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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition

CHAPTER 16

COMPLEX FINANCIAL INSTRUMENTS

ASSIGNMENT CLASSIFICATION TABLE

TopicsBrief

Exercises Exercises Probe!s"ri#i$%

Assi%$!e$#s

1. nderstandingderi!ati!es

1, ", # 1, ", $ 1, ", #, % &, ', (, )

". *o+ to account forderi!ati!es

1, ", #, %,$

1, ", #, %,$

1, ", #,%, $, &

)

#. Accounting forhyrid-comoundinstruments

&, ', (, ),1/, 11,1", 1#,1%, 1$,1&

$, &, ', (,), 1/, 11,1", 1#,1%

$, &, ',(, )

1, ",

%. 0tock comensationlans

1', 1( 1/

$. 0hareasedcomensation

1) 1$, 1&,1'

$, &, 1/ ", $

&. 2ifferences et+een A03E and I450

", ), 1/,11, 1",1%, 1&,"/, "1

#, $, ',1), "/

&, ', 1" %, $, '

6'. 2eri!ati!e instrumentsfor hedging

$ 11, 1" #, %, $, )

6(. *edge accounting 1(, 1),"/

11, 1" &

6). 0A50 "/, "1, "" "1, "", "#

61/. 7tions ricing models "#

6This material is dealt +ith in an Aendi8 to the chater.

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ASSIGNMENT CLASSIFICATION TABLE &Co$#i$'e()

97TE: If your students are sol!ing the endofchater material using a financialcalculator or an E8cel sreadsheet as oosed to the 3; tales, lease note thatthere +ill e a difference in amounts. E8cel and financial calculators yield a more

recise result as oosed to 3; tales. The amounts used for the rearation of <ournal entries in solutions ha!e een reared from the results of calculationsarri!ed at using the 3; tales.

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ASSIGNMENT CHARACTERISTICS TABLE

I#e! *escrip#io$Le+e of *iffic'#,

Ti!e&!i$'#es)

E1&1 2eri!ati!e transaction. 0imle 1/1$

E1&" 2eri!ati!e transaction. 0imle 1/1$ E1&# 3urchase Commitment 0imle 1/1$ E1&% 2eri!ati!es In!ol!ing Entity=s 7+n 0hares 0imle 1/1$ E1&$ Issuance and con!ersion of onds. Moderate "/"$ E1&& Issuance and con!ersion of onds. Moderate "/"$ E1&' Con!ersion of onds. Moderate "/"$ E1&( Con!ersion of onds. 0imle 1/"/ E1&) Con!ersion of onds and e8ired rights 0imle 1/"/ E1&1/ Con!ersion of onds Moderate "/"$

E1&11 Con!ersion of onds. 0imle 1/"/ E1&1" Con!ersion of onds. Comle8 #/%/

E1&1# Issuance of onds +ith detachale +arrants. 0imle 1/1$ E1&1% Issuance, e8ercise, and termination of stock

otions.Moderate "$#$

E1&1$ Issuance, e8ercise, and termination of stockotions.

Moderate 1/1$

E1&1& Issuance of onds +ith detachale +arrants. 0imle 1/1$ E1&1' Issuance and e8ercise of stock otions. Moderate 1$"$6E1&1( Cash 4lo+ *edge. Moderate 1$"/6E1&1) Cash 4lo+ *edge. Moderate 1$"/6E1&"/ 4air ;alue *edge. Comle8 "/"$

6E1&"1 0tock areciation rights. Moderate 1$"$6E1&"" 0tock areciation rights. Moderate 1$"$6E1&"# 0tock areciation rights. Moderate "$#/31&1 Call otion contract > urchased. Moderate #/%/31&" Call otion contract > +ritten. Moderate #/%/31&# 3ut otion contract > deri!ati!e instrument. Moderate #/%/31&% 2eri!ati!es In!ol!ing Entity=s 7+n 0hares Moderate #/%/31&$ Entries for !arious financial instruments. Moderate #$%/31&& Correction of issuance of ond, calculate

yield.Moderate #$%/

31&' Issuance of notes +ith +arrants. 0imle 1$"/31&( ?onds, +arrants, con!ersion rights. Moderate #/#$

31&) @oan, C073, and for+ard contract Moderate #/#$31&1/ 0tock otion lan. Moderate #/#$631&11 4air !alue hedge interest rate s+a. Comle8 #$%$631&1" Cash flo+ hedge > futures contract. Comle8 %/$/631&1# 4air !alue hedge > ut otion. Comle8 %/$/

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SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 16-1

S.+er Rio L#(/ s0o'( .cco'$# for #0e c. op#io$ .# #0e cos# #o.c'ire i# &2344) .$( recor( i# .s *eri+.#i+es 5 Fi$.$ci.Asse#sLi.bii#ies/ S.+er Rio L#(/ is $o# obi%.#e( #o exercise #0eop#io$ .$( b', #0e s0.res/ T0e i$+es#!e$# 7o'( be !e.s're(.# f.ir +.'e .# #0e repor#i$% (.#e 7i#0 . %.i$ or oss8 if .$,8reco%$i9e( i$ $e# i$co!e for #0e (iffere$ce be#7ee$ #0e cos#.$( #0e !.r:e# +.'e/

T0is c. op#io$ res'#s i$ .((i#io$. co'$#erp.r#,cre(i# ris:

&ris: #0.# #0e o#0er p.r#, 7i f.i #o f'fi #0eir si(e of #0e b.r%.i$).$( i'i(i#, ris: &ris: #0.# S.+er 7i $o# be .be #o co!e 'p 7i#0#0e !o$e, #o exercise #0e co$#r.c# if #0e co$#r.c# is i$ #0e!o$e,)/ If #0e op#io$ 7.s p'rc0.se( o$ .$ exc0.$%e8 #0eco'$#erp.r#, ris: (is.ppe.rs/ I$ .((i#io$8 #0ere is s#i . ris: #0.##0e op#io$s 7i ose +.'e & price ris:)/ No#e #0.# si$ce #0is is .p'rc0.se( op#io$8 S.+er 0.s #0e ri%0# b'# $o# #0e obi%.#io$ #oexercise #0e op#io$ .#0o'%0 i# 7o'( 7.$# #o exercise i# if #0eco$#r.c# 7.s i$ #0e !o$e, .# #0e exercise (.#e/

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BRIEF EXERCISE 16-;

&.) T0is p'rc0.se co!!i#!e$# is .$ exec'#or, co$#r.c# #0.# c.$be se##e( o$ . $e# b.sis b, p.,i$% c.s0 .s oppose( #o

#.:i$% (ei+er, of #0e .ppes/ U$(er IFRS8 bec.'se *.i,Pro('ce L#(/ i$#e$(s o$ #.:i$% (ei+er, of #0e .ppes8 #0eco$#r.c# is (esi%$.#e( .s <expec#e( 'se= .$( $o# .cco'$#e(for .s . (eri+.#i+e> r.#0er8 #0e #r.$s.c#io$ is $o# reco%$i9e('$#i (ei+er, of #0e .ppes #.:es p.ce/ O$ Apri 18 ;41?8*.i, Pro('ce recor(s@

I$+e$#or,////////////////////////////////////////////////// 18444Acco'$#s P.,.be/////////////////////////// 18444

&b) U$(er ASPE8 . p'rc0.se co!!i#!e$# is %e$er.,.cco'$#e( for .s .$ '$exec'#e( co$#r.c# .$( is $o#reco%$i9e( '$#i #0e '$(er,i$% $o$-fi$.$ci. i#e! is(ei+ere(/ T0erefore *.i, Pro('ce L#(/ 7o'( $o# .cco'$#for #0e co$#r.c# .s . (eri+.#i+e> r.#0er8 #0e #r.$s.c#io$ 7o'($o# be reco%$i9e( '$#i (ei+er, of #0e .ppes #.:es p.ce/O$ Apri 18 ;41?8 *.i, Pro('ce recor(s@

I$+e$#or,////////////////////////////////////////////////// 18444

Acco'$#s P.,.be/////////////////////////// 18444

&c) T0is co$#r.c# res'#s i$ . price ris: for *.i, Pro('ce si$ce#0e, 0.+e oc:e( i$ . price .$( #0e +.'e of #0e .ppes !.,c0.$%e/ T0e co$#r.c# fixes #0e c.s0 fo7s 0o7e+er8 so#0ere is $o c.s0 fo7 ris:/ I# .so exposes #0e e$#i#, #o .co'$#erp.r#,cre(i# ris: &#0e ris: #0.# #0e s'ppier 7i $o#be .be #o f'fi #0e co$#r.c#) .$( . i'i(i#, ris: &#0e ris:#0.# *.i, Pro('ce 7i $o# be .be #o co!e 'p 7i#0 #0ef'$(s #o p., #0e s'ppier)/

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BRIEF EXERCISE 16-

&.)

.$'.r, 18 ;41?No o'r$. e$#r, $ecess.r, si$ce #0e f.ir +.'e of #0e for7.r(co$#r.c# 7o'( be 24/

.$'.r, 138 ;41?*eri+.#i+es 5 Fi$.$ci. Asse#sLi.bii#ies / / / 3

G.i$/////////////////////////////////////////////////// 3

&b) T0is co$#r.c# res'#s i$ . price ris: &si$ce Gi$se$% 0.s.%ree( #o p., . fixe( price for #0e 2US .$( #0e +.'e of #0e 2US

!., c0.$%e)8 cre(i#co'$#erp.r#, ris: &si$ce #0e o#0er p.r#, #o#0e co$#r.c# !., $o# be .be #o f'fi i#s si(e of #0e b.r%.i$870ic0 is (ei+eri$% #0e 2US) .$( i'i(i#, ris: &#0e ris: #0.#Gi$se$% 7i $o# be .be #o co!e 'p 7i#0 #0e f'$(s #o se##e #0eir si(e of #0e co$#r.c# i/e/8 (ei+er, of 2C38;D4) No#e #0.# #0eco$#r.c# ei!i$.#es c.s0 fo7 ris: si$ce #0e e$#i#, :$o7s ex.c#,70.# i# 7i p., for #0e 2US/

BRIEF EXERCISE 16-?

.$'.r, 18 ;41?*eposi#s///////////////////////////////////////////////////// ;3

C.s0////////////////////////////////////////////////// ;3

.$'.r, 138 ;41?

*eri+.#i+es 5 Fi$.$ci. Asse#sLi.bii#ies 3

G.i$////////////////////////////////////////////////// 3

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BRIEF EXERCISE 16-3

P.cer L#(/ is f.ce( 7i#0 . prese$#.#io$ iss'e@ s0o'( #0e 218444cos# of #0e op#io$ be #re.#e( .s .$ i$+es#!e$#8 si!i.r #o #0e

cos# of .$ op#io$ #o p'rc0.se #0e s0.res of .$o#0er co!p.$,I$ #0is #r.$s.c#io$8 P.cer L#(/ 0.s .%ree( #o b', b.c: . fixe($'!ber of #0e co!p.$,=s o7$ s0.res for . fixe( .!o'$# of co$si(er.#io$/

IAS ; s#.#es #0.# #0is #,pe of fixe( for fixe( #r.$s.c#io$ 7o'(be prese$#e( .s . re('c#io$ fro! s0.re0o(ers= e'i#, .$( $o#.s .$ i$+es#!e$#/ T0is is8 effec#i+e,8 #0e prospec#i+e re#ire!e$#of s0.res &or .c'isi#io$ of #re.s'r, s0.res8 if #0.# is per!i##e()/

BRIEF EXERCISE 16-6

T0ese bo$(s .re co$si(ere( #o be . perpe#'. (eb# obi%.#io$/.!ieso$ is obi%.#e( #o pro+i(e #o #0e 0o(er p.,!e$#s o$.cco'$# of i$#eres# .# fixe( (.#es ex#e$(i$% i$#o #0e i$(efi$i#ef'#'re8 .$( . pri$cip. p.,!e$# for #0e f.ce +.'e of #0e bo$(+er, f.r i$#o #0e f'#'re/ T0e bo$(s 7o'( be repor#e( o$.!ieso$=s s#.#e!e$# of fi$.$ci. posi#io$ .# #0e prese$# +.'e

of #0e .$$'i#, of i$#eres# p.,!e$#s o+er #0e #er! of #0e bo$(8c.c'.#e( .# #0e !.r:e# r.#e of i$#eres# &.# #0e (.#e of iss'e)8i%$ori$% #0e f'#'re +.'e of #0e pri$cip. p.,!e$#/ Bec.'se #0eperpe#'. bo$(=s +.'e is (ri+e$ soe, b, #0e co$#r.c#'.obi%.#io$ #o p., i$#eres# i# 7o'( be c.ssifie( .s . o$%-#er!(eb# o$ #0e s#.#e!e$# of fi$.$ci. posi#io$/ I# 7o'( $o# bere!e.s're( .$$'., '$ess (esi%$.#e( '$(er #0e f.ir +.'eop#io$8 i$ 70ic0 c.se i# 7o'( be re+.'e( .# f.ir +.'e .$(%.i$sosses boo:e( #o $e# i$co!e/

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BRIEF EXERCISE 16-

U$(er #0e #er!s of #0e .%ree!e$# 7i#0 #0e preferre(s0.re0o(ers8 i# is 0i%0, i:e, #0.# Si:, Li!i#e( 7i re(ee! #0epreferre( s0.res before #0e (i+i(e$( r.#e (o'bes .f#er fi+e,e.rs/ Accor(i$%,8 f.i're #o (o so 7o'( res'# i$ Si:, p.,i$%.$ ex#re!e, 0i%0 (i+i(e$( #o #0e preferre( s0.re0o(ers/ Si:,0.s i##e or $o (iscre#io$ #o .+oi( p.,i$% o'# #0e c.s0 #o re(ee!#0e s0.res before #0e e$( of #0e fif#0 ,e.r .$( #0is i:e,obi%.#io$ #o (ei+er c.s0 cre.#es . i.bii#,/ Co$se'e$#,8 #0epreferre( s0.res s0o'( be c.ssifie( .s o$%-#er! (eb# o$ #0es#.#e!e$# of fi$.$ci. posi#io$/

Bec.'se #0e preferre( s0.res .re c.ssifie( .s o$%-#er! (eb# o$

#0e s#.#e!e$# of fi$.$ci. posi#io$8 #0e (i+i(e$(s (ec.re( .$(p.i( #o preferre( s0.re0o(ers 7o'( be c.ssifie( .s i$#eres#expe$se o$ #0e s#.#e!e$# of i$co!e/ I# !i%0# be (esir.be #osep.r.#e #0e .!o'$# of (i+i(e$(s &repor#e( .s i$#eres# expe$se)p.i( o$ #0e preferre( s0.res 7i#0 #0e i$#eres# p.i( o$ o#0er (eb#/

BRIEF EXERCISE 16-D

U$(er IFRS8 #0e preferre( s0.res 7o'( be recor(e( .s . i.bii#,bec.'se #0e co$#i$%e$# se##e!e$# pro+isio$ is b.se( o$ .$e+e$# o'#si(e #0e co!p.$,=s co$#ro/

Ho7e+er8 '$(er ASPE8 #0e preferre( s0.res 7o'( be .cco'$#e(for .s . i.bii#, o$, 70e$ i# is 0i%0, i:e, #0.# #0e fir!=s $e#i$co!e 7i (rop beo7 23448444 i$ . f'#'re fisc. perio(/ If #0e#ri%%eri$% e+e$# is '$i:e,8 #0e$ #0e preferre( s0.res 7o'( be.cco'$#e( for .s e'i#,/

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BRIEF EXERCISE 16-

T0e so'#io$ is #0e s.!e for IFRS .$( ASPE/

"0e$ . preferre( s0.re pro+i(es for !.$(.#or, re(e!p#io$ b,#0e iss'er for . fixe( or (e#er!i$.be .!o'$# .# . fixe( or (e#er!i$.be f'#'re (.#e or %i+es #0e 0o(er #0e ri%0# #o re'ire#0e iss'er #o re(ee! #0e s0.re .# or .f#er . p.r#ic'.r (.#e for .fixe( or (e#er!i$.be .!o'$#8 #0e i$s#r'!e$# !ee#s #0e(efi$i#io$ of . fi$.$ci. i.bii#,/ Co$se'e$#,8 #0e preferre(s0.re s0o'( be c.ssifie( .s o$%-#er! (eb# o$ #0e s#.#e!e$# of fi$.$ci. posi#io$/

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BRIEF EXERCISE 16-14

&.)

PJ .$$'i#, ,e.rs8 K8 2348444 2 1;68363PJ 21844484448 i$ ,e.rs8 K ;81D4

PJ of #0e (eb# co!po$e$# b, i#sef 2 DD8?3

&b) U$(er IFRS8 #0e procee(s .re .oc.#e( #o #0e i.bii#, .$(e'i#, co!po$e$#s '$(er #0e resi('. !e#0o(8 7i#0 #0e(eb# co!po$e$# !e.s're( firs# &%e$er., .# #0e prese$#+.'e of f'#'re c.s0 fo7s)/

To#. procee(s .# p.r 2 184448444

PJ of #0e (eb# co!po$e$# b, i#sef &DD8?3)

I$cre!e$#. +.'e of op#io$ 2 1418;33

C.s0///////////////////////////////////////////////////////////// 184448444Bo$(s P.,.be////////////////////////////////////// DD8?3Co$#rib'#e( S'rp's 5 Co$+ersio$ Ri%0#s 1418;33

&c) U$(er ASPE8 #0e e'i#, co!po$e$# !., be !e.s're( .# 24/I$ #0is c.se8 #0e o'r$. e$#r, 7o'( be@

C.s0///////////////////////////////////////////////////////////// 184448444Bo$(s P.,.be//////////////////////////////////////

184448444

A#er$.#i+e,8 !e.s're #0e co!po$e$# #0.# is !os# e.si,

!e.s'r.be firs# &of#e$ #0e (eb# co!po$e$#)8 .$( .pp, #0eresi('. #o #0e o#0er co!po$e$#/ T0is op#io$ is co$sis#e$#7i#0 #0e re'ire( #re.#!e$# '$(er IFRS/

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&.)

