Accounting and Financial Management: Long Service Leave, Employee Stock Options, and Intangible Assets

This article covers the accounting treatment of long service leave, employee stock options, and intangible assets in Accounting and Financial Management. It includes insights into estimating expenses, journal entries, and disclosure requirements. The article cites relevant AASB standards and the conceptual framework for financial reporting.

Accounting and Financial Management
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Case-1
Requirement-A
Step 1: Estimating the number of employees who are expected to become
eligible for LSL
Years of Service
Probability LSL
will Vest
No of
employees
Expected
Number of
Entitled
employees
(1) (2) (3) (4)= 2*3
3 30% 1 0.3
5 40% 1 0.4
7 80% 1 0.8
11 100% 1 Note-2
13 100% 1 Note-2
Step 2: Estimate the projected
salaries
Current salary*(1+inflation rate)^n
Years of
Service
Expected
Number of
Entitled
employees
Current
Salary
Inflation
rate
Period
until
LSL
vests
Projecte
d
salary
3 0.3 54,000.00 2.50% 7 64189.03
5 0.4 80,000.00 2.50% 5 90512.66
7 0.8
105,000.0
0 2.50% 3 113073.5
Step 3: Determine the accumulated benefit
Years of employment/Years required for LSL x weeks of paid leave x projected
salaries Years required for LSL 52
Years of
Service
Projected
salary
Unit credit (Years
of
employment/Year
s required for LSL)
LSL
weeks /52
Accumulate
d
benefit
3 0.30 5,554.82
2

64,189.03 0.29
5 90,512.66 0.50 0.29 13,054.71
7 113,073.52 0.70 0.29 22,832.15
Step 4: Measure the present value of the accumulated benefit
accumulated benefit/(1 + i)n
Years of Service
Accumulated
benefit
Discount
factor
Present
value
3 5,554.82 0.81 4,516.58
5 13,054.71 0.86 11,266.58
7 22,832.15 0.92 21,109.11
36,892.27
Note-1: Rate of discount is taken based on yield on government bond. Yield on bond being
taken based on years of service remaining to vesting period
Note-2: In case of Yu Lew, the vesting condition of 10 years has been satisfied, so, no expense
on this as it is due for payment. In the case of Adrian Toomes, the vesting conditions have
already been satisfied and he has completed the payment perido as well so no expense to be
recognized it is already debt due on company
Journal entries
S. No. Account title Debit Credit
30-Jun-19 Long service leave expense
36,892.2
7
Provision for Long service leave expense 36,892.27
(Provision for long service leave expense created on 30
June 2009)
30-Jun-19 Profit and loss account
36,892.2
7
Long service leave expense 36,892.27
3

(Long service leave expense for 2009 charged to profit and
loss account)
Requirement-B
Note disclosure regarding the long-service leave
Opening in provision
account 62,400.00
Add: Current year expense 36,892.27
Balance at the end 99,292.27
Discount rate
Bond yield based on number of
years
Phineas Mason 3.000%
Herman Schultz 2.990%
Jackson Brice 2.650%
Notes:
Assumed that benefits of Adrian Toomes have been paid
Assumed that plan assets of amount equal to benefits paid to Adrian Toomes have been
disposed off
Case-B
Requirement-A
Determination of expense to be recognized each year1
2019 2020 2021 2022
A. No of employees entitled 360 344 336 403
(450-20-
70)
(450-20-
11-75)
(450-20-11-
8-75)
(450-20-11-
8-8)
B. Options per employee 230 230 230 230
C. Total options (A*B) 82800 79120 77280 92690
D. Fair value 3.9 3.9 3.9 3.9
E. Total expense cumulative 322920 308568 301392 361491
1 AASB 2, 2018, Share based payments, Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB2_07-04_COMPjul09_01-10.pdf accessed on 13
September 2018.
4

