Equity Compensation Benefits

33. Equity Compensation Benefits

Management Share Option Plan (MSOP) of adidas AG Under the Management Share Option Plan (MSOP) adopted by the shareholders of adidas AG on

May 20, 1999, and amended by resolution of the Annual General Meeting on May 8, 2002, and on May 13, 2004 the executive board was authorized to issue nontransferable stock options for up to 1,373,350 no-par value bearer shares to members of the executive board of adidas AG as well as to managing directors/senior vice presidents of its related companies and to other executives of adidas AG and its related companies until August 27, 2004. The granting of stock options was able to take place in tranches not exceeding 25% of the total volume for each fiscal year.

There is two-year vesting period for the stock options and a term of approximately seven years upon their respective issue.

Management share option plan (MSOP) 1

Tranche I (1999)

Tranche II (2000)

Tranche III (2001)

Tranche IV (2002) Tranche V (2003)

Number price in € Originally issued

price in €

Number

price in €

Number

price in €

Number

price in €

Number

price in €

Outstanding as at Jan. 1, 2005 163,450 -- 17,450 21.75 55,700 37.95 204,550 90.85 82,500 --

Forfeited during the period

2.56 3,700 38.00 2,500 2.56 Exercised during the period May 2005

0 -- Aug. 2005

Outstanding as at Dec. 31, 2005 61,150 153.96 10,250 2.56 17,900 2.56 50,945 38.76 23,700 2.56

Exercisable as at Dec. 31, 2005

Outstanding as at Jan 1, 2006

Forfeited during the period

26.84 0 4.00 Exercised during the period May 2006²

4.00 4,400 43.84 1,750 4.00 Expired during the period

Outstanding as at Dec. 31, 2006 2 0 -- 8,050 4.00 12,150 4.00 30,625 43.84 7,800 4.00

Exercisable as at Dec. 31, 2006 2 0 -- 8,050 4.00 12,150 4.00 30,625 43.84 7,800 4.00 ¹ In the table the exercise period is relevant, not the payment date

² Due to the share split effective May 2006, one option is now equivalent to four shares (see also Note 22).

398 Wiley IFRS: Practical Implementation Guide and Workbook

The expense recognized in the income statement for 2006 arising from share-based payment transactions amounted to €0 million (2005: €0.5 million) and is recorded within the operating ex- penses. The contra-entry to the expense was recorded in equity.

The remaining contractual lives for stock options outstanding at the end of the period are pre- sented as follows: Tranche II (2000) until July 2007, Tranche III (2001) until July 2008, Tranche IV (2002) until July 2009, and Tranche V until July 2010.

For stock options outstanding at the end of the period, it is not possible to disclose the range of exercise prices because they are dependent on future share prices. No stock options were issued during the year under review. The stock options may only be exercised subject to the attainment of at least one of the following

performance objectives:

1. Absolute performance: During the period between the issuance and exercise of the stock op- tions, the stock market price for the adidas AG share—calculated upon the basis of the total shareholder return approach—has increased by an annual average of at least 8%.

2. Relative performance: During the same period, the stock market price for the adidas AG share must have developed by an annual average of 1% more favorably than the stock market prices of a basket of competitors of the adidas Group globally and in absolute terms may not have fallen.

The stock options may only be exercised against payment of the exercise price. The exercise price corresponds to the arithmetical mean of the closing prices of the adidas AG share over the last 20 trading days of the respective exercise period, less a discount, which is composed of the absolute and relative performance components. In any case, the exercise price shall be at least the lowest issue price as stated in § 9 section 1 of the German stock Corporation Act (AKTG), currently €1.00 (i.e., €

4.00 per option). The option terms and conditions stipulate that the stock options may be used for existing common shares in lieu of new shares from the contingent capital, or in the place of common shares the discount is paid in cash.

The new shares participate in profits from the beginning of the year in which they are issued.

Chapter 34 / Share-Based Payments (IFRS 2) 399

MULTIPLE-CHOICE QUESTIONS

(c) $300,000

1. Which of the following transactions involving

(d) $250,000

the issuance of shares does not come within the defi-

Answer: (b)

nition of a “share-based” payment under IFRS 2? (a) Employee share purchase plans.

5. An entity grants 1,000 share options to each of its (b) Employee share option plans.

five directors on July 1, 20X4. The options vest on June 30, 20X8. The fair value of each option on

(c) Share-based payment relating to an acquisi- tion of a subsidiary.