C.s0 &344 X 218444 X 1/4)////////////////////////////////// 3138444Bo$(s P.,.be//////////////////////////////////////////////

?D38444Contributed Surplus—Conversion Rights/

48444

U$(er IFRS8 #0e resi('. !e#0o( is .ppie( 70ereb, c.s0 is.oc.#e( #o #0e +.'e of #0e (eb# i$s#r'!e$# firs#8 .$( #0eresi('. is .oc.#e( #o e'i#,/ T0e (eb# +.'e is c.c'.#e( .sfoo7s@ 344 x 218444 x 4// T0is .ss'!es #0.# #0e 7.rr.$#s .re

.cco'$#e( for .s e'i#, i$s#r'!e$#s/

&b)

U$(er ASPE &D36/;4 .$( /;1) o$e op#io$ is #o !e.s're #0eco!po$e$# #0.# is !os# e.si, !e.s'r.be firs# &of#e$ #0e (eb#co!po$e$#)8 .$( .pp, #0e resi('. #o #0e o#0er co!po$e$#/T0is op#io$ is co$sis#e$# 7i#0 #0e re'ire( #re.#!e$# '$(er IFRS8.$( #0e o'r$. e$#r, 7o'( be #0e s.!e .s '$(er IFRS/ I$ #0isc.se8 #0e 7.rr.$# is .so e.si, !e.s'r.be so #0e e$#i#, co'(recor( #0e #r.$s.c#io$ .s foo7s@

C.s0 &344 X 218444 X 1/4)////////////////////////////////// 3138444Bo$(s P.,.be//////////////////////////////////////////////

34;8344Contributed Surplus—Conversion Rights/

1;8344

A$o#0er op#io$ is #o !e.s're #0e e'i#, co!po$e$# .# 24/ I$#0is c.se8 #0e o'r$. e$#r, 7o'( be@

C.s0 &344 X 218444 X 1/4)///////////////////////////////// 3138444Bo$(s P.,.be///////////////////////////////////////////// 3138444


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BRIEF EXERCISE 16-1;

Bo$(s P.,.be//////////////////////////////////////////////////// 3148444Co!!o$ S0.res////////////////////////////////////////// 3148444

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BRIEF EXERCISE 16-1

Preferre( S0.res///////////////////////////////////////////////// D48444

Contributed Surplus—Conversion Rights//////// D8444

Co!!o$ S0.res////////////////////////////////////////// DD8444

BRIEF EXERCISE 16-1?

&.) A p'##.be s0.re co$#.i$s . 7ri##e$ p'# op#io$ #0.# re'ires#0e co!p.$, #o p., c.s0 or o#0er .sse#s if #0e op#io$ isexercise(/ T0e 0o(er 0.s #0e ri%0# #o exercise #0e op#io$870ic0 is be,o$( #0e co!p.$,=s co$#ro/ For #0ese

re.so$s8 p'##.be s0.res .re $or!., c.ssifie( .s .i.bii#,/ Ho7e+er8 '$(er IFRS8 #0e s0.res !., be c.ssifie(.s e'i#, if #0e s0.res .re i$-s'bs#.$ce e'i#,i$s#r'!e$#s/ Bec.'se #0e p'##.be co!!o$ s0.res e$#i#e#0e 0o(er #o . pro r.#. s0.re of *.+iso$=s $e# .sse#s 'po$i'i(.#io$8 bec.'se #0e s0.res (o $o# 0.+e preferre( r.$:or (i+i(e$( prefere$ce8 .$( bec.'se #0ere .re $o o#0er co!!o$ s0.res8 *.+iso$=s p'##.be co!!o$ s0.res !.,be c.ssifie( .s e'i#, '$(er IFRS/

&b) U$(er ASPE8 #0e cri#eri. for c.ssific.#io$ of p'##.bes0.res .s e'i#, .re si!i.r #o #0e IFRS cri#eri./ T0erefore'$(er ASPE8 *.+iso$=s p'##.be co!!o$ s0.res !., .sobe c.ssifie( .s e'i#,/

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&.) T0ese .re !.$(.#ori, re(ee!.be preferre( s0.res8 70ic0

!'s# be c.ssifie( .s . i.bii#, '$(er IFRS/ T0e !.$(.#or,re(e!p#io$ i!poses . co$#r.c#'. obi%.#io$ #o (ei+er c.s0 or o#0er .sse#s 'po$ re(e!p#io$8 70ic0 represe$#s .fi$.$ci. i.bii#,/

&b) U$(er ASPE8 !.$(.#ori, re(ee!.be preferre( s0.res&.so referre( #o .s 0i%0o7 preferre( s0.res) .re re'ire(#o be c.ssifie( .s e'i#,/

&c) T0is #,pe of #r.$s.c#io$ i$+o+i$% preferre( s0.res is.bee( .$ es#.#e free9e bec.'se #0e f.ir +.'e of #0eb'si$ess=s .sse#s is fro9e$ .# . poi$# i$ #i!e &b, free9i$%#0e re(e!p#io$ +.'e of #0e preferre( s0.res .# . +.'ee'. #o f.ir +.'e of #0e b'si$ess=s .sse#s .# #0e #i!e of #r.$si#io$)/ T0e s'ccessi+e o7$ers #0e$ p'rc0.seco!!o$ s0.res i$ #0e $e7 corpor.#io$ .# . $o!i$..!o'$#8 70ic0 .o7s #0e! #o be$efi# fro! s'bse'e$#i$cre.ses i$ #0e b'si$ess=s +.'e/


&.) U$(er IFRS8 . i.bii#, exis#s si$ce #0e co$#i$%e$#se##e!e$# pro+isio$ &b.se( o$ #0e f.ir +.'e of #0eco!p.$,=s co!!o$ s0.res) is b.se( o$ .$ e+e$# o'#si(e#0e co!p.$,=s co$#ro/ T0e preferre( s0.res .re re'ire(#o be c.ssifie( .s . i.bii#,/

&b) U$(er ASPE8 #0e preferre( s0.res 7o'( be c.ssifie( .s .i.bii#, o$, if #0e co$#i$%e$c, is 0i%0, i:e, #o occ'r/ I$#0is c.se8 i# is co$si(ere( '$i:e, #0.# P.r:er=s co!!o$s0.res 7i excee( . f.ir +.'e of 2144 per s0.re8 .$(#0erefore '$i:e, #0.# #0e co$#i$%e$c, 7i occ'r/ T0epreferre( s0.res 7o'( be c.ssifie( .s e'i#,/

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BRIEF EXERCISE 16-1

Fo'r co!!o$ s#oc: co!pe$s.#io$ p.$s .re@

1/ Co!pe$s.#or, s#oc: op#io$ p.$s &CSOPs)

;/ *irec# .7.r(s of s#oc:

/ S#oc: .ppreci.#io$ ri%0#s p.$s &SARs)

?/ Perfor!.$ce-#,pe p.$s

BRIEF EXERCISE 16-1D

T0e !.i$ (iffere$ce be#7ee$ .$ e!po,ee s#oc: op#io$ p.$&ESOP) .$( . co!pe$s.#or, s#oc: op#io$ p.$ &CSOP) is #0.#7i#0 ESOPs8 #0e e!po,ee 's'., p.,s for #0e op#io$s &ei#0er f', or p.r#i.,)/ T0's ESOP #r.$s.c#io$s .re reco%$i9e( .sc.pi#. #r.$s.c#io$s &c0.r%e( #o e'i#, .cco'$#s)/ T0e e!po,eeis i$+es#i$% i$ #0e co!p.$,/

Ho7e+er8 CSOPs8 o$ #0e o#0er 0.$(8 .re pri!.ri, see$ .s .$.#er$.#i+e 7., #o co!pe$s.#e p.r#ic'.r8 of#e$ se$ior8e!po,ees for #0eir ser+ices8 i:e . b.r#er #r.$s.c#io$/ T0eser+ices .re re$(ere( b, #0e e!po,ee i$ s'ppor# of #0e .c# of pro('ci$% re+e$'es/ T0's CSOP #r.$s.c#io$s .re reco%$i9e( o$#0e i$co!e s#.#e!e$# &c0.r%e( #o .$ expe$se .cco'$#)/

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BRIEF EXERCISE 16-1

111? No e$#r,

1;11? Co!pe$s.#io$ Expe$se////////////// 38444

Co$#rib'#e( S'rp'sS#oc:Op#io$s

////////////////////////////// 38444

1;113 Co!pe$s.#io$ Expe$se////////////// 38444

Co$#rib'#e( S'rp'sS#oc:Op#io$s ////////////////////////////// 38444

238444 21468444 X 1;

BRIEF EXERCISE 16-;4

&.)

U$(er ASPE8 . c.s0-se##e( p.$ is !e.s're( .# i$#ri$sic +.'e/

;41?@ 38?44 X &2;; 5 2;4) X 34K 238?44

;413@ 38?44 X &2? 5 2;4) 5 238?44 248;44

&b)

U$(er IFRS8 . c.s0-se##e( p.$ is !e.s're( .# #0e f.ir +.'e of #0e SARs p.$8 70ic0 is es#i!.#e( 'si$% .$ op#io$s prici$%!o(e .$( i$corpor.#es bo#0 i$#ri$sic +.'e .$( #i!e +.'e/

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BRIEF EXERCISE 16-;1

&.) *ece!ber 18 ;41?

Co!pe$s.#io$ Expe$se///////////////////////////////////////////////////38444Li.bii#, '$(er S#oc:-Appreci.#io$Ri%0#s P.$s////////////////////////////////////////////////////// 38444

&21348444 X 34K)

&b) *ece!ber 18 ;41?Co!pe$s.#io$ Expe$se///////////////////////////////////////////////////348444

Li.bii#, '$(er S#oc:-Appreci.#io$Ri%0#s P.$s////////////////////////////////////////////////////// 348444

&&24 5 2;4) X 148444) X 34K

BRIEF EXERCISE 16-;;

Perfor!.$ce-#,pe p.$s .7.r( specifie( exec'#i+es co!!o$s0.res &or c.s0) if specifie( perfor!.$ce cri#eri. .re .##.i$e(('ri$% #0e perfor!.$ce perio( &%e$er., #0ree #o fi+e ,e.rs)/ Aperfor!.$ce-#,pe p.$=s co!pe$s.#io$ cos# is !e.s're( b, #0ef.ir +.'e of s0.res &or c.s0) iss'e( o$ #0e exercise (.#e/ T0e

co!p.$, !'s# 'se i#s bes# es#i!.#es #o !e.s're #0eco!pe$s.#io$ cos# before #0e (.#e of exercise8 .$( .oc.#e #0eco!pe$s.#io$ cos# o+er #0e perfor!.$ce perio( 'si$% #0eperce$#.%e .ppro.c0/

U$(er o#0er co!pe$s.#or, p.$s8 op#io$s .re +.'e( .# #0e (.#eof %r.$# 'si$% .$ op#io$s prici$% !o(e s'c0 .s B.c:-Sc0oes8.$( #0eir +.'e is .oc.#e( e+e$, o+er #0e perio( of re'ire(ser+ice/

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BRIEF EXERCISE 16-;

F.ir +.'e is !os# re.(i, (e#er!i$e( 70ere #0ere is .$ .c#i+e!.r:e# 7i#0 p'bis0e( prices/ "0ere #0is is $o# #0e c.se8 .

+.'.#io$ #ec0$i'e is 'se(/ For op#io$s8 op#io$ prici$% !o(es.re 'sef' for c.c'.#i$% f.ir +.'e/

T0e i$p'#s #o #0e !o(e i$c'(e@

1/ T0e exercise price/ T0is is #0e price .# 70ic0 #0e op#io$!., be se##e(/ I# is .%ree( 'po$ b, bo#0 p.r#ies #o #0eco$#r.c#/

;/ T0e expec#e( ife of #0e op#io$/ T0is is #0e #er! of #0eop#io$/ I# is .%ree( 'po$ b, bo#0 p.r#ies #o #0e co$#r.c#/So!e op#io$s !., o$, be se##e( .# #0e e$( of #0e #er!&:$o7$ .s E'rope.$ op#io$s) 70ie o#0ers !., be se##e(.# poi$#s ('ri$% #0e #er! &:$o7$ .s A!eric.$ op#io$s)/

/ T0e c'rre$# !.r:e# price of #0e '$(er,i$% s#oc:/ T0is isre.(i, .+.i.be fro! #0e s#oc: !.r:e#/

?/ T0e +o.#ii#, of #0e '$(er,i$% s#oc:/ T0is is #0e !.%$i#'(eof f'#'re c0.$%es i$ #0e !.r:e# price/ Jo.#ii#, oo:s .#0o7 #0e specific s#oc: price !o+es re.#i+e #o #0e !.r:e#/

3/ T0e expec#e( (i+i(e$( ('ri$% #0e op#io$ ife/6/ T0e ris:-free r.#e of i$#eres# for #0e op#io$ ife/ I$ %e$er.8

%o+er$!e$# bo$(s c.rr, . re#'r$ #0.# is co$si(ere( #o be#0e ris:-free re#'r$/

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SOLUTIONS TO EXERCISES

EXERCISE 16-1 &14-13 !i$'#es)

&.) .$'.r, ;8 ;41?*eri+.#i+es 5 Fi$.$ci. Asse#sLi.bii#ies///////////////////////34

C.s0/////////////////////////////////////////////////////////////////////// 34

&b) M.rc0 18 ;41?*eri+.#i+es 5 Fi$.$ci. Asse#sLi.bii#ies///////////////////////138134

G.i$//////////////////////////////////////////////////////////////////////// 138134&2138344 5 234)

&c) T0e %.i$ i$cre.ses $e# i$co!e for #0e perio( b, 2138134/

&() As $o i$for!.#io$ is pro+i(e( .s #o o#0er i$+es#!e$#s or expos'res #0.# .c:so$ !., 0.+e8 i# .ppe.rs #0.# #0eco!p.$, 0.s 'se( #0e op#io$ for spec'.#i+e p'rposes/.c:so$ .ppe.rs $o# #o be 0e(%i$% #o !i$i!i9e #0e ris: of . c'rre$# or f'#'re #r.$s.c#io$/

&e) T0is (eri+.#i+e 7i expose #0e co!p.$, #o . price

ris: 8 .s #0e price of #0e '$(er,i$% is . +.ri.be #0.# !.,c0.$%e #0e +.'e of #0e op#io$/ I$ .((i#io$8 #0ere is .cre(i#co'$#erp.r#, ris: &#0e ris: #0.# #0e o#0er p.r#, #o #0eco$#r.c# 7i $o# 0o$o'r #0eir si(e of #0e co$#r.c#) .$( .i'i(i#, ris: &#0e ris: #0.# .c:so$ 7i $o# be .be #o0o$o'r i#s si(e of #0e co$#r.c#)/ Si$ce #0is is . p'rc0.se(op#io$8 .c:so$ 0.s #0e ri%0# b'# $o# #0e obi%.#io$ #oexercise #0e op#io$/ If #0e op#io$ is i$ #0e !o$e,8 .c:so$7o'( 7.$# #o exercise i#/

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EXERCISE 16-; &14-13 !i$'#es)

&.) Apri 18 ;41?*eri+.#i+es 5 Fi$.$ci. Asse#sLi.bii#ies///////////////////////134

C.s0/////////////////////////////////////////////////////////////////////// 134

&b) '$e 48 ;41?*eri+.#i+es 5 Fi$.$ci. Asse#sLi.bii#ies///////////////////////?8D34

G.i$ QQQQQQQQQQQQQQ ?8D34

&238444 5 2134)

&c) ',8 18 ;41?FJ-NI I$+es#!e$#s/////////////////////////////////////////////////////////////18;34

Loss QQQQQQQQQQQQQQQQQQ/ ;34C.s0 &344 X 2;3)//////////////////////////////////////////////////////// 1;8344*eri+.#i+es5Fi$.$ci. Asse#sLi.bii#ies////////////////// 38444

344 X 2?/34

(d) Rec. #0.# #0e f.ir +.'e of . c. op#io$ is b.se( o$ #0ei$#ri$sic +.'e .$( #0e #i!e +.'e/ The option is a 6-monthoption and it was exercised after three months. Because theoption was exercised (with three months remaining), Petey

would not be able to recover the time value portion of theoption’s fair value.