(C*D)
F. Expense to be recognized 80730 150696 69966 60099
Journal entries
S. No. Account title Debit
Cred
it
30-Jun-
19 ESOP expense
8073
0
ESOP outstanding-liability
8073
0
(employee stock option expense recognized)
Profit and loss account
8073
0
ESOP expense
8073
0
(expense transferred to profit and loss account)
30-Jun-
20 ESOP expense
1506
96
ESOP outstanding-liability
1506
96
(employee stock option expense recognized)
Profit and loss account
1506
96
ESOP expense
1506
96
(expense transferred to profit and loss account)
30-Jun-
21 ESOP expense
6996
6
ESOP outstanding-liability
6996
6
(employee stock option expense recognized)
Profit and loss account
6996
6
ESOP expense
6996
6
(expense transferred to profit and loss account)
30-Jun- ESOP expense 6009
5

22 9
ESOP outstanding-liability
6009
9
(employee stock option expense recognized)
Profit and loss account
6009
9
ESOP expense
6009
9
(expense transferred to profit and loss account)
30-Jun-
23 Bank
4830
00
ESOP outstanding-liability
2691
00
Share capital
6900
0
Share premium
6831
00
(Equity shares issued to 300 employees exercising the option)
ESOP outstanding-liability
9239
1
General reserve
9239
1
(Remaining balance in ESOP outstanding-liability account
transferred to general reserve)
Requirement-B
If three more employees leave on 31 Dec 2022, it will not affect the answer in part-A in any
way. The amount of expenditure would remain same as the employees are leaving after the
vesting period. Also, if it is assumed that these three employees were among 103 employees
who did not exercise the option, the change will not affect the amount transferred to general
reserve account too.
Case-C
As per the ruling given in AASB 1382, the expenditure incurred on the in house developed
intangible assets should be recognized in the statement of profit and loss account in the year of
incurrence itself until development phase of the intangible being developed is started. This
2 AASB 138, 2018, Intangible assets, Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB138_08-15_COMPoct15_01-18.pdf accessed on 13
September 2018.
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means that the expenditure after starting the development phase activities of the intangible being
developed can be capitalized. However, this is also subject to certain conditions.
Based on the above ruling, the accounting treatment of the expenditure incurred on development
of a motion- sensing system by StarK Ltd is given below:
Expenses to be charged to profit and loss account (Research phase)
All expenses incurred during the research phase would be charged to the statement of profit and
loss account. The project started on 01 August 2017. The research phase of this project continued
till May 2018 until company developed a prototype of the motion-sensing system. The
expenditure incurred till May 2018 would be charged to profit and loss of the current year i.e.
2017-18. Thus, salary paid in September 2017 of 319000, cost of basic model production of
215000 incurred in November 2017, a $103000 incurred in January 2018 and another $93000
incurred in January 2018 would be charged to the profit and loss account. Further, a sum of
$230000 incurred in April 2018 for incorporating new design would also be charged to the profit
and loss account. So, a total of $960,000 would be charged to profit and loss account in 2017-18.
Expenses to be capitalized (Development phase)
The expenses incurred in the development phase can be capitalized to meeting the asset
recognition criteria as set out in the framework. The framework states that an item can be
recognized as asset in books if future economic benefits are expected to flow from its use in
future years3. In May 2018, Stark Ltd had developed a prototype of the system which shows that
the system would be successfully available to the company for future economic benefits. Thus,
expenses of $112,000, $38,000, and $40,000 resulting in total of 190,000 to be capitalized as
intangible assets and these expenses would be amortized on yearly basis.
3 Conceptual framework, 2018, Conceptual Framework for Financial Reporting, Available at:
https://www.aasb.gov.au/admin/file/content105/c9/ACCED264_06-15.pdf accessed on 13 September 2018.
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References
AASB 119, 2018, Employee benefits, Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB119_09-11_COMPjun14_07-14.pdf
accessed on 13 September 2018.
AASB 138, 2018, Intangible assets, Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB138_08-15_COMPoct15_01-18.pdf
accessed on 13 September 2018.
AASB 2, 2018, Share based payments, Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB2_07-04_COMPjul09_01-10.pdf
accessed on 13 September 2018.
Conceptual framework, 2018, Conceptual Framework for Financial Reporting, Available at:
https://www.aasb.gov.au/admin/file/content105/c9/ACCED264_06-15.pdf accessed on 13
September 2018.
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