Zenon Inc. has recently decided to pay share appreciation rights to its employees as part of their compensation package. The share appreciation rights will be paid in cash. The SARs vest over two years, and expire in five years.
The company is a private enterprise that manufactures and sells automotive parts. The CEO has recently come to his controller to ask how these new rights will impact the company's financial statements. In the past the company had used stock options to compensate its employees. It has been determined that the SARs have an intrinsic value of $50,000 and a fair value of $65,000 at the date of grant. If compensatory stock options had been granted in lieu of the SARs, the fair value of the stock options would have been $65,000 with a vesting period of two years, and an expiry date of five years.
Instructions
(a) Explain how SARs are different from compensatory stock options from the employee's point of view.
(b) Explain to the CEO how SARs are measured and reported under IFRS and ASPE. How does this differ from the reporting and measurement of stock options? Explain why there are these differences.
(c) What will be the impact on the statement of financial position and the income statement under these accounting standards for the reporting of the SARs for the initial year of grant and future years? If the compensatory stock options had been granted instead, what would have been the impact on the statements?