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EXERCISE 16- &14-13 !i$'#es)

&.) U$(er IFRS8 #0is p'rc0.se co!!i#!e$# is .$ exec'#or,co$#r.c# #0.# c.$ be se##e( o$ . $e# b.sis b, p.,i$% c.s0 .s

oppose( #o #.:i$% (ei+er, of #0e or.$%es/ Ho7e+er8bec.'se Fres0 'ice f', i$#e$(s #o #.:e (ei+er, of #0eor.$%es8 #0e co$#r.c# is (esi%$.#e( .s <expec#e( 'se= .$($o# .cco'$#e( for .s . (eri+.#i+e> r.#0er8 #0e co$#r.c# is $o#reco%$i9e( '$#i (ei+er, of #0e or.$%es #.:es p.ce/

T0erefore8 #0ere .re $o o'r$. e$#ries re'ire( .# ei#0er .$'.r, 1 or .$'.r, 1/ A o'r$. e$#r, 7i be recor(e(70e$ Fres0 'ice .c#'., #.:es (ei+er, of or.$%es/

&b) If Fres0 'ice (oes $o# i$#e$( #o #.:e (ei+er, of #0eor.$%es8 #0e$ #0e exec'#or, co$#r.c# 7i be +ie7e( .s .(eri+.#i+e bec.'se i# c.$ be se##e( o$ . $e# b.sis/T0erefore8 #0e co$#r.c# 7o'( be recor(e( .# f.ir +.'e/

Bec.'se #0ere 7.s $o cos# #o e$#er i$#o #0e co$#r.c#8 #0ere7o'( be $o i$i#i. e$#r, o$ .$'.r, 1/

Ho7e+er8 #0e co$#r.c# 7i be !.r:e( #o !.r:e# .$( 7ic0.$%e .s #0e price of or.$%es c0.$%e/ T0erefore #0efoo7i$% o'r$. e$#r, 7i be !.(e o$ .$'.r, 1@

Loss &148444 X &4/34 5 4/?)) ////////////////////////////////////144*eri+.#i+es5Fi$.$ci. Asse#sLi.bii#ies/////////// 144

&c) U$(er ASPE8 #0is p'rc0.se co!!i#!e$# co$#r.c# 7o'( $o#be .cco'$#e( for .s . (eri+.#i+e bec.'se #0is .%ree!e$# is

$o# exc0.$%e #r.(e(/ T0erefore8 #0e co$#r.c# 7o'( $o# bereco%$i9e( '$#i (ei+er, of or.$%es #.:es p.ce/

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EXERCISE 16-? &14-13 !i$'#es)

&.) T0e (eri+.#i+e is co$si(ere( . fixe(-for-fixe( (eri+.#i+e i$ .$e$#i#,=s o7$ s0.res .s #0e op#io$ s#ip'.#es #0.# #0e e$#i#,

7i p'rc0.se &b', b.c:) . fixe( $'!ber of s0.res for .fixe( .!o'$# of co$si(er.#io$/ IFRS s#.#es #0.# #0is#r.$s.c#io$ 7o'( be prese$#e( .s . re('c#io$ fro!s0.re0o(ers= e'i#, .$( $o# .s .$ i$+es#!e$#/ T0is is8effec#i+e,8 #0e prospec#i+e re#ire!e$# of s0.res &or .c'isi#io$ of #re.s'r, s0.res8 if #0.# is per!i##e()/

E'i#, 5 Fixe(-for-fixe( *eri+.#i+e ///////////////////////////;34C.s0///////////////////////////////////////////////////////////////////// ;34

&b) Bec.'se #0e op#io$ .o7s . c0oice i$ 0o7 #0e op#io$ 7i bese##e(8 #0e i$s#r'!e$# is . fi$.$ci. .sse# or i.bii#,&(eri+.#i+e) b, (ef.'# '$(er IFRS '$ess . possibese##e!e$# op#io$s res'# i$ i# bei$% .$ e'i#, i$s#r'!e$#/ I$#0is c.se8 o$e se##e!e$# op#io$ is #0e (ei+er, of c.s0/T0erefore8 i# 7i be c.ssifie( .s . fi$.$ci. .sse#&(eri+.#i+e)/

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EXERCISE 16-3 &13 5 ;3 !i$'#es)

Type of financial

instrument

Timing of

recognition

Measurement Gains or

Losses

1. Financial derivative –

forward contract

When fair value

fluctuates. Value

at acquisition is

$nil.

PV of future cash

flows

Net Income

2. Non-financial

derivative –

exchange- traded

futures

When fuel prices

fluctuate. Value at

acquisition is $nil.

PV of future cash

flows

Net Income

3. This is not a financial

instrument

N/A N/A N/A

4. This is a purchasecommitment (and

therefore not

exchange traded)

As these are notexchange traded

and the company

intends to take

delivery of the

steel, these are

not recognized in

the financial

statements under

either ASPE or

IFRS

Not recognizedunless onerous

N/A

5. Contra equity - this is

a purchased call

option that is

settleable only in the

entity’s own equity

instruments (fixed for

fixed)

When options are

purchased and

cash is paid

Cash paid N/A

6. Non-financial

derivative –

exchange- traded

futures

Initial margin is

similar to a bank

account.

Cash deposited

on margin

Net Income

7. Liability. Increase in

redemption amount

makes it highly likely

company will redeem,

When shares are

issued

PV of future cash

flows

Net Income

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and imposes a

liability to deliver

cash or other assets

at the time of

redemption.

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EXERCISE 16-3 &Co$#i$'e()

Type of financial

instrument

Timing of

recognition

Measurement Gains or

Losses

8. Hybrid instrument.

Warrants are written

call options, and debt

is a liability.

When debt is

issued

IFRS – debt at PV of

future cash flows

and rest to equity

ASPE – may allocate

$0 to the warrant or

may bifurcate the

initial amount

between debt and

equity allocating the

more easily

measurable firstwith the residual to

the other component

Net Income for

debt

component

including

interest and

gains/losses

upon

extinguishment

9. Hybrid instrument –

conversion option is

a written call option

and is equity since a

fixed number of

shares will be issued.

When debt is

issued

IFRS – debt at PV of

future cash flows

and rest to equity

ASPE– may allocate

$0 to the conversion

feature or may

bifurcate the initial

amount betweendebt and equity

allocating the more

easily measurable

first with the

residual to the other

component

Net Income for

debt

component

including

interest and

gains/losses

upon

extinguishment

10.Liability – these are

puttable shares and

since the option to

put the shares back

to the company is

beyond the control of

the entity, they are

liabilities unless

certain specific

conditions are met.

When

instruments

are issued

Amount received Net Income for

debt

component

including

interest and

gains/losses

upon

extinguishment

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EXERCISE 16-6 &;4-;3 !i$'#es)

1/ F.ir +.'e of bo$(s 7i#0o'# 7.rr.$#s is 2;D38444

&2448444 X /3)

C.s0 &2448444 X 1/4?)/////////////////////// 1;8444Bo$(s P.,.be///////////////////////////// ;D38444Co$#rib'#e( S'rp'sS#oc: ".rr.$#s ;8444

;/ U$(er ASPE8 #0e firs# op#io$ is #o !e.s're #0e co!po$e$##0.# is !os# e.si, !e.s'r.be firs# &of#e$ #0e (eb#co!po$e$#)8 .$( .pp, #0e resi('. #o #0e o#0er co!po$e$#/T0e seco$( op#io$ is #o !e.s're #0e e'i#, co!po$e$# .#24/ T0e e$#ries '$(er #0ese #7o .ppro.c0es .re8

respec#i+e,8 .s foo7s@

C.s0 &21484448444 X /)/////////////////////////////8448444Bo$(s P.,.be///////////////////////////// 8448444Co$#rib'#e( S'rp's Co$+ersio$ Ri%0#s////////////////// ?448444

C.s0 &21484448444 X /)///////////////////// 8448444Bo$(s P.,.be///////////////////////////// 8448444

/ U$(er ASPE8 #0e firs# op#io$ is #o !e.s're #0e co!po$e$##0.# is !os# e.si, !e.s'r.be firs#8 .$( .pp, #0e resi('.#o #0e o#0er co!po$e$#/

C.s0 //////////////////////////////////////////////////// 186448444Bo$(s P.,.be///////////////////////////// 1D8?448444Co$#rib'#e( S'rp'sS#oc: ".rr.$#s 18;448444

J.'e of bo$(s p's 7.rr.$#s &2;484448444 X /D) 2186448444

J.'e of 7.rr.$#s &;448444 X 26) 18;448444 J.'e of bo$(s 21D8?448444

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T0e seco$( op#io$ is #o !e.s're #0e e'i#, co!po$e$# .#24/

C.s0 //////////////////////////////////////////////////// 186448444Bo$(s P.,.be///////////////////////////// 186448444

?/ Loss o$ Re(e!p#io$ of Bo$(s////////// 48444

Re#.i$e( E.r$i$%s///////////////////////////////38444Bo$(s P.,.be//////////////////////////////////// 8;38444Co$#rib'#e( S'rp's Co$+ersio$ Ri%0#s //////////////////////// ;48444

Co!!o$ S0.res////////////////////////// 148138444C.s0////////////////////////////////////////////// 638444

28338444 5 &21484448444 5 238444) 2638444 5 248444

3/ F.ir +.'e of bo$(s 7i#0o'# 7.rr.$#s 2?38444&23448444 X /3)

C.s0 &23448444 X 1/4)/////////////////////////// 3138444Bo$(s P.,.be//////////////////////////////// ?38444Co$#rib'#e( S'rp'sS#oc: ".rr.$#s ?48444

T0e 7.rr.$#s .re e'i#, i$s#r'!e$#s si$ce #0e, .re fixe( forfixe(/

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EXERCISE 16- &;4-;3 !i$'#es)

&.) C.s0///////////////////////////////////////////////////////// 3848444Bo$(s P.,.be &2684448444 X /)// 38D;48444I$#eres# P.,.be////////////////////////////// 48444Co$#rib'#e( S'rp's Co$+ersio$ Ri%0#s ///////////////////// 648444

&2684448444 X K X ;1;) &2684448444 X /D) 248444

&b) I$#eres# P.,.be ///////////////////////////////////// 48444

I$#eres# Expe$se///////////////////////////////////// 1D6814;

Bo$(s P.,.be///////////////////////////////// 6814; C.s0 &2684448444 X K ;)///////////// ;48444

C.c'.#io$s@

P.r +.'e 2684448444Iss'.$ce price / 38D;48444To#. (isco'$# 2 1D48444

Mo$#0s re!.i$i$% 11D

*isco'$# per !o$#0 2183;3&21D48444 11D)

*isco'$# .!or#i9e( 26814;&? X 2183;3)

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EXERCISE 16- &Co$#i$'e()

&c) Bo$(s P.,.be &2183448444 5 2?181D6)// 18?3D8D1?Co$#rib'#e( S'rp's

Co$+ersio$ Ri%0#s /////////////////////////// 138444Co!!o$ S0.res///////////////////////// 18?8D1?

C.c'.#io$s@

*isco'$# re.#e( #o ;3K of #0e bo$(s &21D48444 X /;3) 2?38444

Less (isco'$# .!or#i9e(&2?38444 11D) X 14 8D1?

U$.!or#i9e( bo$( (isco'$# 2?181D6

Ac#'. procee(s 70e$ bo$(s so( 238DD48444J.'e of bo$(s o$, 38D;48444J.'e of co$+ersio$ ri%0#s 648444Propor#io$ co$+er#e( ;3KJ.'e of ri%0#s co$+er#e( 2138444

&() U$(er ASPE8 #0ere .re #7o op#io$s i$ .cco'$#i$% for 0,bri(co!po'$( i$s#r'!e$#s/ T0e firs# op#io$ is #o!e.s're #0e co!po$e$# #0.# is !os# e.si, !e.s'r.be firs#

&of#e$ #0e (eb# co!po$e$#)8 .$( .pp, #0e resi('. #o #0eo#0er co!po$e$#/ T0is op#io$ is co$sis#e$# 7i#0 #0ere'ire( #re.#!e$# '$(er IFRS/ If *.is, c0ooses #0is op#io$8#0e o'r$. e$#r, #o recor( #0e iss'.$ce of #0e co$+er#ibebo$(s o$ '$e 18 ;41? is #0e s.!e .s i$ p.r# &.)/

T0e seco$( op#io$ is #o !e.s're #0e e'i#, co!po$e$# .#24/ If *.is, c0ooses #0is op#io$8 #0e o'r$. e$#r, #o recor(#0e iss'.$ce of #0e co$+er#ibe bo$(s o$ '$e 18 ;41? is@

C.s0//////////////////////////////////////////////////////// 3848444Bo$(s P.,.be /////////////////////////////// 38DD48444I$#eres# P.,.be////////////////////////////// 48444

&2684448444 X K X ;1;) &2684448444 X /D) 248444

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EXERCISE 16- &Co$#i$'e()

&e) T0e bo$(0o(ers 7o'( o$, be !o#i+.#e( #o co$+er#bo$(s i$#o co!!o$ s0.res if #0e, percei+e( .$ i$cre.se i$#0e +.'e of #0eir i$+es#!e$#8 .$( if #0e, 7o'( %e# co!!o$s0.res 7i#0 . f.ir +.'e 0i%0er #0.$ #0e f.ir +.'e of #0ebo$(s #0.# 7ere %i+e$ 'p i$ #0e co$+ersio$/ T0e boo: +.'eof 70.# #0e, %.+e 'p .# #0e #i!e of co$+ersio$ is s0o7$ i$#0e e$#r, .bo+e .s 218?8D1? for 48444 co!!o$ s0.res/T0is 7or:s o'# #o si%0#, o+er 2? per s0.re/ Li:e, #0eco!!o$ s0.res .re #r.(i$% .# .$ .!o'$# 0i%0er #0.$ 2?b, . %oo( !.r%i$/ T0ere s0o'( be .$ excess o+er #0e boo:+.'e of 2? .s #0e bo$(0o(ers .re %i+i$% 'p . s#e.(, c.s0i$fo7 fro! #0e i$#eres# i$co!e ob#.i$e( fro! #0e bo$(s i$

exc0.$%e for s0.res8 70ic0 !i%0# $o# ,ie( .$, (i+i(e$(s/T0is is especi., #r'e .s co$#i$'i$% #o 0o( #0e bo$(spro+i(es . re#'r$ i$ #0e for! of i$#eres#8 ,e# #0e op#io$fe.#'re oc:s i$ #0e s#oc: .ppreci.#io$ i$ f.+o'r of #0e0o(er 5 so #0e i!!e(i.#e oppor#'$i#, for . %.i$ !'s# beco$si(er.be/

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EXERCISE 16-D &14-;4 !i$'#es)

&.) Bo$(s P.,.be &2;8?448444 2??8344) ;8???8344Co$#rib'#e( S'rp's Co$+ersio$ Ri%0#s //////////////////////////// ;;8;44

Preferre( S0.res///////////////////////////// ;8?66844

&b) T0e .(+.$#.%es of bo$(s fro! #0e perspec#i+e of #0ebo$(0o(er .re pri$cip., sec'ri#, .$( s#e.(, c.s0 fo7sfro! #0e i$#eres# .$( #0e re#'r$ of c.pi#. .# #0e !.#'ri#,(.#e of #0e bo$(s/ T0e .(+.$#.%es of preferre( s0.res7o'( be si!i.r #o bo$(s .s #o #0e c.s0 fo7s fro!(i+i(e$(s recei+e(8 p.r#ic'.r, if #0e preferre( s0.res .re

c'!'.#i+e .$( #0e co!p.$, 0.s . s#ro$% 0is#or, of (i+i(e$( p.,i$% .bii#,/ "0ere.s #0e bo$(s 0.+e . fixe(!.#'ri#, (.#e8 #,pic., #0e preferre( s0.res (o $o#/ T0e.c: of . !.#'ri#, (.#e or . (.#e .# 70ic0 #0e preferre(s0.re0o(er c.$ %e# 0is c.pi#. i$+es#!e$# re#'r$e( .# .fixe( .!o'$# !i%0# be percei+e( .s . (is.(+.$#.%e/ T0is!i%0# .so be #0e percep#io$ bec.'se #0e iss'i$% co!p.$,0.s $o p.$s #o re(ee! #0e preferre( s0.res8 .#0o'%0 #0ispercei+e( (is.(+.$#.%e is .e+i.#e( si%$ific.$#, if #0e

preferre( s0.res .re .c#i+e, #r.(e(/ T0e co$+ersio$ fro!bo$(s !i%0# be precipi#.#e( b, . rise i$ i$#eres# r.#es8c.'si$% #0e !.r:e# +.'e of #0e bo$(s #o (rop8 e.(i$% #o .o7er re#'r$ o$ i$+es#!e$# if so(/ O#0er co$si(er.#io$s!i%0# be #0.# #0e (i+i(e$( r.#e o$ #0e preferre( s0.reso'#p.ces #0e re#'r$ of #0e bo$(s/ Fi$., #0e #.x #re.#!e$#of #0e re+e$'e #,pe &i$#eres# +ers's (i+i(e$(s) !i%0# be.$o#0er !o#i+e for #0e co$+ersio$ b, bo$(0o(ers> #0eeffec# of #0e (i+i(e$( #.x cre(i# c.$ i$cre.se #0e .f#er-#.x,ie( si%$ific.$#, for .$ i$(i+i('.8 .$( i$#er-corpor.#e

(i+i(e$(s .##r.c# $o $e# #.x i$ . corpor.#io$/

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EXERCISE 16- &14-;4 !i$'#es)

&.)Bo$(s P.,.be/////////////////////////////////////// 68444Co$#rib'#e( S'rp's Co$+ersio$ Ri%0#s //////////////////////////// 138444

Co!!o$ S0.res///////////////////////////// 184D8444

Pre!i'! .s of ', 18 ;41? for 284448444 of bo$(s 2;148444F.ce +.'e of bo$( co$+er#e( 84448444C.rr,i$% +.'e of bo$( co$+er#e( 28;148444

2448444 X 28;148444 268444284448444

2448444X 2?348444 2138444

284448444

&b)Co$#rib'#e( S'rp's Co$+ersio$ Ri%0#s //////////////////////////// 138444

Co$#rib'#e( S'rp's Co$+ersio$ Ri%0#s Expire( ////// 138444

&2?348444 5 2 138444)

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EXERCISE 16-14 &;4-;3 !i$'#es)

