Question Tag: Fair Value Measurement

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  • 7 Marks

CR – Nov 2021 – L3 – Q2a – IFRS 2: Share-based Payments | IFRS 13: Fair Value Measurement

Advise Mariam Plc on the correct accounting treatment for share appreciation rights (SARs) in compliance with IFRS 2 and IFRS 13.

On 1 April 2018, Mariam Plc granted 500 share appreciation rights (SARs) to its 300 employees. All of the rights vested on 31 March 2020 and can be exercised from 1 April 2020 up to 31 March 2022. At the grant date, the value of each SAR was GH¢10, and it was estimated that 5% of the employees would leave during the vesting period. The fair value of the SARs is as follows:

Date Fair Value of SAR (GH¢)
31 March 2019 9
31 March 2020 11
31 March 2021 12

All the employees who were expected to leave the employment did leave the company as expected before 31 March 2020. On 31 March 2021, 60 employees exercised their options when the intrinsic value of the right was GH¢10.50 and were paid in cash. Mariam Plc is, however, confused as to whether to account for the SARs under IFRS 2: Share-based Payment or IFRS 13: Fair Value Measurement and would like to be advised as to how the SARs should have been accounted for from the grant date to 31 March 2021.

Required:

Advise Mariam Plc on how the above transactions should be accounted for in its financial statements with reference to relevant International Financial Reporting Standards (IFRS).

Mariam Limited will account for this transaction under the provisions of IFRS 2: Share-based Payments. IFRS 13 applies when another IFRS requires or permits fair value measurements or disclosures about fair value measurements (and measurements, such as fair value less costs to sell, based on fair value or disclosures about those measurements). IFRS 13 specifically excludes transactions covered by certain other standards, including share-based payment transactions within the scope of IFRS 2: Share-based Payment and leasing transactions within the scope of IFRS 16: Leases.

Thus, share-based payment transactions are outside the scope of IFRS 13. For cash-settled share-based payment transactions, the fair value of the liability is measured in accordance with IFRS 2 initially, at each reporting date, and at the date of settlement using an option pricing model. Unlike equity-settled transactions, the measurement reflects all conditions and outcomes on a weighted average basis. Any changes in fair value are recognised in profit or loss in the period.

Therefore, the SARs would be accounted for as follows:

Statement of Profit or Loss for the year ended (Extracts):

Year Staff Costs (GH¢)
2019 641,250
2020 926,250
2021 97,500

Statement of Financial Position Extract as at (Extracts):

Year SARs Liabilities (GH¢)
2019 641,250
2020 1,567,500
2021 1,350,000
  • 15 Marks

CR – July 2024 – L3 – Q4a – Business Valuation

Determine a range of values for Alomo's equity in Bediako Metals Ltd using three valuation bases: Net assets, Earnings, and Dividend yield.

Question:

Alomo Investments and Financial Services (Alomo) is a locally based investment portfolio firm which holds several financial assets across different industries in Ghana. Alomo holds some equity assets in Bediako Metals Ltd (Bediako). Currently, Alomo is preparing its financial statements and would like to know the fair value of its current year-end 20% equity holdings in Bediako based on the latter’s recently available financial data (for the year ended 31 December 2021) provided below:

Items GH¢ million
Tangible assets 895
Non-current financial assets 150
Current assets 485
Total liabilities (including all redeemable preference share capital) 750
Irredeemable preference share capital 100
Draft profit after tax 170

Additional information:

  1. At year-end, the entity had to make a downward revision of decommissioning provision relating to one of its plants as both the expected cash outflows and the current-market rate discount rate were reassessed. Reduction of GH¢40 million (appropriately discounted) has been used to revise the liability and same credited to profit or loss.
  2. Bediako holds some 3-year bonds which are measured at fair value through other comprehensive income. Coupon and effective interest rates, which are the same, have been correctly dealt with. The carrying value of these bonds is GH¢92 million, and the bonds are yet to be revised to reflect their year-end fair value. For the purpose of obtaining the appropriate fair value in line with IFRS 13: Fair value measurement, the following information has been obtained:
Reference to most advantageous market GH¢ million
Quoted market prices 120
Quoted market prices (with minor adjustment) 85
Based on own model 140
  1. The directors of Bediako Ltd have refused to agree with their external auditors to a reduction in the year-end inventory value for the firm’s main product. As a result, the auditors have issued a qualified opinion on the financial statements. The items in question are being included in current assets at the cost of GH¢200 million. The auditors noted during their subsequent event procedures that 90% of these items had been sold for 95% of their cost.
  2. The directors also failed to cooperate with the Finance Director (FD) over how the issued 5-year bonds should be accounted for. The FD’s position is that, though the firm has clear intention to pay all interests and principal on the bonds to the bondholders, such treatment would result in a very huge measurement mismatch. Hence, the fair value option should be taken. Taking that option would have created a fair value gain on the bond by GH¢12 million (including a credit-worthiness element of GH¢5 million).
  3. On 30 June 2021, Bediako Ltd made an issue of 30 million new ordinary shares to a venture capital firm to raise GH¢120 million. Later, on 1 November 2021, the entity also made a capitalisation issue on the basis of one new share for every four shares held at that time. Bediako has correctly accounted for these issues in its financial statements. Its total number of ordinary shares outstanding as at 31 December 2021 was 200 million.
  4. Ordinary dividends for the current period, when compared to the draft profit attributable to ordinary shareholders, translate into a dividend cover of 5:1. The following details relate to preference dividends paid by Bediako during the current year:
Class of shares Type of dividend GH¢ million
Irredeemable preference shares (non-cumulative) Final 10
Redeemable preference shares (non-cumulative) Final 15

Bediako has correctly accounted for these dividends.

  1. A comparable listed firm provides a price/earnings ratio of 12 and dividend yield of 4%. A risk factor of 20% should be assumed.

Required:
Determine a range of values for Alomo’s equity investment in Bediako using the following bases:
i) Net assets basis
ii) Earnings basis
iii) Dividend yield basis

Range of values for Alomo’s 25% investment in Bediako:

  1. GH¢ 136 million (25% x 200 million shares x GH¢ 2.71)
  2. GH¢ 160 million (25% x 200 million shares x GH¢ 3.20)
  3. GH¢ 180 million (25% x 200 million shares x GH¢ 3.60)
  4. GH¢ 309.5 million (25% x 200 million shares x GH¢ 6.19)

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