CR Cash
29. Which of the following statements in relation to disclosures required under IFRS 2 is not
correct?
Learning Objective 8.9 Describe and apply the disclosure requirements of IFRS 2:
a. Option pricing models used in valuing share options must be identified.
b. The number and weighted average exercise price of share options outstanding at
the beginning and end of each period must be disclosed.
c. Information about share-based payment arrangements that are substantially the
same may be aggregated.
*d. The total expense arising from share-based payment transactions in which the
services qualified for recognition as an asset must be disclosed.

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Applying IFRS Standards 4th Edition

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© John Wiley & Sons, Ltd 2016 8.2

Multiple Choice Questions

1. Which of the following is NOT within the scope of IFRS 2?

2. A share–based payment transaction in which the entity acquires goods or services by

3. A share–based payment transaction in which the entity receives goods or services as

4. Reload features are accounted for as follows:

© John Wiley & Sons, Ltd 2016 8.3

© John Wiley & Sons, Ltd 2016 8.4

© John Wiley & Sons, Ltd 2016 8.5

The following information relates to questions 9 and 10

Year ended Share price Number of options

9. The cumulative remuneration expense to be recognised by Fantasy as at 30 June 2015

© John Wiley & Sons, Ltd 2016 8.6

The following information relates to questions 11 to 13

Year ended Fair value Intrinsic value

12. The liability recorded at 30 June 2015 is:

13. This is an example of:

© John Wiley & Sons, Ltd 2016 8.7

The following information relates to questions 14 to 16

14. What is the fair value of the cash alternative?

15. What is the fair value of the equity alternative?

16. What is the liability component at the end of year 1?

© John Wiley & Sons, Ltd 2016 8.8

© John Wiley & Sons, Ltd 2016 8.9

© John Wiley & Sons, Ltd 2016 8.10

© John Wiley & Sons, Ltd 2016 8.11

© John Wiley & Sons, Ltd 2016 8.12

© John Wiley & Sons, Ltd 2016 8.13

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