July 1, 2004, is $5, and it is anticipated that all of the share options will vest on June 30, 20X8. What will

(d) Share appreciation rights. be the accounting entry in the financial statements for

Answer: (c)

the year ended June 30, 20X5? 2. Which of the following is true regarding the re-

(a) Increase equity $25,000, increase in expense quirements of IFRS 2?

income statement $25,000. (b) Increase equity $5,000, increase in expense

(a) Private companies are exempt. (b) “Small” companies are exempt.

income statement $5,000. (c) Subsidiaries using their parent entity’s

(c) Increase equity $6,250, increase in expense income statement $6,250.

shares as consideration for goods and ser- vices are exempt.

(d) Increase equity zero, increase in expense in- come statement zero.

(d) There are no exemptions from IFRS 2.

Answer: (c)

Answer: (d)

6. Entity A is an unlisted entity, and its shares are 3. An entity issues shares as consideration for the

purchase of inventory. The shares were issued on owned by two directors. The directors have decided to January 1, 20X4. The inventory is eventually sold on

issue 100 share options to an employee in lieu of many years’ service. However, the fair value of the

December 31, 20X5. The value of the inventory on January 1, 20X4, was $3 million. This value was un-

share options cannot be reliably measured as the en- tity operates in a highly specialized market where

changed up to the date of sale. The sale proceeds were $5 million. The shares issued have a market value of

there are no comparable companies. The exercise $3.2 million. Which of the following statements cor-

price is $10 per share, and the options were granted on January 1, 20X4, when the value of the shares was

rectly describes the accounting treatment of this share-based payment transaction?

also estimated at $10 per share. At the end of the fi- nancial year, December 31, 20X4, the value of the

(a) Equity is increased by $3 million, inventory is increased by $3 million; the inventory

shares was estimated at $15 per share and the options value is expensed on sale on December 31,

vested on that date. What value should be placed on the share options issued to the employee for the year

20X5. (b) Equity is increased by $3.2 million, inven-

ended December 31, 20X4?

(a) $1,000

tory is increased by $3.2 million; the inven- tory value is expensed on sale on De-

(b) $1,500

cember 31, 20X5.

(c) $ 500 (d) $ 250

(c) Equity is increased by $3 million, inventory is increased by $3 million; the inventory

Answer: (c)

7. On June 1, 20X4, an entity offered its employees (d) Equity is increased by $3.2 million, inven-

value is expensed over the two years to De- cember 31, 20X5.

share options subject to the award being ratified in a general meeting of the shareholders. The award was

tory is increased by $3.2 million; the inven- tory value is expensed over the two years to

approved by a meeting on September 5, 20X4. The entity’s year-end is June 30. The employees were to

December 31, 20X5. receive the share options on June 30, 20X6. At which

Answer: (a)

date should the fair value of the share options be val- 4. An entity issues fully paid shares to 200 employ-

ued for the purposes of IFRS 2? ees on December 31, 20X4. Normally shares issued to

(a) June 1, 20X4.

employees vest over a two-year period, but these

(b) June 30, 20X4.

shares have been given as a bonus to the employees

(c) September 5, 20X4.

because of their exceptional performance during the

(d) June 30, 20X6.

year. The shares have a market value of $500,000 on

Answer: (c)

December 31, 20X4, and an average fair value for the 8. Many shares and most share options are not year of $600,000. What amount would be expensed traded in an active market. Therefore, it is often diffi- in the income statement for the above share-based

payment transaction? cult to arrive at a fair value of the equity instruments being issued. Which of the following option valuation

(a) $600,000 (b) $500,000

techniques should not be used as a measure of fair value in the first instance?

(a) Black-Scholes model. (b) Binomial model.

Wiley IFRS: Practical Implementation Guide and Workbook

(c) Monte-Carlo model. December 31, 20X5. The expense charged in the in- (d) Intrinsic value.

come statement since the grant date of January 1,

Answer: (d)

20X3, had been year to December 31, 20X3, $2 mil- lion, and year to December 31, 20X4, $2.1 million.

9. Ashleigh, a public limited company, has granted The expense that would have been charged in the year share options to its employees with a fair value of $6

to December 31, 20X5, was $2.2 million. What would million. The options vest in three years’ time. The

be the expense charged in the income statement for Monte-Carlo model was used to value the options,

the year December 31, 20X5? and these estimates had been made:

(a) $2.2 million.

• Grant date (January 1, 20X4): estimate of em-

(b) $8 million.

ployees leaving the entity during the vesting

(c) $3.9 million.

period—5%

(d) $2 million.

• January 1, 20X5: revision of estimate of em-

Answer: (c)

ployees leaving to 6% before vesting date • December 31, 20X6: actual employees leaving

12. Elizabeth, a public limited company, has granted 5%

100 share appreciation rights to each of its 1,000 em- ployees in January 20X4. The management feels that

A. What would be the expense charged in the as of December 31, 20X4, 90% of the awards will income statement in

vest on December 31, 20X6. The fair value of each Year to December 31, 20X4?

share appreciation right on December 31, 20X4, is (a) $6 million.

