Financial Accounting

This article discusses share-based payment, ESG reporting, consolidation accounting, business combination, lease, and financial instruments in financial accounting. It also provides insights into the impact of these transactions on the financial and non-financial aspects of a company. The article cites examples from The Warehouse's 2018 annual report to illustrate the application of NZ IFRS 2 and NZ IFRS 16. The subject matter is relevant to accounting and finance courses in universities and colleges.

Running head: FINANCIAL ACCOUNTING
Financial Accounting
Name
Institution
Author’s Note

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Table of Contents
Share-based Payment.................................................................................................................2
Discussion on Financial and Non-Financial Impacts.................................................................4
ESG Reporting.......................................................................................................................4
Consolidation Accounting......................................................................................................4
Business Combination............................................................................................................5
Lease......................................................................................................................................5
Financial Instruments.............................................................................................................5
References..................................................................................................................................7

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Share-based Payment
Share-based payments are transactions that involve settlement of liability or payments
for goods or services offered by an employee or an entity using and equity instrument or
other payment that is based on the company’s share price (Voulgaris, Stathopoulos and
Walker 2014). Share based payments are considered as an effective technique to reward the
organizational employees for meeting certain specified targets. In Australia, the presence of
NZ IFRS 2 can be seen that provide the companies with the necessary accounting standards
to deal with the share based payments. As per this accounting standard, when an entity
undertakes any share-based payment, it is needed for it to reflect it in the profit and loss
position along with the expenses associated with these transactions.
NZ IFRS 2 obliges entities to maintain records of all share-based payments. Such
payments include transactions involving employees, where cash, equity instruments or other
assets are used as settlement. NZ IFRS 2 provides guidance on how the three types of
settlements are used to complete share-based payments (Roberts, Zaslavsky and McWilliams
2018). The guidance provided by NZ IFRS 2 contains the following requirements and
measurement principles:
Equity-settled share-based payments–
Under this type of payment, an entity accepts goods, services or equity in exchange
for its own equity. With employees or directors, a company will typically issue share options
as part of the consideration for their services. Share options are issued as the employee or
director delivers services but then the shares vest in the future as long as the employee or
director will still be working with the company at the future date. NZ IFRS 2 requires the
entity to record the issue of shares at the point share options are granted. Subsequently, NZ
IFRS 2 requires the entity to review and record changes in the fair value of the shares issued.

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Cash-settled share-based payment –
These transactions take place when the entity pays for goods and services in cash with
the settlement amount being based on the equity instruments of the entity. The amount of
cash paid by the entity is recorded as the expense for the cash-settled transaction (Abu Risheh
and Al-Saeed 2014).
The third category is one where the settlement of the share-based transaction is either
done using equity instruments or cash. These type of transactions are more common as they
benefit both the employee and the company. The employee benefits from immediate
ownership of the company’s equity while the company does not require to have cash
immediately to settle meet its obligation to employees. These are regarded as critical
considerations in the accounting of share-based payments.
It is apparent from the foregoing discussion that the primary objective of NZ IFRS2 is
to provide guidance to entities when recording and reporting share-based payment
transactions. Specifically, entities that make share-based payments have to record expenses in
the income statement and to record the substance of the transaction in the balance sheet.
IFRS2 requires entities to record share-based payment transactions as goods or services are
delivered to the entity. Additionally, for equity settled transactions, the entity should record
changes in equity along with the corresponding changes in liability. If the goods or services
received in exchange for share payments do not qualify to be recognized as an asset, then
they should be recognized as expenses (Giner and Arce 2014).
The management of The Warehouse need to ensure that the entity’s share-based
payments are in compliance with the principles, rules and regulations set out in NZ IFRS 2.
The company’s annual financial statements should include a statement that acknowledges
that the entity has complied with the provisions of NZ IFRS 2 in recording share-based

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payments. It can be seen from the 2018 Annual Report of The Warehouse that the company
has undertaken certain tractions for share-based payments. As per the rule, the company has
disclosed share based payment expenses for both 2018 and 2017; which are $25,622,000 and
$40,061,000 respectively. The equity settled share based payment is $353,000 in 2018 and
$1,283,000 in 2017. It can also be seen from the 2018 Annual Report that The Warehouse has
a share based payment reserve which states that the company grants the share rights to the
employees with the executive share right plan of the group (thewarehousegroup.co.nz 2019,
pp. 112).
Discussion on Financial and Non-Financial Impacts
Financial
All share-based payments have an impact on the balance of a company’s paid up
capital. Paid-up capital increases when employees or directors are granted shares as
compensation. Equity-settled payments do not have an effect on cash flows and thus only
affect the balance sheet. In contrast, cash settled payments have an impact on both the
balance sheet and the cash flow statement.
Non-financial Impacts
Share-based payments are meant to serve as an incentive to employees. They give
employees ownership of the company and as a result potentially motivate employees and
directors to do their best to ensure that the company succeeds. A further non-financial impact
of share-based payments is that they encourage employees to work for longer until the future
date when their share options vest. This has the effect of lowering staff turnover and related
costs. Additionally, employees will work to ensure that the company’s performance is good
so that at the date when their shares vest, the intrinsic value of the shares will be high.

