Kappa is an entity that operates in a sector where the recruitment and retention of high quality employees is particularly important in order to achieve corporate goals. You are the financial controller of Kappa and you have recently received a memorandum from a member of the board of directors. The memorandum includes the following key issues:

(i) The board is eager to reward employees appropriately but is aware that large salary payments have an immediate impact on the liquidity and earnings per share of Kappa.

(ii) A more appropriate method of remuneration is to grant key employees share options that will vest at a future date, if the employees comply with specified conditions (e.g. continued employment) or achieve specific performance targets (e.g. completing an assignment to a specified standard or achieving a specified growth in the share price). This would allow employees to exercise the options at an appropriate time for them and would prevent an immediate impact on the liquidity or earnings per share of Kappa at the grant date.

Required:

Draft a reply that responds to the observations made by the board. Your reply should focus on the impact on the statement of financial position and statement of profit or loss and other comprehensive income of Kappa, rather than the personal tax positions of the employees. Your reply should contain a summary of the appropriate provisions of IFRS 2 Share-based Payment.