$10. What is the fair value of the liability to be re- (b) $2 million.

corded in the financial statements for the year ended (c) $1.90 million.

December 31, 20X4?

(d) $5.70 million.

(a) $300,000 (b) $10 million

Answer: (c) ($6 million × 95% × 1/3)

(c) $100,000

B. Year to December 31, 20X5?

(d) $90,000

(a) $1.90 million.

Answer: (a) (100 × 1000 × 90% × $10 × 1/3)

(b) $1.88 million. (c) $2 million.

13. Jay, a public limited company, has granted 20 (d) $3.78 million.

share appreciation rights to each of its 500 employees on January 1, 20X4. The rights are due to vest on

Answer: (b) ($6 million × 94% × 2/3 – $1.90

December 31, 20X7, with payment being made on

million)

December 31, 20X8. Assume that 80% of the awards C. Year to December 31, 20X6?

vest. Share prices are

(a) $1.90 million. $ (b) $1.88 million.

15 (c) $2 million.

January 1 20X4

18 (d) $1.92 million.

December 31, 20X4

December 31, 20X7

Answer: (d) ($6 million × 95% – $3.78 million)

19 10. Joice, a public limited company, has granted

December 31, 20X8

What liability will be recorded on December 31, share options to its employees prior to the date from

20X7, for the share appreciation rights? which IFRS 2 became applicable (November 7,

(a) $ 60,000

2002). The company decided after the issuance of

(b) $210,000

IFRS 2 to reprice the options. The original exercise

(c) $ 48,000

price of $20 was repriced at $15 per option. IFRS 2

(d) $150,000

would require the company to

Answer: (c) [20 × 500 × 80% × ($21 – $15)]

(a) Apply the Standard to the share options from the original grant date and ignore the

14. How should the settlement of the transaction be repricing.

accounted for on December 31, 20X8? (b) Apply the Standard to the share options

(a) Payment to employees of $32,000, no gain from the original grant date, taking into ac-

recorded.

count the repriced award. (b) Payment to employees of $16,000, gain of (c) Apply the Standard to the repriced award

$32,000 is recorded. only.

(c) Payment to employees of $48,000, no gain (d) Ignore the Standard for the whole award of

recorded.

share options. (d) Payment to employees of $32,000, gain of $16,000 is recorded.

Answer: (c) Answer: (d) [20 × 500 × 80% × ($19 – $15)] that

11. An entity has granted share options to its em-

is, $32,000

ployees. The total expense to the vesting date of De- cember 31, 20X6, has been calculated as $8 million.

15. Doc, a public limited company, has purchased The entity has decided to settle the award early, on

inventory of $100,000. The company has offered the supplier a choice of settlement alternatives. The alter-

Chapter 34 / Share-Based Payments (IFRS 2) 401

natives are either receiving 1,000 shares of Doc six months after the purchase date (valued at $110,000 at the date of purchase) or receiving a cash payment equal to the fair value of 800 shares as of Decem- ber 31, 20X4 (estimated value $90,000 at the date of purchase). What should be the accounting entry at the date of purchase of the inventory?

(a) Inventory $90,000, liability $90,000. (b) Inventory $100,000, liability $100,000. (c) Inventory $100,000, liability $110,000, in-

tangible asset $10,000. (d) Inventory $100,000, liability $90,000, equity $10,000.

Answer: (d) 16.A.

In the tax jurisdiction of Mack, a public limited company, a tax deduction is allowed for the intrinsic value of the share options issued to employees. The company issued options on January

1, 20X4, worth $15 million to employees. They vest in three years. The share options’ intrinsic value at December 31, 20X4, was $12 million. The tax rate in the jurisdiction is 30%. What is the tax effect of the above issue of share options at December 31, 20X4?

(a) $1.5 million benefit to income statement. (b) $1.2 million benefit to income statement. (c) $1.5 million benefit recognized in equity. (d) $1.2 million benefit recognized in equity.

Answer: (b) At December 31, 20X4, 30% of $12 million divided by three years = $1.2 million to income statement as the tax effect of the cumula- tive remuneration expense exceeds the tax benefit ($5 million @ 30% compared with $4 million @ 30%).

B. In the above example, what would be the tax effect if the intrinsic value at December 31, 20X4, was $21 million?

(a) $2.1 million tax benefit to income. (b) $2.1 million recognized in equity. (c) $1.5 million tax benefit to income, $0.6 mil-

lion recognized in equity. (d) $1.5 million recognized in equity, $0.6 mil- lion tax benefit to income.