&.) C.s0///////////////////////////////////////////////////////// 148D448444Bo$(s P.,.be///////////////////////////////// D83448444

Co$#rib'#e( S'rp's Co$+ersio$ Ri%0#s ////////////////////

;8448444

&To recor( iss'.$ce of 21484448444 of DK co$+er#ibe(ebe$#'res for 2148D448444/ T0e bo$(s !.#'re i$;4 ,e.rs8 .$( e.c0 218444 bo$( is co$+er#ibei$#o 3 co!!o$ s0.res)

&b) Bo$(s P.,.be &Sc0e('e 1)////////////////// ;8338444Co$#rib'#e( S'rp's Co$+ersio$ Ri%0#s //////////////////////////// 648444

&;8448444 X 4K)Co!!o$ S0.res //////////////////////////// 8;D38444

&To recor( co$+ersio$ of 4K of #0e o'#s#.$(i$% DKco$+er#ibe (ebe$#'res .f#er %i+i$% effec# #o #0e ;-for-1s#oc: spi#)

Sc0e('e 1Co!p'#.#io$ of C.rr,i$% J.'e of Bo$(s Co$+er#e(

*isco'$# o$ bo$(s p.,.be o$ .$'.r, 18 ;41? 2183448444A!or#i9.#io$ for ;41? &2183448444 ;4) 238444A!or#i9.#io$ for ;413 &2183448444 ;4) 38444 1348444*isco'$# o$ bo$(s p.,.be o$ .$'.r, 18 ;416 18348444Bo$(s co$+er#e( 4KU$.!or#i9e( (isco'$# o$ bo$(s co$+er#e( ?438444F.ce +.'e of bo$(s co$+er#e( 84448444C.rr,i$% +.'e of bo$(s co$+er#e( 2;8338444

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&c) Co!p'#.#io$ of Co!!o$ S0.res Res'#i$% fro! Co$+ersio$

N'!ber of s0.res co$+er#ibe o$ .$'.r, 18 ;41?@

N'!ber of bo$(s &21484448444 218444) 148444

N'!ber of s0.res for e.c0 bo$( X 3348444

S#oc: spi# o$ .$'.r, 18 ;413 X ;N'!ber of s0.res co$+er#ibe .f#er #0e s#oc: spi# 1448444K of bo$(s co$+er#e( X 4KN'!ber of s0.res iss'e( 48444

&() Fro! #0e perspec#i+e of H.!!o$( Corp/8 #0e co$+ersio$fro! bo$(s #o co!!o$ s0.res 0.s #0e foo7i$%.(+.$#.%es@

1/ No obi%.#io$ &or !ore fexibii#,) #o p., (i+i(e$(s8 .soppose( #o fixe( c.s0 o'#fo7s for i$#eres# p.,!e$#s8re('ci$% fi$.$ci. ris:/

;/ No obi%.#io$ #o rep., pri$cip. .# !.#'ri#, (.#e ofbo$(s/

/ I$cre.se( i$co!e fro! re('ce( i$#eres# cos#s &#o beco!p'#e( o$ .$ .f#er-#.x b.sis)/

?/ *epe$(i$% o$ H.!!o$(=s fi$.$ci. s#r'c#'re8 #0eeffec# of #0e co$+ersio$ !i%0# be . posi#i+e or$e%.#i+e effec# o$ e.r$i$%s per s0.re/

3/ Posi#i+e effec# o$ (eb# #o e'i#, r.#io/

T0e (is.(+.$#.%es of #0e co$+ersio$ #o H.!!o$(Corpor.#io$ i$c'(e@

1/ *i'#io$ of e.r$i$%s for exis#i$% s0.re0o(ers !i%0#!.:e s0.re0o(ers '$0.pp,> offse# .# e.s# i$ p.r# b,0i%0er i$co!e bec.'se ess i$#eres# is p.i(/

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;/ Exis#i$% s0.re0o(ers 7i co$cei+.b, press're #0eco!p.$, $o# #o (i'#e #0eir o7$ers0ip .$( po7er #o+o#e &#0is !., .c#'., be '$i:e,8 .s #0e f.c# of #0e


co$+ersio$ fe.#'re 7o'( 0.+e bee$ f', (iscose(si$ce #0e i$i#i. iss'.$ce of #0e bo$(s8 .$( #0epossibii#, of co$+ersio$ 7o'( be f', refec#e( i$ #0eprice of #0e s0.res)/

/ Press're fro! $e7 s0.re0o(ers for (i+i(e$( p.,o'#/

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EXERCISE 16-11 &14-;4 !i$'#es)

Bo$(s P.,.be/////////////////////////////////////// 181;38444Co$#rib'#e( S'rp's

Co$+ersio$ Ri%0#s //////////////////// 8444Co!!o$ S0.res///////////////////////////// 181?8444

*isco'$# .s of '$e 48 ;41? for 2D84448444 of bo$(s 23448444F.ce +.'e of . bo$(s D84448444C.rr,i$% +.'e of . bo$(s 283448444

C.rr,i$% .!o'$# of bo$(s co$+er#e(@

218;448444 X 283448444 2181;384442D84448444

C.rr,i$% .!o'$# of ri%0#s exercise( o$ co$+ersio$@

218;448444X 2648444 28444

2D84448444

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EXERCISE 16-1; &4-?4 !i$'#es)

&.) &1) *ece!ber 18 ;413I$#eres# Expe$se///////////////////////////////////// ;4?8444

Bo$(s P.,.be &21;48444 X 1;4)////////// 68444 C.s0 &2684448444 X K X 61;)/////// ;148444

&;) .$'.r, 18 ;416Bo$(s P.,.be//////////////////////////////////////// ?468?44Co$#rib'#e( S'rp's

Co$+ersio$ Ri%0#s //////////////////// D8444Co!!o$ S0.res///////////////////////////// ?1?8?44

1/4? ess 1/4; ;K X 26 !iio$ X 6/66K

To#. pre!i'!&2684448444 X /4;) 21;48444

Pre!i'! .!or#i9e(&21;48444 X ;14) ;?8444

B..$ce 268444

Bo$(s co$+er#e(&2?448444 2684448444) 6/66K

Re.#e( pre!i'!&268444 X 6/66K)

268?44F.ce +.'e of bo$( re(ee!e( ?448444C.rr,i$% +.'e of bo$( re(ee!e( 2?468?44

&) M.rc0 18 ;416I$#eres# Expe$se///////////////////////////////////// 68D44

Bo$(s P.,.be//////////////////////////////////////// ;44

&21;48444 14 X 1; X 6/66K)

I$#eres# P.,.be////////////////////////////// 8444

&2?448444 X K X 1;)

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EXERCISE 16-1; &Co$#i$'e()

M.rc0 18 ;416Bo$(s P.,.be//////////////////////////////////////// ?468;44Co$#rib'#e( S'rp's

Co$+ersio$ Ri%0#s //////////////////// D8444Co!!o$ S0.res////////////////////// ?1?8;44

Pre!i'! .s of .$'.r, 18 ;416 for 2?448444 of bo$(s 268?44268?44 D ,e.rs re!.i$i$% X 1; &;44)

Pre!i'! .s of M.rc0 18 ;416 for 2?448444 of bo$(s 68;44F.ce +.'e of bo$( co$+er#e( ?448444C.rr,i$% +.'e of bo$( co$+er#e( 2?468;44

&?) '$e 48 ;416I$#eres# Expe$se///////////////////////////////////// 168D44Bo$(s P.,.be//////////////////////////////////////// 38;44

I$#eres# P.,.be////////////////////////////////////// 8444

&2?448444 X K X 1;)

C.s0///////////////////////////////////////////////// 1D8444

Pre!i'! #o be .!or#i9e(@ &21;48444 X D6/66K) X 1;4 238;448 or 2D8;44 16 &re!.i$i$% i$#eres# .$(.!or#i9.#io$ perio(s) 238;44

To#. #o be p.i(@ &238;448444 X K ;) 28444 21D8444

Ori%i$. pre!i'! 21;48444;41? .!or#i9.#io$ &1;8444);413 .!or#i9.#io$ &1;8444).$/ 18 ;416 7ri#e-off &68?44)M.r/ 18 ;416 .!or#i9.#io$ &;44

)M.r/ 18 ;416 7ri#e-off &68;44)

2D8;44

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EXERCISE 16-1; &Co$#i$'e()

&b) Bo$(0o(ers 7o'( be !o#i+.#e( #o 0o( off co$+er#i$%#0eir i$+es#!e$# i$ bo$(s i$#o co!!o$ s0.res #o co$#i$'e#o #.:e .(+.$#.%e of #0e sec'ri#, .$( s#e.(, c.s0 fo7sfro! #0e i$#eres# .$( #0e re#'r$ of c.pi#. .# #0e !.#'ri#,(.#e of #0e bo$(s/ S0o'( #0e +.'e of #0e co!!o$ s0.resco$#i$'e #o ci!b 0i%0er8 #0e oppor#'$i#, #o co$+er# is s#i.+.i.be '$#i #0e co$+ersio$ ri%0# expires/ O$ #0e o#0er 0.$(8 if #0e f.ir +.'e of #0e co!!o$ s0.res (eci$es8 #0ebo$(0o(er c.$ co$#i$'e #o 0o( #0e bo$(s #o #0eir !.#'ri#, .$( recei+e #0e f.ce +.'e of #0e bo$(8 .$( coec#i$#eres# p.,!e$#s #o !.#'ri#,/

T0e ris: i$ pos#po$i$% #0e co$+ersio$ ies i$ #0e +o.#ii#,of #0e f.ir +.'e of #0e co!!o$ s0.res/ If #0e bo$(0o(er (oes $o# co$+er# 70e$ #0e co!!o$ s0.re f.ir +.'e is0i%08 #0e bo$(0o(er c.$$o# re.i9e . %.i$ o$ #0e res.e of #0e s0.res/ S'bse'e$#,8 if #0e f.ir +.'e of #0e co!!o$s0.res (eci$es #0e bo$(0o(er 7i $o# be .be #o se #0ebo$( .# . s'bs#.$#i. %.i$ si$ce #0e i$ce$#i+e #o co$+er# #oco!!o$ s0.res is $o7 $o$-exis#e$# .$( #0e co$+ersio$ri%0# is 7or#0ess/

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EXERCISE 16-1 &14-13 !i$'#es)

&.)

ASPE .o7s for #7o op#io$s@ 1) #o .oc.#e #0e e$#ire iss'.$ce #o#0e (eb# co!po$e$#> or ;) #o 'se #0e resi('. !e#0o(/

Resi('. !e#0o(@

T0e resi('. !e#0o( '$(er ASPE .o7s for #0e firs# .oc.#io$ #obe #o #0e co!po$e$# #0.# is !ore e.si, !e.s'r.be8 i$ #0isc.se8 #0e e'i#, co!po$e$#@

OXFOR* CORP/

o'r$. E$#r,Sep#e!ber 18 ;41?

C.s0 &2384?8444 2118444)////////////////////////// 38?;18444Bo$(s P.,.beSc0e('e 1/////////////////// 38;3;8444Co$#rib'#e( S'rp'sS#oc: ".rr.$#s

Sc0e('e 1 //////////////////////////////////////////// 3;8444

I$#eres# P.,.beSc0e('e ;///////////////// 118444

&To recor( #0e iss'.$ce of #0e bo$(s)

Sc0e('e 1Pre!i'! o$ Bo$(s P.,.be .$( J.'e of S#oc: ".rr.$#s

S.es price &38;44 X 218444 X 1/4;) 2384?8444*e('c# +.'e .ssi%$e( #o s#oc: 7.rr.$#s

&38;44 X ; 148?44 X 23) 3;8444

Bo$(s p.,.be 238;3;8444

Sc0e('e ;

Accr'e( Bo$( I$#eres# #o *.#e of S.eF.ce +.'e of bo$(s 238;448444I$#eres# r.#e KA$$'. i$#eres# 2 ?6D8444

Accr'e( i$#eres# for !o$#0s 5 &2?6D8444 X 1;) 2 118444

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Aoc.#io$ of 9ero #o e'i#,

A seco$( op#io$ is .+.i.be '$(er ASPE 70ereb, #0e e$#ireiss'.$ce is .oc.#e( #o #0e (eb#/

OXFOR* CORP/o'r$. E$#r,

Sep#e!ber 18 ;41?

C.s0 &2384?8444 2118444)////////////////////////// 38?;18444Bo$(s P.,.be///////////////////////////////////////// 384?8444

I$#eres# P.,.beSc0e('e 1///////////////// 118444

Sc0e('e 1Accr'e( Bo$( I$#eres# #o *.#e of S.e

F.ce +.'e of bo$(s 238;448444I$#eres# r.#e KA$$'. i$#eres# 2 ?6D8444

Accr'e( i$#eres# for !o$#0s 5 &2?6D8444 X 1;) 2 118444

&b)

A o7er (eb# #o #o#. .sse#s r.#io i$(ic.#es be##er (eb#-p.,i$%.bii#, .$( o$%-r'$ so+e$c,/ Aoc.#i$% #0e e$#ire iss'.$ce #o#0e (eb# co!po$e$# &.$( #0erefore 9ero #o e'i#,) res'#s i$ .0i%0er (eb# #o #o#. .sse#s r.#io co!p.re( #o 'si$% #0e resi('.!e#0o(/ T0e cre(i#or !., .so .$.,9e #0.# #0e '$(er,i$%

fi$.$ci. i$s#r'!e$# is #0e s.!e '$(er e.c0 op#io$8 .$( #0.# #0eco!p.$,=s .cco'$#i$% c0oice is .ffec#i$% #0is c.c'.#e( r.#io/

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EXERCISE 16-1? &13-;3 !i$'#es)

.) U$(er ASPE8 fi$.$ci. i.bii#ies #0.# .re i$(exe( #o .$e$#i#,=s perfor!.$ce .re !e.s're( .# #0e 0i%0er of #0e

.!or#i9e( cos# .$( #0e .!o'$# o7i$% .# #0e s#.#e!e$# of fi$.$ci. posi#io$ (.#e %i+e$ #0e fe.#'re/ T0erefore8 #0e

o'r$. e$#r, 'po$ iss'.$ce is recor(e( .# #0e iss'e.!o'$#/

C.s0 &218444 x 144 x 1/4)/////////////////////// 148444Bo$(s P.,.be///////////////////////////////// 148444

&b) T0e bo$( .!or#i9e( c.rr,i$% .!o'$# s0o'( be co!p.re( #o#0e po#e$#i. c.s0 o'#fo7 '$(er #0e i$(exi$% fe.#'re #o(e#er!i$e i#s ,e.r-e$( c.rr,i$% .!o'$#/

A!or#i9e(cos#

I$(exe( fe.#'re Hi%0er of #7o op#io$s

*ec/ 18;41?

214;8?44&2148444 5 2644)

238444&2;34 x x 144)

214;8?44

*ec/ 18

;413

21418D44

&214;8?44 5 2644)

21438444

&234 x x 144)

21438444

*ec/ 18;416

21418;44&21418D44 5 2644)

2138444&2?34 x x 144)

21;48444

T0e .!or#i9.#io$ of #0e pre!i'! is c.c'.#e( .s foo7s@Bo$( Pre!i'!@ 28444

Ve.rs #o M.#'ri#,@ 3A!or#i9.#io$ per ,e.r@ 2644

A#0o'%0 #0e i$(exe( fe.#'re c.c'.#es . re(e!p#io$ fe.#'re.# 21384448 #0e bo$( .%ree!e$# s#.#es #0.# #0e bo$(s c.$$o# bere(ee!e( for !ore #0.$ 218;44 per bo$(/

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EXERCISE 16-13 &13-;3 !i$'#es)

&.)

