Accounting for Share-Based Payments: Agrico plc Case Study Analysis

This assignment analyzes the financial reporting of Agrico plc, focusing on share-based payments in accordance with IFRS 2. The solution addresses the accounting treatment of share options, including fair value determination, journal entries, and the impact on financial statements. It includes adjustments to the statement of profit or loss and statement of financial position, along with the calculation of ROCE and interest coverage ratio. Additionally, the assignment delves into the principles of IFRS 2, covering vesting conditions, cancellations, and criticisms of the standard, with discussions on graded vesting and shareholder granting. The assignment provides a comprehensive understanding of share-based payment accounting and its implications for financial reporting.

Running head: ACCOUNTING
Accounting
Name of the Student:
Name of the University:
Author’s Note

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ACCOUNTING
Table of Contents
Answer to Part a.............................................................................................................2
Answer to Part b.............................................................................................................3
Answer to Part d.............................................................................................................6
Share-Based Payments...................................................................................................6
Vesting conditions and cancellation...............................................................................7
IFRS 2............................................................................................................................8
Graded vesting...........................................................................................................8
Shareholder granting..................................................................................................9
Conclusion....................................................................................................................11
Bibliography.................................................................................................................12
Answer to Part a

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Transaction 1
As per the provisions which are stated in IFRS 2, the fair value of goods or service
provide should be used for valuing the share option unless the same cannot be valued
properly. In this case Agrico Plc offered to share options which were of less value as
compared to goods received by the company. The business is required to account for the
goods received and the same should be done at the fair value of the goods which is received.
Inventory A/c ………………………………………..Dr $ 10,000,000
To Equity A.c $ 10,000,000
(Being goods received for share based payment recorded)
Transaction 2
For the first year = ( 2000 shares * (500- 40) employees*1/3) * $ 21.74 = 6666919
For the second year = (2000 shares * 460 employees*2/3) * $ 21.74 = 13333859
For the third year = (2000 shares * 460 employees*3/3) * $ 21.74 = 20000800
Total = $ 40,001,600
The treatment of the business is wrong as the Vesting period of the employees is for 3
years and the same needs to be considered as the base for 3 years as the vesting period of the
same period.
The Journal entry for the same would be an increase in the non-current liabilities and a charge
against profits of the business.
Answer to Part b.
Draft statement of profit or loss for the year ended 31 December 2019

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£m
Draft
£m
adjustments
£m
Revised
Revenue 494 10 504
Cost of sales (360)
(360)
Gross profit 134 144
Administrative expenses (64) +40 (104)
Distribution costs (25) (25)
Operating profit 45 15
Finance costs (6) (6)
Profit before tax 39 9
Income tax expense (8)
Profit for the year 31
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Draft statement of financial position at 31 December 2019
£m
Draft
£m
Adjustments
£m
Revised
Non-current assets Property,
plant and equipment 44 44
Current assets
Inventory 74
74
Trade and other receivables 107 107
Cash 15 15
Total assets 240 240
Equity and liabilities
Share capital 3 10 13
Share premium 4 4
Other components of equity

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Retained earnings 36 (1) 35
43 52
Non-current liabilities
Long-term bank loan 70 70
Other long-term liabilities 26 40 66
96 136
Current liabilities and
provisions
Trade and other payables 101 101
Total equity and liabilities 240
289
Answer to Part c

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ROCE = (Profit before interest and tax)/ (Equity (defined as share capital + reserves)
plus non-current liabilities) x 100
ROCE = (15/(52-136) – 17.85%
Interest Coverage Ratio = Operating profit/ Finance cost
= 15/ 6
= 2.5
Answer to Part d
Share-Based Payments
Share based payments have been controversial from the time it has been
announced in the year 2004. Its major principles requires it to have recognized an expense for
the share based payments to the employee, which gets spread from granting to vesting period
when it doesn’t have any condition. The International Standards Boards (IASB) has
introduced a nearly last draft of the amendment related to the redefinition of vesting
conditions and cancellations procedure in the IFRS 2. However, there has been an air of
confusion related to when the final amendment will finally issue. IFRS has always spoke
about writings related to the principle based standards. However, this particular amendment
has seemed to be against the qualities related to the principle based standards and therefore it
raised a lot of questions to it.
It has generally been noted that a good standard based principles should be
comprised of the four qualities and those are:-
 It should be written in easy and simple English
 It should be easily explained in minutes.
 It should have good intuitions

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 It should help the preparers to brief the underlying effect of the transactions.
All these are the primary criteria that helps in judging the standards and its principle
elements. However the different principles that IFRS 2 related to the share payment
method deals with is that in one principle it is noted that an expense is required to occur
from the payment that has been made to the employee for their services and this can be in
any forms whether it be in cash, shares or other options. Secondly, the fair value for those
services will be considered which has been decided during the agreement between the
employee and the company.
Vesting conditions and cancellation
The mere principle behind the amendment that took place is that when the
person agrees with the amount of the reward then that person also needs to know what they
have to do in order to win that reward. There are certain arrangements where there are certain
other parameters that the employee has to meet in order to claim the reward. Such conditions
includes saving money in the save-as-you-earn scheme (SAYE).
The modification states that situations including savings of money does no longer
ensure that the organization gets the employee's services, and therefore expense booking are
not supposed be conditional on the savings of the employee. Therefore, the change requires
the fee of the award to comprise the condition applied and, if the employee are not willing to
save at the present, the fee is multiplied at that point will therefore be required for
cancellations in the existing.
IFRS 2.
At one point there may be feel within the precept inside the change. Further, the IASB
should be congratulated upon stopping themselves from issuing detailed regulations about a

