The continuing employment condition should be based on the best estimates at the statement of financial position date, which in this case is for 16 executives to be employed at the vesting date. The charge to the income statement is therefore £378,000 (10,000 x 16 x £12.60 x ¼ x 9/12). This will reduce profit after tax and therefore EPS. In addition this sum is also credited in the statement of financial position to equity. IFRS2 does not state where in equity this entry should arise, and many companies add it to retained earnings. When calculating diluted EPS it will be necessary to take into consideration the number of ‘free’ shares being allocated to executives assuming the whole scheme will vest. (see appendix for calculations) Lease of machinery Shane Ponting’s analysis of the agreement as an operating lease is incorrect. This would appear to be a finance lease because: (a) the lease term and useful life of the asset are the same (b) the present value of the lease payments received, plus the residual value guaranteed by Prior plc come to £606,381, which is almost all of the fair value of the machinery. The asset should therefore be derecognised and a receivable created. This is called the net investment in the lease. The direct costs incurred should be included in the initial measurement of the finance lease receivable and will therefore be recognised in the income statement over the lease term as part of interest receivable. The rental income of £150,000 is removed from the income statement. Interest receivable of £61,000 is credited to the income statement (appendix 3) Because the machinery is being derecognised the depreciation charge should be added back to profit. Overall the reclassification of the lease to a finance lease will increase EPS. In the statement of financial position at 31 May 2010 there will be a receivable of £524,000 (appendix 3) which should be analysed between amounts due in less than and more than one year.
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