1;1? No e$#r, &#o#. co!pe$s.#io$ cos# is 23348444)

1;11? Co!pe$s.#io$ Expe$se/////////////////////// ;38444Co$#rib'#e( S'rp'sS#oc: Op#io$s ;38444To recor( co!pe$s.#io$ expe$se for ;41? &1; X 23348444)

?113 Co$#rib'#e( S'rp'sS#oc: Op#io$s ;18DCo!pe$s.#io$ Expe$se///////////////// ;18D

&2;38444 X 8344?38444)

&To recor( #er!i$.#io$ of s#oc:op#io$s 0e( b, resi%$e( e!po,ees)

1;113 Co!pe$s.#io$ Expe$se/////////////////////// ;38611Co$#rib'#e( S'rp'sS#oc: Op#io$s ;38611To recor( co!pe$s.#io$ expe$se for ;413 &1; X 23348444) 5 ;18D

116 C.s0 &18344 X 2?;)/////////////////////////// 18;8444Co$#rib'#e( S'rp'sS#oc: Op#io$s// D38444

&23348444 X 18344?38444 or

2348;;; X 18344?18344)Co!!o$ S0.res///////////////////////// 184D8444

&To recor( iss'.$ce of 18344 s0.res 'po$exercise of op#io$s .# op#io$ price of 2?;)

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&No#e #o i$s#r'c#or@ T0e f.ir +.'e of #0e s0.res 0.s $oree+.$ce i$ #0is e$#r, .$( #0e foo7i$% o$e/)

3116 C.s0 &148444 X 2?;)/////////////////////////////////?;48444Co$#rib'#e( S'rp'sS#oc: Op#io$s////1;;8;;;

&23348444 X 148444?38444 or

2348;;; X 148444?18344)Co!!o$ S0.res/////////////////////////////// 3?;8;;;

&To recor( iss'.$ce of 148444 s0.res 'po$ exercise of re!.i$i$% op#io$s .# op#io$ price of 2?;)

&b) The pricing model may not take into account forfeituresbec.'se #0e, c.$$o# be re.so$.b, es#i!.#e(/ T0eobec#i+e of offeri$% s#oc: op#io$s is #o .##r.c#8 !o#i+.#e8.$( re!'$er.#e seec#e( i$(i+i('.s i$ #0e or%.$i9.#io$/I$c'(i$% . re('c#io$ of #0e expec#e( expe$(i#'re b, .$.rbi#r.r, .!o'$# of forfei#'res is co$#r.r, #o #0e %o. .$((oes $o# refec# !.$.%e!e$#=s i$#e$#io$/ H.( forfei#'resbee$ i$c'(e( i$ #0e es#i!.#e .# #0e #i!e of #0e %r.$# of #0eop#io$s #0e #o#. co!pe$s.#io$ expe$se 7o'( be

propor#io$.#e, re('ce(8 b.se( o$ !.$.%e!e$#=s bes#es#i!.#e/

&c) Fo'r co!!o$ co!pe$s.#io$ p.$s .re@

1/ Co!pe$s.#or, s#oc: op#io$ p.$s &CSOPs)

;/ *irec# .7.r(s of s#oc:

/ S#oc: .ppreci.#io$ ri%0#s p.$s &SARs)

?/ Perfor!.$ce-#,pe p.$s

T0ese (iffere$# p.$s .re 'se( #o co!pe$s.#e e!po,ees .$(especi., !.$.%e!e$#/ I# is %e$er., .%ree( #0.# effec#i+eco!pe$s.#io$ pro%r.!s@

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1/ Mo#i+.#e e!po,ees #o 0i%0 e+es of perfor!.$ce/

;/ Hep re#.i$ exec'#i+es .$( recr'i# $e7 #.e$#/

/ B.se co!pe$s.#io$ o$ e!po,ee .$( co!p.$,perfor!.$ce/

?/ M.xi!i9e #0e e!po,ee=s .f#er-#.x be$efi# .$( !i$i!i9e #0ee!po,er=s .f#er-#.x cos#/

3/ Use perfor!.$ce cri#eri. #0.# #0e e!po,ee c.$ i$f'e$ce/

&() T0e !.i$ (iffere$ce be#7ee$ .$ e!po,ee s#oc: op#io$p.$ &ESOP) .$( . co!pe$s.#or, s#oc: op#io$ p.$ &CSOP)is #0.# 7i#0 ESOPs8 #0e e!po,ee 's'., p.,s for #0eop#io$s &ei#0er f', or p.r#i.,) .$( #0ere !., be . +er,.r%e $'!ber of p.r#icip.$#s .cross #0e co!p.$,/ T0'sESOP #r.$s.c#io$s .re reco%$i9e( .s c.pi#. #r.$s.c#io$s&c0.r%e( #o e'i#, .cco'$#s)/ T0e e!po,ee is i$+es#i$% i$#0e co!p.$,/

CSOPs8 o$ #0e o#0er 0.$(8 .re pri!.ri, see$ .s .$.#er$.#i+e 7., #o co!pe$s.#e p.r#ic'.r8 of#e$ se$ior8e!po,ees for #0eir ser+ices8 i:e . b.r#er #r.$s.c#io$/ T0eser+ices .re re$(ere( b, #0e e!po,ees i$ #0e .c# of pro('ci$% re+e$'es/ T0's CSOP #r.$s.c#io$s .rereco%$i9e( o$ #0e i$co!e s#.#e!e$# &c0.r%e( #o .$expe$se .cco'$#)/

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EXERCISE 16-16 &;3-3 !i$'#es)

&.)111? No e$#r,

1;11? Co!pe$s.#io$ Expe$se/////////////////// 38444Co$#rib'#e( S'rp's S#oc: Op#io$s/////////////////////// 38444

&2348444 X 1;)

1;113 Co!pe$s.#io$ Expe$se/////////////////// 38444Co$#rib'#e( S'rp's S#oc: Op#io$s//////////////////////// 38444

3116 C.s0 &D8444 X 2;3)//////////////////////////// ;448444Co$#rib'#e( S'rp's S#oc: Op#io$s///////////////////////////////// 448444

Co!!o$ S0.res //////////////////////// 3448444&2348444 X D8444;48444)

1;11 Co$#rib'#e( S'rp's S#oc: Op#io$s///////////////////////////////// ?348444

Co$#rib'#e( S'rp's 5

Expire( S#oc: Op#io$s///////////

?348444&2348444 5 2448444)

&b) T0e !.r:e# price of #0e H.r7oo( s0.res .# #0e (.#e of %r.$# 7o'( i:e, be o7er #0.$ #0e exercise price/ T0eobec#i+e of iss'i$% #0e s#oc: op#io$s is pri$cip., #o!o#i+.#e e!po,ees #o 7or: .# e$0.$ci$% #0e !.r:e# +.'eof #0e co!p.$,=s s0.res/ T0e op#io$s 0.+e . ser+iceperio(8 #,pic., of !ore #0.$ o$e ,e.r/ Co$se'e$#,8 #0eco!p.$, 7o'( 7.$# #o .o7 for .$ 'p7.r( !o+e!e$# i$

#0e s0.re price #o 's#if, #0e re!'$er.#io$ of :e,e!po,ees 70ose 7or: 7o'( 0.+e e( #o #0e i$cre.se i$#0e !.r:e# +.'e of #0e s0.res/ If #0e !.r:e# +.'e of #0es0.res .# #0e (.#e of %r.$# 7.s .# or %re.#er #0.$ #0eexercise price8 #0e i$ce$#i+e 7o'( be s'bs#.$#i.,re!o+e(8 .$( so #0e p.$ 7o'( be ess effec#i+e/

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&c) T0e !.r:e# price of #0e H.r7oo( s0.res .# M., 18 ;416 of 21 is $o# 'se( i$ recor(i$% #0e exercise of #0e s#oc:op#io$s/ Fro! .$ .cco'$#i$% perspec#i+e8 #0e !.r:e# priceis $o# ree+.$#/ I# is $o$e#0eess ree+.$# #o #0e exec'#i+esi$ !.:i$% #0eir (ecisio$ #o exercise #0eir s#oc: op#io$s/T0e !.r:e# price is !e$#io$e( #o i$(ic.#e #0.# #0e #i!i$% of #0e exercise is 's#ifie(8 or .# e.s# !.:es se$se/ T0e!.r:e# price of #0e s0.res excee(s #0e c.rr,i$% +.'e of #0e s#oc: op#io$s p's #0e c.s0 p.i(/ Exec'#i+esexercisi$% . s#oc: op#io$ 7o'( 0.+e p.i( 2;3 .$( co'(rese #0e s0.res i!!e(i.#e, for 218 for . %.i$ of 26 per

s0.re/

&() *'ri$% ;41 #0e !.r:e# price of #0e s0.res i:e, fe beo72;3 per s0.re/ T0is 7o'( exp.i$ 70, $o .((i#io$. s#oc:op#io$s 7ere exercise(8 .$( 7ere ef# #o .pse8 .s #0ere7.s $o be$efi# #o be %.i$e( b, #0e exec'#i+es i$ exercisi$%#0e!/ T0e, co'( $o# reco+er #0e c.s0 re'ire( #oexercise #0e s#oc: op#io$ #0ro'%0 #0e res.e of #0e s0.resif #0e s#oc: price 7.s beo7 #0e exercise price of 2;3 per s0.re/

&e) T0e exec'#i+es 0o(i$% #0e s#oc: op#io$s !i%0# (e., #0eexercise of #0e op#io$s #o pos#po$e #0e re'ire!e$# of ob#.i$i$% #0e $ecess.r, c.s0 #o exercise #0e op#io$/ Of#e$exec'#i+es !'s# se #0e s0.res ob#.i$e( o$ #0e exercise of s#oc: op#io$s #o p., off b.$: o.$s sec're( #o ob#.i$ #0e$ecess.r, c.s0 re'ire(/ Procee(s fro! #0e s.e of #0es0.res .re .so 'se( for #0e p.,!e$# of #0e perso$.i$co!e #.x #0.# is .ssesse( o$ #0e i$co!e for #.x

p'rposes re.i9e( o$ #0e s.e of #0e s0.res ob#.i$e(#0ro'%0 #0e exercise of s#oc: op#io$s/

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EXERCISE 16-1 &14-13 !i$'#es)

&.) .$'.r, 18 ;41?No e$#r,

&b) *ece!ber 18 ;41?Co!pe$s.#io$ Expe$se/////////////////// 1;8344

Co$#rib'#e( S'rp's S#oc: Op#io$s /////////////////////// 1;8344

&38444 X 214 X 1?)

&c) .$'.r, 18 ;41C.s0 &?8444 X 26;)//////////////////////////// ;?D8444Co$#rib'#e( S'rp's

S#oc: Op#io$s///////////////////////////////// ?48444Co!!o$ S0.res /////////////////////// ;DD8444&38444 X 214 X ?8444 38444)

&() *ece!ber 18 ;4;1Co$#rib'#e( S'rp's S#oc: Op#io$s //////////////////////////////// 148444

Co$#rib'#e( S'rp's 5Expire( S#oc: Op#io$s/////////// 148444

&38444 X 214 X 18444 38444)

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EXERCISE 16-1D &13-;4 !i$'#es)

&.)

'$e 48 ;41? No#e R.#e A!o'$#I$#eres# p.i( 2 1448444 /3K 2 834

C.s0 recei+e( o$ s7.p &34)

I$#eres# expe$se 2 1448444 K 2 8444

&3/ K 1K) X 61;

&3/ K 1K) 5 6K X 21448444 X 61;

*ece!ber 18 ;41? No#e R.#e A!o'$#

I$#eres# p.i( 2 1448444 /D3K 2 8D34

C.s0 recei+e( o$ s7.p &D34)

I$#eres# expe$se 2 1448444 K 28444

&6/ K 1K) X 61;

&6/ K 1K) 5 6K X 21448444 X 61;

&b)

'$e 48 ;41?

I$#eres# Expe$se///////////////////////////////////////////////////////////////834C.s0//////////////////////////////////////////////////////////////////////////// 834

C.s0///////////////////////////////////////////////////////////////////////////////////34I$#eres# Expe$se//////////////////////////////////////////////////////// 34

*ece!ber 18 ;41?I$#eres# Expe$se///////////////////////////////////////////////////////////////8D34

C.s0//////////////////////////////////////////////////////////////////////////// 8D34

C.s0///////////////////////////////////////////////////////////////////////////////////D34I$#eres# Expe$se//////////////////////////////////////////////////////// D34

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&c) T0e i$#eres# r.#e s7.p is . c.s0 fo7 0e(%e bec.'se #0e0e(%e is e$#ere( i$#o #o pro#ec# T0o!pso$ .%.i$s# +.ri.#io$s i$f'#'re c.s0 fo7s c.'se( b, #0e c0.$%es i$ #0e pri!e i$#eres#r.#e/ A# #0e #i!e of e$#eri$% i$#o #0e co$#r.c#8 T0o!pso$ 0.($o# ,e# i$c'rre( #0e i$#eres# c0.r%es for #0e $o#e/ T0e c.s0fo7s .re #0erefore re.#e( #o f'#'re i$#eres# p.,!e$#s/Co$se'e$#, #0e 0e(%e c.$$o# be . f.ir +.'e 0e(%e/

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EXERCISE 16-1 &13-;4 !i$'#es)

&.)

*ece!ber 18 ;41? No#e R.#e A!o'$#I$#eres# p.i( 2 1484448444 3/DK 2 3D48444

C.s0 p.i( o$ s7.p ;48444

I$#eres# expe$se 2 1484448444 6K 2 6448444

&6K 5 3/DK) X 21484448444

*ece!ber 18 ;413 No#e R.#e A!o'$#

I$#eres# p.i( 2 1484448444 6/6K 2 6648444

C.s0 recei+e( o$ s7.p &648444)

I$#eres# expe$se 2 1484448444 6K 2 6448444

&6/6K 5 6K) X 21484448444

&b) *ece!ber 18 ;41?I$#eres# Expe$se///////////////////////////////////////////////////////////////3D48444

C.s0////////////////////////////////////////////////////////////////////////// 3D48444

I$#eres# Expe$se///////////////////////////////////////////////////////////////;48444

C.s0////////////////////////////////////////////////////////////////////////// ;48444*ece!ber 18 ;413

I$#eres# Expe$se///////////////////////////////////////////////////////////////6648444C.s0////////////////////////////////////////////////////////////////////////// 6648444

C.s0///////////////////////////////////////////////////////////////////////////////////648444I$#eres# Expe$se////////////////////////////////////////////////////// 648444

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&c) T0e i$#eres# r.#e s7.p is . c.s0 fo7 0e(%e bec.'se#0e 0e(%e 7.s e$#ere( i$#o #o pro#ec# Veo7:$ife .%.i$s#+.ri.#io$s i$ f'#'re c.s0 fo7s c.'se( b, #0e c0.$%es i$#0e LIBOR r.#e of i$#eres#/ A# #0e #i!e of e$#eri$% i$#o #0eco$#r.c#8 Veo7:$ife 0.( $o# ,e# i$c'rre( #0e i$#eres#c0.r%es for #0e $o#e/ T0e c.s0 fo7s .re #0erefore re.#e(#o f'#'re i$#eres# p.,!e$#s/ Co$se'e$#, #0e 0e(%ec.$$o# be . f.ir +.'e 0e(%e/

&() If #0e co!p.$, foo7s 0e(%e .cco'$#i$% '$(er IFRS8#0e s7.p 7o'( be reco%$i9e(8 re!e.s're( #o f.ir +.'e .#

e.c0 repor#i$% (.#e8 .$( %.i$s .$( osses i$ f.ir +.'e7o'( be boo:e( #o OCI '$(er 0e(%e .cco'$#i$%/ As #0ei$#eres# c.s0 fo7s .c#'., occ'r8 #0e %.i$sosses i$ OCI.re #r.$sferre( #o $e# i$co!e/

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EXERCISE 16-;4 &;4-;3 !i$'#es)

&.) *ece!ber 18 ;41?

I$#eres# Expe$se///////////////////////////////////////////////////////////////38444C.s0//////////////////////////////////////////////////////////////////////////// 38444

&2184448444 X /3K)

&b) *ece!ber 18 ;41?C.s0///////////////////////////////////////////////////////////////////////////////////18444

I$#eres# Expe$se//////////////////////////////////////////////////////// 18444

&c) *ece!ber 18 ;41?*eri+.#i+es 5 Fi$.$ci. Asse#sLi.bii#ies///////////////////////?D8444

U$re.i9e( G.i$ or Loss//////////////////////////////////////////// ?D8444

&() *ece!ber 18 ;41?U$re.i9e( G.i$ or Loss //////////////////////////////////////////////////?D8444

Bo$(s P.,.be//////////////////////////////////////////////////////////// ?D8444

&e) F.ir +.'e 0e(%e .cco'$#i$% c.$ be .ppie( #o #0is 0e(%e

bec.'se #0e expos're is fro! . reco%$i9e( i.bii#,8 &#0efixe(-r.#e bo$( p.,.be)/ T0e co!p.$, is co$cer$e( #0.##0e i$#eres# r.#es 7i (eci$e .$( #0erefore #0.# #0e bo$(7i beco!e o$ero's &f.ir +.'e 7i i$cre.se)/

&f) U$(er ASPE8 #0e firs# #7o e$#ries 7o'( be recor(e( b'##0e bo$( 7o'( $o# be re+.'e( .$( #0e s7.p 7o'( $o# bereco%$i9e( &$or re!e.s're()/

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EXERCISE 16-;1 &13-;3 !i$'#es)

&.)

F.ir J.'e

Pre-es#.b/Price

*iffe-re$ce

N'!ber of Ri%0#s

To#.Co!pe$-s.#io$

Accr'.E$#r,

B..$ceof Li.bii#,

;41? 26 2; 2? ?48444 21648444 2?48444 2?48444 ;3K

;413 ?4 ; D ?48444 ;48444 1;48444 1648444 34K

;416 ?3 ; 1 ?48444 3;48444 ;48444 48444 3K

;41 6 ; ? ?48444 1648444 &;48444) 1648444 144K

;41D ?D ; 16 ?48444 6?48444 ?D48444 6?48444

&b)*ece!ber 18 ;41?