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way to fair value percentage-based payments with 'different' conditions. However, with the
application of any new rules, situation are like, that modifications to the related to the
cancellation might also have consequences which are not intentionally done.
It has to be noted that for some it is only a bunch of regulations. However, this is a
legitimate criticism. In order to explain the consequences the upcoming paragraphs will
examine some of those policies through a connection with the qualities of standards which
are primarily based standards.
Graded vesting
The first rule that this report is going to speak about is graded vesting. This rule is
extremely good illustrated with the aid of using an example. Considering the case in which an
enterprise awards a worker a hundred shares for service next twelve months and every other
100 shares for company in the following year. It is clean from the phrase that the substance in
the arrangement is that every one hundred stocks relates mainly to provider in the said year.
Intuitively, it may seem to be commonplace enjoy to understand the fee of each one
hundred percent tranche in the year to which it relates. However, the guideline of thumb in
IFRS 2 is that you have to deal with the second one award of 100 stocks as even though the
period of company to which it relates begins on day one and lasts years, that is, the primary
100 stocks are for the first twelve months and the second one a hundred stocks are for both
years. Following this rule, the cost is front-forestall loaded due to the reality the first 12
months includes half the charge for the second one 12 months's award.
Searching on the functions, it is able to be argued that graded vesting accounting isn't
intuitively right, nor does it offer a cause of the economic fact underlying this transaction. it
is interesting to word that US GAAP efficiently recognizes this thru allowing the common
experience remedy as a coverage desire in place of graded vesting in a few occasions.

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Shareholder granting
The 2d rule that was introduced on a massive value of problem is para three. The rule
of thumb in para three says that if a share-based absolutely fee is awarded by way of a
shareholder, one need to cope with it as presented via the usage of the organization and
account for a capital contribution by way of the shareholder. The motive force for this is anti-
abuse. It goals to discourage businesses structuring so that you can keep away from
accounting for proportion-primarily based bills with the aid of arranging for them to be
awarded with the aid of a shareholder.
Suitable standards-based totally completely requirements have to no longer need to be
written with explicit anti-abuse clauses in them. Instead, it must be feasible to draft a
principle that specializes in accounting for the services of the worker instead of who has
granted the percentage-based fee.
The truth is truly misplaced whilst the rule of thumb in para 3 of the amendment is
done to enterprise arrangements. This has spawned a complex enterprise of capital
contribution accounting with the resource of figure and subsidiary businesses and
workarounds to cope with reimbursements made by way of manner of subsidiaries to parents.
As an alternative, the allocation of the value of worker services within an enterprise
want to be based totally upon practical ideas applicable to separate bills of determine and
subsidiary companies. It is however an approach that would artwork in working out is to base
the rate within the man or woman entity bills on the quantities paid or charged below a said
policy or contractual settlement.
In reality, IAS 19, employee blessings, has sensible storage much like this, so why
reinvent the wheel? Enormous capital contribution accounting to make amends for the
unintended results of an anti-abuse rule isn't always the answer.

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There's the issue of redeemable stocks. There may be a rule in IFRS 2 that if a
percentage is redeemable then a supply of this form of percent is accounted for as a coins-
settled share-based totally absolutely legal responsibility, liability accounting should be
continued until the association is settled; in different phrases until the proportion is redeemed.
It is not uncommon for stocks to be redeemable handiest at the same time as the employee
leaves or retires, as an instance thru the phrases of the percentage scheme and related
agreements.
In case you have a look at this rule to unlisted businesses absolutely owned through
employees, the result may be that a lot of its shares might be treated as unsettled percentage-
based price liabilities for a very long time, stocks regarding such liabilities are seemed as
unissued and consequently the organization need to have little net equity. Many consider that
this isn't an intuitively proper answer. They trust that after the arrangement vests, the
personnel come to be shareholders. Therefore, it can be concluded that it is an important
precept which is lacking from IFRS 2.
Moving forward in any such precept won't usually suggest that the coins-settled
criminal duty will become fairness, due to the truth a financial liability might result instead of
depending on the phrases of redemption. However, it might be an credit which one have
moved from percentage-based totally price accounting to percentage possession, which many
could regard as intuitively right and higher reflective of the financial reality of the business.
Conclusion
Graded vesting which is also known as the anti-abuse shareholder granting rule and
also redeemable percentage accounting all offer sufficient evidence to enhance the belief that
IFRS 2 is a group of rules, once this notion has taken hold, it dissuades customers of the
identical vintage from searching out the standards and trying to practice them.

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Even shoddier than this, preparers of money owed who are seeking out for thoughts
also can welcome to be with the wrong solution because every now and then the policies
battle with the standards or they cannot see the wood for the bushes. The situations related to
cancellations and vesting situations change does no longer craft a signal that for percentage-
based totally which is going to charge the IASB is going within the proper direction.
Everyone would love to look the IASB living up to its dedication to put in writing concepts-
based requirements. An appropriate starting region might be to rewrite IFRS 2 to get rid of
the pointers that strangle with the ideas, it may additionally deliver a message that they imply
to supply on principles-based requirements.
Bibliography
ACCA Global. (2020). Share-based payment | DipIFR | Students | ACCA | [online]
Accaglobal.com. https://www.accaglobal.com, A. Available at:
https://www.accaglobal.com/us/en/student/exam-support-resources/dipifr-study-resources/
technical-articles/shared-based-payment.html [Accessed 20 Mar. 2020].

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Assets.kpmg. (2020). [online] Available at:
https://assets.kpmg/content/dam/kpmg/xx/pdf/2018/11/ifrs-2-handbook-2018.pdf [Accessed
20 Mar. 2020].
Iasplus.com. (2020). IFRS 2 — Share-based Payment. [online] Available at:
https://www.iasplus.com/en/standards/ifrs/ifrs2 [Accessed 20 Mar. 2020].