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ESG Reporting
Environmental, Social and Governance (ESG) reporting, as the name suggests, refers
to reporting on how a company’s practices promote sustainability. ESG reporting essentially
challenges companies to consider how their future performance will be influenced by their
current actions.
Consolidation Accounting
Consolidation accounting is the process of bringing tegether financial results of
subsidiaries into the financial record of a parent company. If a company owns more than 50%
of another company (subsidiary), then the subsidiary’s financial results have to be included in
the parent’s results pro-rata (Milojević, Vukoje and Mihajlović2013). The Warehouse is
obliged to prepare consolidated accounts because of its parent-subsidiary relationships. The
Warehouse is therefore required to issue a consolidated financial report that combines all
parent and subsidiary accounts into one (thewarehousegroup.co.nz 2019, pp78).
Business Combination
A business combination is an acquisition of an entity by another or two entities or more
combine to form a new company. In the case of an acquisition, the two entities involved
retain their identities but the acquirer gains control over the entity that has been acquired.
Business combinations provide an avenue for companies to grow in size more rapidly than
they would grow organically (Verrecchia2013). The Warehouse can realize immediate
growth in size and scale of operations through a business combination.
Lease
A lease is a legal contract in which a party that owns an asset grants another party
rights to use the asset for a defined period in exchange for periodic payments. The owner of
the asset is referred to as the lessor while the party that seeks to use the asset in exchange for

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payment is referred to as the lessee (Barone, Birt and Moya 2014). The warehouse’ 2018
annual report indicates that the company has entered into a number of lease arrangements.
The company should take into consideration the impact NZ IFRS 16 which will provide new
guidance on lease transaction from the year 2020. The new standard will require entities to
recognize liability under lease and the right to use lease assets. The Warehouse has reported
both operating and finance leases in the year of 2018. The company has also made finance
lease payments in 2018 (thewarehousegroup.co.nz 2019, pp 80).
Financial Instruments
These are monetary instruments between parties that can be traded as assets. Financial
instruments and they play a vital function of ensuring efficient transfer and flow of capital
within financial markets (Blankespooret al.2013). According to its 2018 Annual Report, The
Warehouse has both current and non-current derivatives. These include interest rate swaps
and currency contracts The Warehouse has taken into consideration the impact of change in
accounting standards for financial instruments. The new accounting standard is NZ IFRS 9:
Financial Instrument (thewarehousegroup.co.nz 2019, pp 96).

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References
Abu Risheh, K.E. and Al-Saeed, M.T.A., 2014. The Impact of IFRS Adoption on Audit Fees:
Evidence from Jordan. Accounting & Management Information Systems/Contabilitatesi
Informatica de Gestiune, 13(3).
Barone, E., Birt, J. and Moya, S., 2014. Lease accounting: A review of recent
literature. Accounting in Europe, 11(1), pp.35-54.
Biondi, Y. and Zambon, S. eds., 2013. Accounting and business economics: Insights from
national traditions. Routledge.
Blankespoor, E., Linsmeier, T.J., Petroni, K.R. and Shakespeare, C., 2013. Fair value
accounting for financial instruments: Does it improve the association between bank leverage
and credit risk?. The Accounting Review, 88(4), pp.1143-1177.
Giner, B. and Arce, M., 2014. National standard-setters’ lobbying: An analysis of its role in
the IFRS 2 due process. In Accounting and regulation (pp. 377-398). Springer, New York,
NY.
Milojević, I., Vukoje, A. and Mihajlović, M., 2013. Accounting consolidation of the balance
by the acquisition method. Economics of Agriculture, 60(297-2016-3534), pp.237-252.
Roberts, E.T., Zaslavsky, A.M. and McWilliams, J.M., 2018. The value-based payment
modifier: program outcomes and implications for disparities. Annals of internal
medicine, 168(4), pp.255-265.
Thewarehousegroup.co.nz. 2019. [online] Available at:
https://www.thewarehousegroup.co.nz/application/files/1015/3748/5553/2018_Annual_Repo
rt_Print.pdf [Accessed 11 Aug. 2019].
Verrecchia, R.E., 2013. Accounting alchemy. Accounting Horizons, 27(3), pp.603-617.

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Voulgaris, G., Stathopoulos, K. and Walker, M., 2014. IFRS and the use of accounting-based
performance measures in executive pay. The International Journal of Accounting, 49(4),
pp.479-514.