Co!pe$s.#io$ Expe$se///////////////////////////////////// ?48444Li.bii#, '$(er S0.re Appreci.#io$ Ri%0#s P.$s ?48444

*ece!ber 18 ;41Li.bii#, '$(er S0.re Appreci.#io$ Ri%0#s P.$s ;48444

Co!pe$s.#io$ Expe$se////////////////////////////// ;48444

*ece!ber 18 ;41D

Co!pe$s.#io$ Expe$se///////////////////////////////////// ?D48444Li.bii#, '$(er S0.re Appreci.#io$ Ri%0#s P.$s ?D48444

&c)'$e 18 ;41

Li.bii#, '$(er S0.re Appreci.#io$ Ri%0#s P.$s ;48444C.s0 ;48444 X &2?6 5 2;)//////////////////////////////// ;D48444

Co!pe$s.#io$ Expe$se QQQQQQQQQQ ?48444

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EXERCISE 16-;1 &Co$#i$'e()

&() If B.rre## .ppies IFRS8 #0e proce('re is .!os# i(e$#ic. #o#0e s#eps #.:e$ i$ p.r# &.)/ T0e o$, (iffere$ce is #0.# #0eco'!$ 0e.(e( 'p To#. Co!pe$s.#io$ i$ #0e #.be 7o'($o# be c.c'.#e( .# #0e i$#ri$sic +.'e of #0e SARso'#s#.$(i$%/ I$s#e.(8 #0is co'!$ 7o'( be co!pe#e( b,i$ser#i$% #0e f.ir +.'e of #0e SARs (e#er!i$e( 'si$% .$op#io$ prici$% !o(e/ T0e proce('re of 0o7 #0e #o#. is.ppie( #o expe$se e.c0 ,e.r is #0e s.!e .s '$(er ASPE/

&e) U$(er ASPE8 SARs p.$s .re reco%$i9e( .# #0eir i$#ri$sic+.'e .# e.c0 fi$.$ci. s#.#e!e$# (.#e8 .$( co!pe$s.#io$

expe$se is .ffec#e( b, #0e f.ir +.'e of #0e co!p.$,=ss0.res .# e.c0 fi$.$ci. s#.#e!e$# (.#e/ T0e f.ir +.'e of #0e co!p.$,=s s0.res !., c0.$%e ('e #o e+e$#s #0.# 7erebe,o$( #0e co$#ro or i$f'e$ce of #0e exec'#i+e e!po,eei$ #0e SARs pro%r.!8 .$( B.rre##=s co!pe$s.#io$ expe$se!., or !., $o# refec# #0e +.'e of #0e ser+ices pro+i(e(b, M'rfi## i$ #0e ,e.r/ As 7e8 if f.ir +.'e of #0e co!p.$,=ss0.res f'c#'.#e si%$ific.$#,8 co!pe$s.#io$ expe$se !.,.so f'c#'.#e si%$ific.$#,8 .$( c.c'.#e( profi# !., $o#be .$ .cc'r.#e refec#io$ of #0e co!p.$,=s perfor!.$ce i$#0e ,e.r/ A$ i$+es#or s0o'( c.ref', co$si(er #0e effec#sof #0e SARs pro%r.! 70e$ .$.,9i$% B.rre##=s profi#/

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EXERCISE 16-;; &13-;3 !i$'#es)

&.) Sc0e('e of Co!pe$s.#io$ Expe$se - S#oc: Appreci.#io$ Ri%0#s &;448444)

*.#e

F.ir

J.'e

Pre-es#.bis0e(

Price

C'!'.#i+eCo!pe$-

s.#io$

Reco%$i9.be

Perce$-#.%e

Accr'e(

Co!pe$-s.#io$

Accr'e( #o

*.#e

Expe$se;413

2

Expe$se;416

2

Expe$se;41

2

Expe$se;41D

21;113

1;116

1;11

1;11D

213

11

;1

1

21;

1;

1;

1;

2 6448444

4

18D448444

18?448444

;3K

34K

3K

144K

2 1348444 &1348444)

4

18348444 348444

218?448444

1348444

&1348444)18348444

348444

&b) Co!pe$s.#io$ Expe$se/////////////////////////////////////////////////////////// 348444Li.bii#, '$(er S0.re Appreci.#io$ Ri%0#s P.$s/////////// 348444

&c) Li.bii#, '$(er S0.re Appreci.#io$ Ri%0#s P.$s////////////////// 18?448444C.s0 ;448444 X &21 5 21;)//////////////////////////////////////////// 18?448444

&() Co!pe$s.#io$ expe$se for ;416 refec#s . (rop i$ #0e f.ir +.'e of #0e s0.res8 b'# i# (oes $o#refec# #0e (rop i$ f.ir +.'e of #0e s0.res #o beo7 #0e pre-es#.bis0e( price of 21; per s0.re/O$ *ece!ber 18 ;4168 . (ebi# of 21348444 #o Li.bii#, U$(er S#oc:-Appreci.#io$ Ri%0#s P.$s.$( . cre(i# of 21348444 #o Co!pe$s.#io$ Expe$se 7o'( be recor(e(8 res'#i$% i$ . 9erob..$ce i$ Li.bii#, U$(er S#oc:-Appreci.#io$ Ri%0#s P.$s/ If f.ir +.'e of #0e s0.res (ropsbeo7 #0e pre-es#.bis0e( price of 21;8 #0e SARs .re o'#-of-#0e-!o$e, .$( 7o'( $o# beexercise( b, #0e officers i$ #0e pro%r.!/ T0's co!pe$s.#io$ expe$se s0o'( $o# refec# .(rop i$ f.ir +.'e of #0e s0.res #o beo7 #0e pre-es#.bis0e( price of 21; per s0.re/

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EXERCISE 16-; &;3-4 !i$'#es)

&.) Sc0e('e of Co!pe$s.#io$ Expe$se - S0.re Appreci.#io$ Ri%0#s &348444)

*.#e

F.ir J.'e

Pre-es#.-

bis0e(Price

C'!'.#i+eCo!pe$-

s.#io$Reco%$i9.be

Perce$-

#.%eAccr'e(

Co!pe$-

s.#io$

Accr'e(#o *.#e

Expe$se

;41?

Expe$se

;413

Expe$se

;416

Expe$se

;41

Expe$se

;41D

1;11?

1;113

1;116

1;11

1;11D

26

?3

6

?D

2;

;

;

;

;

2;448444

348444

6348444

;448444

D448444

;3K

34K

3K

144K

2348444 1;38444 138444 1;8344 ?D8344

&;D8344) ;448444 64484442D448444

234844421;38444

21;8344

2&;D8344)

26448444

&b);41?

Co!pe$s.#io$ Expe$se////////////////////////////////////////////////////////////////////// 348444Li.bii#, '$(er S0.re Appreci.#io$ Ri%0#s P.$s////////////////////// 348444;41

Li.bii#, '$(er S0.re Appreci.#io$ Ri%0#s P.$s///////////////////////////// ;D8344Co!pe$s.#io$ Expe$se////////////////////////////////////////////////////////////// ;D8344

;41DCo!pe$s.#io$ Expe$se////////////////////////////////////////////////////////////////////// 6448444

Li.bii#, '$(er S0.re Appreci.#io$ Ri%0#s P.$s////////////////////// 6448444

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EXERCISE 16-; &Co$#i$'e()

&c) Fro! #0e perspec#i+e of #0e e!po,ee8 #0e c0.r.c#eris#icsof #0e SAR .$( #0e s#oc: op#io$ .re +er, (iffere$#/

A#0o'%0 bo#0 pro+i(e . for! of co!pe$s.#io$ b.se( o$#0e i$cre.se i$ #0e f.ir +.'e of #0e s0.res of #0e e!po,er8#0e (iffere$ces i$ #0e fe.#'res #o #0e e!po,ee .rei!por#.$#/

I$ #0e c.se of #0e exercise of s#oc: op#io$s #0e e!po,ee!'s# pro+i(e c.s0 .$( #0e op#io$s #o ob#.i$ s0.res i$ #0eco!p.$,/ I$ or(er #o reco+er #0e c.s08 #0e s0.resob#.i$e( fro! #0e s#oc: op#io$ $ee( #o be so(/ O$ #0eo#0er 0.$( #0e e!po,ee $ee( $o# p., .$, c.s0 #o #0e

co!p.$, i$ exercisi$% . SAR/ T0e .##er see!s !ore.##r.c#i+e o$ #0is b.sis .o$e/

&() Perfor!.$ce-#,pe co!pe$s.#io$ p.$s .7.r( #0eexec'#i+es co!!o$ s0.res &or c.s0) if specifie(perfor!.$ce cri#eri. .re .##.i$e( ('ri$% #0e perfor!.$ceperio( &%e$er., #0ree #o fi+e ,e.rs)/

A$ ex.!pe of . perfor!.$ce-#,pe p.$ is #0e .7.r( of

c.s0 if #0e re#'r$ o$ .sse#s or e'i#, i$cre.ses #o !ee# .cer#.i$ #0res0o(/ O#0er #.r%e#s i$c'(e %ro7#0 i$ s.es8%ro7#0 i$ e.r$i$%s per s0.re &EPS)8 or . co!bi$.#io$ of #0ese f.c#ors/

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TIME AN* PURPOSE OF PROBLEMS

3rolem 1&1 Time #/%/ minutesB

3urosethe student calculates and records the urchase and the transactionsconcerning a call otion contract for shares o!er t+o accounting eriods and alsorecords the ultimate settlement of the call otion.

3rolem 1&"

Time #/%/ minutesB

3urosethe student calculates and records the +riting of a call otion contractfor shares o!er t+o accounting eriods and also records the ultimate settlementof the call otion.

3rolem 1&#

Time #/%/ minutesB

3urosethe student calculates and records the urchase and the ad<ustmentsconcerning a ut otion contract for shares o!er t+o accounting eriods and alsorecords the ultimate +riteoff of the ut otion as the market !alue ne!er fallselo+ the strike rice.

3rolem 1&%

Time #$%$ minutesB

3urosethe student analyDes a deri!ati!e that in!ol!es an entity=s o+n shares,and ro!ides the alternati!e accounting treatment under A03E and I450.

3rolem 1&$ Time #$%/ minutesB

3uroseto ro!ide the student +ith an oortunity to reare entries toroerly account for a series of transactions in!ol!ing the issuance and e8erciseof common stock rights and detachale stock +arrants, lus the granting ande8ercise of stock otions. The student is reuired to reare the necessary

<ournal entries to record these transactions and the shareholders= euity sectionof the statement of financial osition as at the end of the year.

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TIME AN* PURPOSE OF PROBLEMS &CONTINUE*)

3rolem 1&& Time 1/1$ minutesB

3uroseto ro!ide the student +ith an oortunity to analyDe three searatefinancial instruments: 1B a financial liaility loanBF "B a comensatory stock otionlanF and #B for+ard contract.

3rolem 1&'

Time #$%/ minutesB

3uroseto ro!ide the student +ith the oortunity to e8erience a situation in+hich the initial recording of a con!ertile ond +as incorrectly done in a rior year. ?ased on the incorrect treatment, the student must re!ise the accounting of the issuance of the con!ertile ond, and reare a correcting entry after calculating the aroriate yield to aly to the calculation of the ond using the

effecti!e interest method. 4inally, comment on the effect if the correction on thedettoeuity ratio is reuired in the rolem.

3rolem 1&(

Time 1$"/ minutesB

3uroseto ro!ide the <ournal entry of the issuance of a note ayale soldtogether +ith a +arrant. The incremental method alies in this case. Thestudent must then reare the related amortiDation tale for the note and somead<usting <ournal entries.

3rolem 1&) Time #/#$ minutesB

3uroseto ro!ide the student +ith an oortunity to record the issuance of onds +ith detachale +arrants and con!ersion rights. nder+riting feesincurred in the issuance of the onds are also recorded in the rolem. Thestudent must calculate the effecti!e yield rate for the onds, reare anamortiDation tale, and reare <ournal entries for the issuance, con!ersion, ande8ercise of +arrants. 4inally some analysis concerning the likely !alue of theshares issued in the con!ersion is discussed.

3rolem 1&1/ Time #/#$ minutesB

3uroseto ro!ide the student +ith an understanding of the entries to roerlyaccount for a stock otion lan o!er a eriod of years. The student is reuired to

reare the <ournal entries +hen the stock otion lan +as adoted, +hen theotions +ere granted, +hen the otions +ere e8ercised, and +hen the otionse8ired.

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TIME AND PURPOSE OF PROBLEMS (CONTINUED)

63rolem 1&11 Time #$%$ minutesB

3urosethe student calculates and records the transactions concerning a fair !alue hedge interest rate s+a, o!er t+o accounting eriods and also ro!idesartial statement of financial osition and statement of income disclosure at threeoints in time o!er the term of the s+a.

63rolem 1&1" Time %/$/ minutesB

3urosethe student calculates and records the transactions concerning a cashflo+ hedge concerning the urchase of gold, o!er t+o accounting eriods andalso ro!ides artial statement of financial osition and statement of incomedisclosure at t+o oints in time o!er the term of the futures contract.

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SOLUTIONS TO PROBLEMS

PROBLEM 16-1

&.) ', 8 ;41?*eri+.#i+es 5 Fi$.$ci. Asse#sLi.bii#ies///////////////////////;?4

C.s0//////////////////////////////////////////////////////////////////////////// ;?4

&b) Sep#e!ber 48 ;41?*eri+.#i+es 5 Fi$.$ci. Asse#sLi.bii#ies///////////////////////18144

G.i$ &218?4 5 2;?4)/////////////////////////////////////////////////// 18144

&c) *ece!ber 18 ;41?Loss &218?4 5 2D;3)/////////////////////////////////////////////////////////313

*eri+.#i+es5Fi$.$ci. Asse#sLi.bii#ies////////////////// 313

&() .$'.r, ?8 ;413C.s0 ;44 X &23 5 24) /////////////////////////////////////////////////18444

G.i$///////////////////////////////////////////////////////////////////////////// 13*eri+.#i+es 5 Fi$.$ci. Asse#sLi.bii#ies//////////////// D;3

', 8 ;41? 2 ;?4Sep#/ 48 ;41? 18144

*ec/ 18 ;41? &313)

B..$ce 2D;3

The option is “in the money” at the exercise date since Hing Wa(the option holder) can purchase the shares for $70 when theyare worth $75.

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PROBLEM 16-;

&.) ', 8 ;41?

C.s0///////////////////////////////////////////////////////////////////////////////////;?4*eri+.#i+es 5 Fi$.$ci. Asse#sLi.bii#ies//////////////// ;?4

&b) Sep#e!ber 48 ;41?Loss($1,340 – $240)/////////////////////////////////////////////////////////18144

*eri+.#i+es 5 Fi$.$ci. Asse#sLi.bii#ies//////////////// 18144

&c) *ece!ber 18 ;41?*eri+.#i+es 5 Fi$.$ci. Asse#sLi.bii#ies///////////////////////313

G.i$ &218?4 5 2D;3)/////////////////////////////////////////////////// 313

&() .$'.r, ?8 ;413*eri+.#i+es > Fi$.$ci. Asse#sLi.bii#ies///////////////////////D;3

Loss //////////////////////////////////////////////////////////////////////////////////13C.s0 ;44 x &23 5 24)//////////////////////////////////////////// 18444

', 8 ;41? 2 ;?4

Sep#/ 48 ;41? 18144

*ec/ 18 ;41? &313)B..$ce 2 D;3

The option is “in the money” (for the holder) at the exercise datesince the holder of the option can purchase the shares for $70when they are worth $75. Hing Wa loses because they must sellthe shares at a price below the current market value.

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PROBLEM 16-

&.) ', 8 ;41?

*eri+.#i+es 5 Fi$.$ci. Asse#sLi.bii#ies///////////////////////?D4C.s0//////////////////////////////////////////////////////////////////////////// ?D4

&b) Sep#e!ber 48 ;41?

Loss &2?D4 5 2;34)////////////////////////////////////////////////////////////;4*eri+.#i+es 5 Fi$.$ci. Asse#sLi.bii#ies//////////////// ;4

&c) *ece!ber 18 ;41?

Loss &2;34 5 2144)////////////////////////////////////////////////////////////134*eri+.#i+es 5 Fi$.$ci. Asse#sLi.bii#ies//////////////// 134

&() .$'.r, 18 ;413P'# op#io$ is $o# exercise( .s #0e !.r:e# price of M,:i.s0.res excee(s 2348 #0e s#ri:e price/

Loss///////////////////////////////////////////////////////////////////////////////////144*eri+.#i+es 5 Fi$.$ci. Asse#sLi.bii#ies//////////////// 144

', 8 ;41? 2 ?D4

Sep#/ 48 ;41? &;4)

*ec/ 18 ;41? &134)

B..$ce 2 144

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PROBLEM 16-?

