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20X8. Management estimates that, at grant date, the fair value of each SAR is Rs. 11; and it estimates that

10% of the employees will leave evenly during the two-year period. The fair values of the SARs at each year
end are shown below:

Year Fair value at year end
31 December 20X5 12
31 December 20X6 8

31 December 20X7 13
31 December 20X8 12
10% of employees left before the end of 20X6. On 31st December 20X7 (when the intrinsic value of each SAR

was Rs. 10), six employees exercised their options and remaining employees exercised their options at the end
of 20X8 (when the intrinsic value of each SAR was equal to the fair value of Rs. 12).

How much expense and liability is to be recognized at the end of each year? Also pass Journal entries.
SOLUTION

The amount recognized as an expense in each year and as a liability at each year end is as follows: 6
Year Expense Liability Calculation of Liability
Rs. Rs.

31 December 20X5 2,16,000 2,16,000 = 36 x 1,000 x 12 x ½
31 December 20X6 72,000 2,88,000 = 36 x 1,000 x 8

31 December 20X7 1,62,000 3,90,000 = 30 x 1,000 x 13
Expense comprises an increase in the liability of
Rs. 102,000 and cash paid to those exercising
their SARs of Rs. 60,000(6 x 1,000 x 10).

31December 20X8 (30,000) 0 Liability extinguished.
Excess liability reversed, because cash paid to
those exercising their SARs Rs. 3,60,000 (30 x

1,000 x 12) was less than the opening liability
Rs.3,90,000.

Journal Entries
31 December 20X5

Employee benefits expenses Dr. 2,16,000
To Share based payment liability 2,16,000
(Fair value of the SAR recognized)

31 December 20X6
Employee benefits expenses Dr. 72,000
To Share based payment liability 72,000

(Fair value of the SAR re-measured)
31 December 20X7
Employee benefits expenses Dr. 1,62,000
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