&.) T0e (eri+.#i+e is co$si(ere( . fixe(-for-fixe( (eri+.#i+e i$.$ e$#i#,=s o7$ s0.res .s #0e op#io$ s#ip'.#es #0.# #0ee$#i#, 7i iss'e . fixe( $'!ber of s0.res for . fixe(.!o'$# of co$si(er.#io$/ IFRS s#.#es #0.# #0is #r.$s.c#io$7o'( be prese$#e( .s . re('c#io$ fro! s0.re0o(ers=e'i#, .$( $o# .s .$ i$+es#!e$#/ T0is is8 effec#i+e,8 #0eprospec#i+e re#ire!e$# of s0.res &or .c'isi#io$ of #re.s'r,s0.res8 if #0.# is per!i##e()/

E'i#, 5 Fixe(-for-fixe( *eri+.#i+e /////////////////////////////////34

C.s0/////////////////////////////////////////////////////////////////////// 34

&b) Bec.'se #0e op#io$ .o7s . c0oice i$ 0o7 #0e op#io$ 7ibe se##e(8 #0e i$s#r'!e$# is . fi$.$ci. .sse#i.bii#,&(eri+.#i+e) b, (ef.'# '$(er IFRS '$ess . possibese##e!e$# op#io$s res'# i$ i# bei$% .$ e'i#, i$s#r'!e$#/If #0is c. op#io$ co$#r.c# .o7s bo#0 p.r#ies . c0oice #ose##e #0e op#io$ b, ei#0er exc0.$%i$% #0e s0.res or

se##i$% o$ . $e# b.sis8 o$e se##e!e$# op#io$ is #0e(ei+er, of c.s08 .$( #0e c. op#io$ 7i be c.ssifie( .s .(eri+.#i+e/

&c) ASPE is sie$# .bo'# #0e .cco'$#i$% for (eri+.#i+esi$+o+i$% #0e e$#i#,=s o7$ s0.res> 0o7e+er8 #0e #re.#!e$#of si!i.r i#e!s 7o'( s'ppor# prese$#i$% #0e op#io$ .s .co$#r. e'i#, i#e! bec.'se i# ce.r, (oes $o# !ee# #0e

(efi$i#io$ of .$ .sse#/ T0erefore8 #0e co$c'sio$ 7i $o#c0.$%e/

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PROBLEM 16-3

&.) 1/ Me!or.$('! e$#r, !.(e #o i$(ic.#e #0e $'!ber of ri%0#s iss'e( i$c'(i$% f' (e#.is .s #o c0.r.c#eris#ics/

;/ C.s0 /////////////////////////////////////////////////// ;448444Bo$(s P.,.be &2;448444 x 4/6) 1;8444Co$#rib'#e( S'rp's

S#oc: ".rr.$#s///////////////// D8444

/ C.s0 ////////////////////////////////////////////////// ;DD8444

Co!!o$ S0.res/////////////////////// ;DD8444

&1448444 5 148444) ri%0#s exercise( &14 ri%0#ss0.re) X 2; 2;DD8444

?/ Co$#rib'#e( S'rp'sS#oc: ".rr.$#s/ 68?44&2D8444 X D4K)

C.s0/////////////////////////////////////////////////////// ?D8444Co!!o$ S0.res/////////////////////////// 3?8?44

/D4 X 2;4484442144 per bo$( 186447.rr.$#s exercise(> 18644 X 24 2?D8444

3/ Co!pe$s.#io$ Expe$se////////////////////// 348444Co$#rib'#e( S'rp's 5 S#oc: Op#io$s///////////////////////// 348444

214 X 38444 op#io$s 2348444

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PROBLEM 16-3 &Co$#i$'e()

6/ For op#io$s exercise(@C.s0 &?8444 X 24)////////////////////////////////// 1;48444

Co$#rib'#e( S'rp'sS#oc: Op#io$s/// ?48444&D4K X 2348444)

Co!!o$ S0.res/////////////////////////// 1648444

For op#io$s .pse(@Co$#rib'#e( S'rp'sS#oc: Op#io$s/// 148444

Co!pe$s.#io$ Expe$se////////////// 148444

&No#e #o i$s#r'c#or@ T0is e$#r, pro+i(es .$ oppor#'$i#, #o

i$(ic.#e #0.# . cre(i# #o Co!pe$s.#io$ Expe$se occ'rs70e$ #0e e!po,ee f.is #o f'fi .$ obi%.#io$8 s'c0 .sre!.i$i$% i$ #0e e!po, of #0e co!p.$,8 perfor!i$% cer#.i$

ob f'$c#io$s8 e#c/ Ho7e+er8 if . s#oc: op#io$ .psesbec.'se #0e s0.re price is o7er #0.$ #0e exercise price8#0e$ . cre(i# #o Co$#rib'#e( S'rp'sExpire( S#oc:Op#io$s occ'rs/)

&b)

S0.re0o(ers= E'i#,@

S0.re C.pi#.@Co!!o$ S0.res8 .'#0ori9e(

184448444 s0.res8 1?8644 s0.res

iss'e( .$( o'#s#.$(i$%

2?814;8?44Co$#rib'#e( S'rp'sS#oc: ".rr.$#s 18644

2?814?8444Re#.i$e( E.r$i$%s 348444

To#. S0.re0o(ers= E'i#, 2?8D3?8444 2D8444 5 268?44C.c'.#io$s@

Co!!o$ S0.resN'!ber A!o'$#

A# be%i$$i$% of ,e.r Fro! s#oc: ri%0#s &e$#r, W .bo+e)Fro! s#oc: 7.rr.$#s &e$#r, W? .bo+e)Fro! s#oc: op#io$s &e$#r, W6 .bo+e)

To#.

448444844418644?8444

1?8644

286448444

;DD8444

3?8?44 1648444

2?814;8?44

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&c) Expir.#io$ of s#oc: op#io$s (oes $o# !.:e i# i$correc# #o0.+e recor(e( co!pe$s.#io$ expe$se re.#e( #o #0e

expire( s#oc: op#io$s8 ('ri$% #0e ser+ice perio(/ T0e ri%0##o exercise #0e s#oc: op#io$s 7.s e.r$e( b, #0e exec'#i+e('ri$% #0e ser+ice perio(8 .$( #0e co!p.$, be$efi#e( fro!#0e exec'#i+e=s ser+ices ('ri$% #0e ser+ice perio(/T0erefore8 co!pe$s.#io$ expe$se 7.s proper, recor(e(i$ #0e ser+ice perio( &.$( $ee( $o# be re+erse( i$ #0e e+e$#of expir.#io$ of #0e s#oc: op#io$s)/ T0e .cco'$#i$%#re.#!e$# res'#e( i$ recor(i$% of co!pe$s.#io$ expe$sei$ #0e ,e.rs #0.# re.#e( re+e$'e 7.s e.r$e(/

If #0e exec'#i+e 0.( f'fie( #0e e!po,!e$# co$#r.c# .$(#0e s#oc: op#io$s expire(8 #0e foo7i$% o'r$. e$#r,7o'( be recor(e( for #0e expir.#io$/

Co$#rib'#e( S'rp's S#oc: Op#io$s///////////////////////////////// 148444

Co$#rib'#e( S'rp's 5Expire( S#oc: Op#io$s///////////

148444

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PROBLEM 16-6

&.)

Financial Instrument #1

This is a hybrid financial instrument. Under ASPE, thecompany can allocate the proceeds between the liabilityand the equity portion, or allocate 100% to the liability, as isrequired in this case. Under IFRS, the company mustalways measure the debt component first (generally at thepresent value of the cash flows), and assign the rest of thevalue to equity since it is a residual item.

ASPE IFRS*ebi# Cre(i# *ebi# Cre(i#

C.s0 384448444 384448444 No#es P.,.be 384448444 ?83684; Co$#rib'#e(

S'rp's -Co$+ersio$Ri%0#s ?;8;D

To recor( iss'e of co$+er#ibe (eb#/

2384448444 X /D3 &#.be A;) 21348444 x ?/;?D &T.be A?) 2?83684;/I$#eres# Expe$se 1348444 ;;D83? No#es P.,.be D83? I$#eres# P.,.be 1348444 1348444To recor( i$#eres# expe$se for ,e.r 2?83684; x 3K 2;;D83?

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Fi$.$ci. I$s#r'!e$# W;@

T0is is . co!pe$s.#or, s#oc: op#io$ p.$/ T0e e$#ries .re

#0e s.!e '$(er ASPE .$( IFRS/


Co!pe$s.#io$ Expe$se 3348444 3348444 Co$#rib'#e( S'rp's 5

S#oc: Op#io$s3348444 3348444

To recor( .$$'. co!pe$s.#io$ expe$se re.#e( #o CSOPC.s0 ;348444 ;348444

Co$#rib'#e( S'rp's 5S#oc: Op#io$s 338444 338444

Co!!o$ S0.res 438444 438444To recor( o$e e!po,ee exercisi$% op#io$s .$( p'rc0.si$%s0.res/

23348444 X 114

Fi$.$ci. I$s#r'!e$# W@

T0is is . for7.r( co$#r.c#/ T0e e$#ries .re #0e s.!e '$(er

ASPE .$( IFRS/


*eri+.#i+es 5 Fi$.$ci.Asse#sLi.bii#ies

48444 48444

G.i$ 48444 48444To recor( %.i$ o$ for7.r( co$#r.c#/

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&b)

B..$ces .# *ece!ber 18 ;41?@Acco'$# B..$ce '$(er

ASPEB..$ce

'$(er IFRS*eri+.#i+es 5 Fi$.$ci. Asse#s 248444 *r 248444 *r I$#eres# P.,.be 1348444 Cr 1348444 Cr No#es P.,.be 384448444 Cr ?86?38?;6 Cr Co$#rib'#e( S'rp's 5 S#oc:Op#io$s ?38444 Cr ?38444 Cr Co$#rib'#e( S'rp's 5Co$+ersio$ Ri%0#s ?;8;D Cr

No#e #o i$s#r'c#or@I# !., be 'sef' #o i's#r.#e #0e foo7i$% proof@

No#es P.,.be '$(er IFRS ?86?38?;6 Cr Co$#rib'#e( S'rp's 5Co$+ersio$ Ri%0#s ?;8;D Cr S'b#o#. 384D83? Cr

Less@ A!or#i9.#io$ #o (.#e of$o#e (isco'$# &D83?) *r B..$ce '$(er ASPE 384448444 Cr

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PROBLEM 16-

&.) E$#r, .# .$'.r, 18 ;41? s0o'( 0.+e bee$@

C.s0 &2184448444 X 1/4D)//////////////////////// 184D48444Bo$(s P.,.be &2184448444 X /D)/ / D48444Co$#rib'#e( S'rp's Co$+ersio$ Ri%0#s////////////////////// 1448444

A# #0e iss'.$ce of #0e co$+er#ibe bo$(8 #0e boo::eeper

s0o'( 0.+e reco%$i9e( #0e (eb# &bo$() .$( co$+ersio$ri%0# &e'i#,) co!po$e$#s sep.r.#e, i$ #0e .cco'$#s/

As #0e co!p.$, is co!pi.$# 7i#0 IFRS8 #0e resi('.!e#0o(8 .s i's#r.#e( i$ #0e correc#e( e$#r, .bo+e8 s0o'(0.+e bee$ 'se(/ U$(er IFRS8 #0e (eb# co!po$e$# is!e.s're( firs#8 7i#0 #0e resi('. +.'e .ssi%$e( #o e'i#,si$ce i# is . resi('. i#e!/

&b) ASPE (oes 0.+e .$ op#io$ #o .o7 for #0e e'i#, por#io$ #o

be .oc.#e( 9ero8 7i#0 . #0e procee(s bei$% .oc.#e( #o#0e (eb# co!po$e$#/ If #0is op#io$ 7.s .+.i.be8 #0eboo::eeper 7o'( be correc#/ Ho7e+er8 #0is is .$ op#io$.#re.#!e$# .$( #0e correc#io$ $o#e( i$ p.r# &.) .bo+e is s#i i$or(er .s #0e co!p.$, is . p'bic, .cco'$#.be e$#erprise.$( !'s# prep.re fi$.$ci. s#.#e!e$#s i$ .ccor(.$ce 7i#0IFRS/

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PROBLEM 16- &Co$#i$'e()

&c) Using either a financial calculator or Excel the effectiveinterest rate on the bonds is calculated as follows:

Excel formula =RATE(nper,pmt,pv,fv,type)

Usi$% . fi$.$ci. c.c'.#or@

PJ 2 D48444

I K Vie(s 14/3?D; K

N 3

PMT 2 &1448444)

FJ 2 &184448444)

T,pe 4

&()Sc0e('e of Bo$( *isco'$# A!or#i9.#io$

Effec#i+e I$#eres# Me#0o(14K Bo$(s So( #o Vie( 14/3?D;K

14K 14/3?D;K

C.s0 Effec#i+e *isco'$# C.rr,i$%

*.#e P.i( I$#eres# A!or#/ A!o'$#

.$/ 18 ;41? 2D48444*ec/ 18 ;41? 21448444 2148;?1 28;?1 D8;?1

*ec/ 18 ;413 1448444 1483D 83D D68D;?

*ec/ 18 ;416 1448444 14864 864 48D?

*ec/ 18 ;41 1448444 14?8 ?8 38161

*ec/ 18 ;41D 1448444 14?8D ?8D 18444844423448444 23;48444 2;48444

ro'$(e( 21&e)

.$'.r, 18 ;413Re#.i$e( E.r$i$%s &2148;?1 5 2D68?44)///////////// 168D?1

Bo$( P.,.be &2184668?44 5 2D8;?1)//////////////// D813

Co$#rib'#e( S'rp's Co$+ersio$ Ri%0#s/////////////////////////////

1448444

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&f)*ece!ber 18 ;413

I$#eres# Expe$se//////////////////////////////////////////////////// 1483DBo$(s P.,.be/////////////////////////////////////////////// 83D

C.s0//////////////////////////////////////////////////////////////// 1448444

&%) The debt to equity ratio, following the correction in part (e)above, will be substantially improved as $100,000 previouslyclassified as part of debt is now correctly classified asequity. This will have a significant effect on the debt toequity ratio, as both the change to the numerator and thechange to the denominator lead to a decrease in the ratio.The improvement in the ratio is reduced by the charge toRetained Earnings for correction in the error in interestexpense from 2014.

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PROBLEM 16-D

&.) T0e e$#r, for #0e iss'.$ce of #0e $o#es o$ .$'.r, 18 ;41?@

The present value of the note is: $1,200,000 X .56743 (factorfor a single payment in 5 years at 12%) = $680,912 (Roundedby $4).


PJ 2 Vie(s 26D481;

I 1;K

N 3

PMT 2 4FJ 2 &18;448444)

T,pe 4

Exce for!'. PJ&r.#e8$per8p!#8f+8#,pe)

.$'.r, 18 ;41?C.s0///////////////////////////////////////////////////////////////// 184448444

No#es P.,.be////////////////////////////////////////// 6D481;

Co$#rib'#e( S'rp'sS#oc: ".rr.$#s// 184DD

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PROBLEM 16-D &Co$#i$'e()

&b)T0e .!or#i9.#io$ sc0e('e for #0e 9ero i$#eres# be.ri$% $o#e is@

Sc0e('e For I$#eres# A$( *isco'$# A!or#i9.#io$Effec#i+e I$#eres# Me#0o(

218;448444 $o#e iss'e( #o ,ie( 1;K

*.#eC.s0I$#eres#

Effec#i+eI$#eres#

*isco'$#A!or#i9e(

C.rr,i$%A!o'$#

111? 2 6D481;1;11? 24 2 D184 2 D184 6;86;11;113 4 18313 18313 D3?8161;116 4 14;8?6 14;8?6 3686;

1;11 4 11?86 11?86 18418?;D1;11D 4 1;D83; 1;D83; 18;448444To#. 24 23184DD 23184DD

26D481; X 1;K 2D18426D481; 2D184 26;86;1

&c)*ece!ber 18 ;41?

I$#eres# Expe$se///////////////////////////////////////////// D184

No#es P.,.be////////////////////////////////////////// D184

(d).$'.r, 18 ;41

C.s0 &3448444 x 2;4)QQQQ//////////////////////// 1484448444Co$#rib'#e( S'rp's 5 S#oc: ".rr.$#s//////// 1383??

Co!!o$ S0.res////////////////////////////////////// 1481383??&2 184DD X 21383??)

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PROBLEM 16-

&.)

Sep#e!ber 48 ;[email protected]///////////////////////////////////////////////////////////////// ?86448444

Bo$(s P.,.be//////////////////////////////////////// ?8;448444Co$#rib'#e( S'rp's S#oc: ".rr.$#s////////////////////////////////// ;?48444Co$#rib'#e( S'rp's Co$+ersio$ Ri%0#s////////////////////////////

1648444

&2?84448444 18444 X ;4 7.rr.$#s X 2)

&b)

Usi$% ei#0er . fi$.$ci. c.c'.#or or Exce8 #0e effec#i+ei$#eres# r.#e o$ #0e bo$(s is c.c'.#e( .s foo7s@

Exce for!'. RATE&$per8p!#8p+8f+8#,pe)


PJ 2 ?8;448444

I K Vie(s /6?6 K

N ;4PMT 2 &1648444)

FJ 2 &?84448444)

T,pe 4

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&c)Sc0e('e of Bo$( Pre!i'! A!or#i9.#io$

Effec#i+e I$#eres# Me#0o(DK Se!i-.$$'. Bo$(s So( #o Vie( /;D;K

?K /6?6K

C.s0 Effec#i+e Pre!i'! C.rr,i$%

*.#e P.i( I$#eres# A!or#/ A!o'$#

Sep#/ 48;41? 2?8;448444

M.r/ 18 ;413 21648444 213841 2686 ?81841

Sep#/ 48;413 1648444 13;8 8;; ?81D38D4D

M.r/ 18 ;416 1648444 13;831? 8?D6 ?81D8;;

Sep#/ 48;416 1648444 13;8;?1 83 ?814836M.r/ 18 ;41 1648444 13183 D84?1 ?816;83;;

Sep#/ 48;41 1648444 1318666 D8? ?813?81DD

M.r/ 18 ;41D 1648444 13186; D86D ?81?38334

Sep#/ 48;41D 1648444 13184? D83 ?81683

M.r/ 18 ;41 1648444 1348;1 8; ?81;81D

Sep#/ 48;41 1648444 1348D 861 ?811841

&()

*ece!ber 18 ;41?I$#eres# Expe$se///////////////////////////////////////////// 68316

I$#eres# P.,.be/////////////////////////////////////// 68316&213841 X 6 268316)

M.rc0 18 ;413I$#eres# Expe$se///////////////////////////////////////////// 68313I$#eres# P.,.be////////////////////////////////////////////// 68316Bo$(s P.,.be//////////////////////////////////////////////// 686

C.s0////////////////////////////////////////////////////////// 1648444

No#e #o i$s#r'c#or@ I# 7o'( be e$#ire, re.so$.be #o recor( o$e0.f of #0e .!or#i9.#io$ of #0e bo$( pre!i'! .# #0e ,e.r e$(8*ece!ber 1/ T0is 7o'( i$cre.se #0e c'rre$# i$#eres# p.,.be#o be e'. #o #0e c.s0 i$#eres# p.,.be of 2D48444/

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&e)M.rc0 ;8 ;41@

C.s0///////////////////////////////////////////////////////////////// 6448444Co$#rib'#e( S'rp's S#oc: ".rr.$#s &2;?48444 X )/////////////

1;48444Co!!o$ S0.res//////////////////////////////// ;48444

N'!ber of 7.rr.$#s exercise(@ &2?84448444 218444 X ;47.rr.$#s X 1; ?48444 )N'!ber of co!!o$ s0.res iss'e(@ ?48444 7.rr.$#s X 1 ?48444&?48444 X 213 26448444)

&f)Sep#e!ber 48 ;41@

Bo$(s P.,.be//////////////////////////////////////////////// ?811841Co$#rib'#e( S'rp's Co$+ersio$ Ri%0#s ////////////////////////////////

1648444Co!!o$ S0.res//////////////////////////////// ?8;841

&%) N'!ber of co!!o$ s0.res iss'e(@ &2?84448444 218444 X D4co!!o$ s0.res ;48444)

The bondholders would only be motivated to convert bondsinto common shares if they perceived an increase in thevalue of their investment, and if they would get commonshares with a market value higher than the fair value of thebonds that were given up in the conversion. The carryingamount of what they gave up at the time of conversion isshown in the entry above as $4,277,701 for 320,000 commonshares. This works out to slightly below $13.37 per share.Likely the common shares are trading at an amount higher

than $13.37 by a good margin. There should be an excessover the carrying amount of $13.37 as the bondholders aregiving up a steady cash inflow from the interest incomeobtained from the bonds in exchange for shares, whichmight not yield any dividends.

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PROBLEM 16-14

;41?/ No o'r$. e$#r, 7o'( be recor(e( .# #0e #i!e #0e s#oc:op#io$ p.$ 7.s .(op#e(/ Ho7e+er8 . !e!or.$('! e$#r, i$ #0e o'r$. !i%0# be !.(e o$ No+e!ber 48 ;41?8 i$(ic.#i$% #0.# .s#oc: op#io$ p.$ 0.( .'#0ori9e( #0e f'#'re %r.$#i$% #o officersof op#io$s #o b', 48444 co!!o$ s0.res .# 2D . s0.re/

;413 .$'.r, ;No e$#r,

*ece!ber 1

Co!pe$s.#io$ Expe$se///////////////////////////////// ;483;?Co$#rib'#e( S'rp'sS#oc: Op#io$s// ;483;?

&To recor( co!pe$s.#io$ expe$se

.##rib'#.be #o ;413;;8444 op#io$s)

Pro-r.#. c.c'.#io$@ ;413 ;416 To#.

Presi(e$# 138444 18444 ;D8444

Jice-Presi(e$# 8444 8444 1?8444

To#. op#io$s ;;8444 ;48444 ?;8444

Co!pe$s.#io$ Expe$se 2 ;483;? 2 148?6 2?448444 ;;8444 ?;8444 X 2?448444 2;483;? ;48444 ?;8444 X 2?448444 2148?6

;416 *ece!ber 1Co!pe$s.#io$ Expe$se///////////////////////////////// 148?6

Co$#rib'#e( S'rp'sS#oc: Op#io$s// 148?6&To recor( co!pe$s.#io$ expe$se

.##rib'#.be #o ;416;48444 op#io$s)

Co$#rib'#e( S'rp'sS#oc: Op#io$s/////////// ;483;?Co$#rib'#e( S'rp'sExpire(

S#oc: Op#io$s //////////////////////////////////// ;483;?&To recor( .pse of presi(e$#=s .$( +ice-

presi(e$#=s op#io$s #o b', ;;8444 s0.res)

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;41 *ece!ber 1C.s0 &;48444 X 2D)////////////////////////////////////////// 1648444

Co$#rib'#e( S'rp'sS#oc: Op#io$s/////////// 148?6Co!!o$ S0.res//////////////////////////////// 348?6

&To recor( iss'.$ce of ;48444 co!!o$ s0.res

'po$ exercise of op#io$s .# 2D)

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PROBLEM 16-11

&.) &1) *ece!ber 18 ;41?No e$#r, re'ire(at the date of the swap because the fair valueof the swap at inception is zero.

&;) '$e 48 ;413I$#eres# Expe$se///////////////////////////////////////////////////////////////?448444

C.s0/////////////////////////////////////////////////////////////////// ?448444&21484448444 X DK X 61;)

&) '$e 48 ;413

C.s0///////////////////////////////////////////////////////////////////////////////////348444 I$#eres# Expe$se ///////////////////////////////////////////////////// 348444

21484448444 X &DK 5 K) X 61;

I$#eres#Recei+e(

&P.i()S7.p recei+.be &DK X 21484448444 X 1;)//////////////////////2 ?448444P.,.be .# LIBOR &K X 1484448444 X 1;)//////////////////////&348444)C.s0 se##e!e$#//////////////////////////////////////////////////////////////// 348444

&?) '$e 48 ;413No#es P.,.be///////////////////////////////////////////////////////////////////;448444

U$re.i9e( G.i$ or Loss ////////////////////////////////////////// ;448444

&3) '$e 48 ;413U$re.i9e( G.i$ or Loss ////////////////////////////////////////////////// ;448444

*eri+.#i+es5Fi$.$ci. Asse#sLi.bii#ies////////////////// ;448444

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&b)M.s#er Corp/

S#.#e!e$# of Fi$.$ci. Posi#io$ &p.r#i.)*ece!ber 18 ;41?

Lo$%-#er! i.bii#iesNo#es p.,.be 21484448444

I$co!e S#.#e!e$# &p.r#i.)For #0e Ve.r E$(e( *ece!ber 18 ;41?

No i#e!s #o repor#

&c)M.s#er Corp/

S#.#e!e$# of Fi$.$ci. Posi#io$ &p.r#i.)'$e 48 ;413

C'rre$# i.bii#ies*eri+.#i+es 5 Fi$.$ci. Li.bii#ies 2;448444

Lo$%-#er! i.bii#ies

No#es p.,.be 28D448444

S#.#e!e$# of I$co!e &p.r#i.)For #0e Six Mo$#0s E$(e( '$e 48 ;413

I$#eres# expe$se 2348444&2?448444 5 2348444)

O#0er re+e$'es .$( %.i$s@

U$re.i9e( %.i$ 5 No#es p.,.be 2;448444U$re.i9e( oss 5 S7.p co$#r.c# &;448444)4

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&() M.s#er Corp/ S#.#e!e$# of Fi$.$ci. Posi#io$ &p.r#i.)

*ece!ber 18 ;413O#0er .sse#s

*eri+.#i+es 5 Fi$.$ci. Asse#s 2648444

C'rre$# i.bii#iesNo#es p.,.be 21484648444

I$co!e S#.#e!e$# &p.r#i.)For #0e Ve.r E$(e( *ece!ber 18 ;413

Income StatementInterest expenseFirst six months $ 350,000 [as shown in

(c)]Nex# six !o$#0s 38444 &see beo7) Total $ 725,000

Unrealized Gain—Swap $ 60,000Unrealized Loss—Notes Payable (60,000) Total $ 0

*Swap receivable (8% X $10,000,000 X 1/2) $ 400,000Payable at LIBOR (7.5% X $10,000,000 X 1/2) 375,000Cash settlement $ 25,000

Interest expense unadjusted June 30–December 31, 2014 $ 400,000

C.s0 se##e!e$# &;38444)$ 375,000

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PROBLEM 16-1;

&.) Apri 18 ;41?No e$#r, re'ire(

&b) '$e 48 ;41?*eri+.#i+es-Fi$.$ci. Asse#sLi.bii#ies//////////////////////////38444

U$re.i9e( G.i$ or Loss - OCI ///////////////////////////////// 38444

&c) Sep#e!ber 48 ;41?*eri+.#i+es-Fi$.$ci. Asse#sLi.bii#ies//////////////////////////;8344

U$re.i9e( G.i$ or Loss - OCI ///////////////////////////////// ;8344

&() Oc#ober 18 ;41?R.7 M.#eri.s ///////////////////////////////////////////////////////////////////138344

C.s0 &344 o'$ces X 213)//////////////////////////////// 138344

C.s0 8344*eri+.#i+es-Fi$.$ci. Asse#sLi.bii#ies/////////////////// 8344

&e) *ece!ber ;48 ;41?Acco'$#s Recei+.beC.s0//////////////////////////////////348444

S.es Re+e$'e//////////////////////////////////////////////////////////// 348444

Cos# of Goo(s So(//////////////////////////////////////////////////;448444Fi$is0e( Goo(s I$+e$#or,///////////////////////////////////////// ;448444

Unrealized Gain or Loss - OCI ........................................ 8344Cos# of Goo(s So( ////////////////////////////////////////////////// 8344

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PROBLEM 16-1; &Co$#i$'e()

&f)S#.#e!e$# of Fi$.$ci. Posi#io$ &p.r#i.)

'$e 48 ;41?C'rre$# .sse#s*eri+.#i+es-Fi$.$ci. Asse#sLi.bii#ies 238444

S0.re0o(ers= E'i#,Acc'!'.#e( O#0er Co!pre0e$si+e I$co!e 238444

Statement of Comprehensive Income (partial)For #0e Six Mo$#0s E$(e( '$e 48 ;41?

O#0er Co!pre0e$si+e I$co!e@U$re.i9e( 0o(i$% %.i$ 5 F'#'res co$#r.c# 238444

&%) S#.#e!e$# of Co!pre0e$si+e I$co!e &p.r#i.)For #0e Ve.r E$(e( *ece!ber 18 ;41?

S.es 2348444Cos# of %oo(s so( &2;448444 - 28344) 1;8344

Gross profi# &i$c'(e( i$ $e# i$co!e) 2138344O#0er co!pre0e$si+e i$co!e@ U$re.i9e( 0o(i$% %.i$s o$ c.s0 fo7 0e(%e

8344 Re.i9e( %.i$ o$ c.s0 fo7 0e(%e #r.$sferre( #o $e# i$co!e

&8344) OCI8 ,e.r e$(e( *ece!ber 18 ;41?-4-

*Note that the $200,000 cost of goods sold includes the $157,500paid for the gold. IFRS also permits the amount in OCI to benetted with the asset inventory when it is acquired.

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PROBLEM 16-1; &Co$#i$'e()

(h)

Under ASPE and using hedge accounting, the futures contractwould not be recognized in the accounts until the hedged item

(the gold inventory) was acquired and recognized on the balance

sheet. The gold would be purchased at $315 per ounce (total

$157,500) and the previously unrecognized future is settled with

the company receiving $7,500 cash which is credited against the

inventory cost. This brings the inventory cost to $150,000,

which reflects the locked in price of $300 per ounce under the

futures contract.

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CASES

No#e@ See #0e C.se Pri!er o$ #0e S#'(e$# 7ebsi#e8 .s 7e .s#0e S'!!.r, of #0e C.se Pri!er i$ #0e fro$# of #0e #ex#/ No#e#0.# #0e firs# fe7 c0.p#ers i$ +o'!e 1 ., #0e fo'$(.#io$ for fi$.$ci. repor#i$% (ecisio$ !.:i$%/

CA 16-1 AIR CANA*A

O+er+ie7

The industry is a challenging one +ith many ankrutcies and significant

cometition. The comany=s main e8ense is fuel +hich accounts for significant

amount of total costs of the comanythe need is to manage cost . Air Canada uses a hedging strategy to fi8 its fuel costs. *edges are

comle8 and there are oerational risks risks in imlementing andmanaging the hedgesB.

A$.,sis .$( reco!!e$(.#io$s

Issue: Accounting for hedge of fuel

Aly hedge accounting 2o not The hedged item is the

anticiated fuel acuisitions andthe hedging items are thederi!ati!es used to lock in therices on these.

4rom an economic ersecti!e,these financial instruments +illfi8 or ca the rice for asignificant ercentage of fuelacuisitions and so this is aneconomic hedge.

*edge accounting is otional. There is a cost associated +ith

alying hedge accountingaccountants must rearedocumentation and assesseffecti!eness and all this muste auditedB.

*edge accounting has risksassociated +ith it as thetransactions and accounting are!ery comle8.

Could note disclose thee8istence of the hedge instead.

7ther.

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CA 16-1 (Continued)

Aly hedge accounting 2o not nder I450, the anticiated fuel

acuisitions +ill not e

recogniDed in the financialstatements ut the hedgingitems deri!ati!esB +ill e sincethey meet the accountingdefinition of deri!ati!es. They+ill e measured at fair !alue ateach reorting dateF thegains-losses +ill other+ise ereflected in net income. Thuse!en though there is aneconomic hedge in lace +ith nofurther risk of loss, gains-losses

+ill e ooked through netincome and introduce !olatility.This is not reflecti!e of the factthat the comany has takenstes to rotect itself and get ridof the !olatility from aneconomic ersecti!e.

7ne otion is to use hedgeaccounting. This +ill result in thegains-losses from there!aluation of the deri!ati!es toe ooked through other

comrehensi!e income thusshielding the net incomenumer. The gains-losses +ill ereclassified to net income +henthe fuel is actually used. Thishas the effect of remeasuringthe fuel costs to reflect thelockedin rices. This +ouldgenerally e treated as a cashflo+ hedge as it is a hedge of afuture transaction and relatedcash flo+s.

The comany +ill ha!e toidentify the hedging relationshiand assess the effecti!eness ofthe hedge.

7ther.

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CA 16-1 (Continued)

5ecommendation:

*edge accounting makes sense in this case as it ro!ides greater transarency

and allo+s users to see the imact of the actions management has taken torotect the comany.

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CA 16-; COACH CORPORATION

O+er+ie7

The comany uses erformanceased comensation lans that areased on net income.

0u<ecti!e estimates of ad det e8ense affect the calculation. 9et income is therefore a key numer. I450 is a constraint since this is a ulic comany.


0u<ecti!ity of income is affecting comensation of e8ecuti!es. Controller faces ethical issue. As long as ad det e8ense is calculated using est estimates, it should

not change <ust ecause of the comensation lan. Accounting should e neutral and uniased.

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IC 16-1 ON-LINE *EALS

7!er!ie+

Gro+ing comany thinking of going ulic

GAA3 is a constraint > due to 4I agreement reuiring audited financials >also thinking of going ulic so est to use GAA3 and in articular I450

May e a ias to make statements look etter in order to increase initialshare rice > senior management is comensated +ith stock otions and+ill stand to enefit greatly from higher share rices.

As auditor +ould e cautious and conser!ati!e due to increased riskassociated +ith otentially going ulic.

Analysis and recommendations

Issue: 5e!enues

Gross 9et Must e8amine +hether they are

acting as a rincial e.g. sellingthings for a rofitB or agent >ro!iding a ser!ice of selling

In this case > +here they areuying locks of rooms orflights, they ha!e the risks andre+ards of o+nershi and standto lose if they do not sell the+hole lock

They are acting as rincials >selling assets that they ha!elegal title to locks of roomsand flightsB

7ther

@ooks like they are ro!iding aser!ice of utting sellers anduyers together

The re!enue is therefore a tyeof commission and should esho+n on a net asis

Would ha!e to analyDe carefullyut for many of the items +herethey are utting uyers andsellers together > there is no riskof loss to them. If the item is notsold then the loss rests +ith theairline or hotel comany

7ther

5ecommendation: Would ha!e to analyDe carefully as there are multile tyes oftransactions. 0afer to sho+ on a net asis until more info can e otainedregarding +hether they take legal title of the rooms-flights and +hether they areat risk of loss.

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IC 16-1 (Continued)

Issue: Wesite costsCaitaliDe E8ense

The +esite is a critical asset

that +ill ro!ide future enefit yro!iding the latform y +hich72I interacts +ith its customers

Without this > no sales or futurecash inflo+s can occur

The +esite is o+ned andcontrolled y the comany

7ther

0eems like the +esite is retty

critical to the usiness and it isimortant to continuously in!estin it > therefore it is an ordinary,ongoing cost of doing usiness

E!en if this is seen as an asset >gi!en the rolems this yearregarding the hacking incident,might +ant to +rite off or imairany costs caitaliDed andunderstand that costs eingincurred going for+ard are only

good until there is a reach.Comuter hacking is a ig risk inthis usiness and as soon asne+ security features are inlace, someone is trying toreach them.

7ther

5ecommendation: Treat as e8enses.

Issue: @a+suit5ecogniDe 2o not

There is definitely an oligationor duty to deal +ith this rolem

It +as caused y a reach thatHay and Wen kno+ aout. 3artof the reach +as due to theiro+n +esite and e!en for the0AI rolem > Hay and Wen+ere the ones that contracted+ith 0AI

Hay and Wen ha!e uliclyaologiDed and romised tomake things right. This creates aconstructi!e oligation.

The la+yers ha!e noted that forsimilar comanies and situations

> there ha!e een significantla+suit losses so a loss is likely.

7ther

;ery difficult to measure E!en though the la+yers feel

that there are similar cases,each case is different

3lan to sue 0AI and so the netlosses may e insignificant

7ther

IC 16-1 (Continued)

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5ecommendation: Accrue a liaility

Issue: 4I2et Euity

An oligation to deli!er cashe8ists ecause of the triggeringe!ent

This triggering e!ent is outsidethe control of the comany as it+ill deend on sales fromcustomers

The comany +ill o!iouslyha!e a goal to gro+ as large asossile and +ould not limitgro+th <ust to reclude the

triggering e!ent haening This is a more conser!ati!e !ie+and gi!en the significant gro+thand the continuing gro+th of thistye of industry > gro+th isine!itale

7ther

@egally euity since aysdi!idends and has no due date @ooks like ermanent financing

since the triggering e!ent is notlikely to haen is not genuineB.5e!enues are so huge currentlyecause of the accounting olicyto recogniDe on a gross asis. Itmakes more sense to recogniDeon a net asis and this +illdecrease re!enues significantly

and make the target moredifficult to achie!e assuming thetarget is ased on the historicallyrecogniDed gross re!enuesB

The le!el of re!enues might eseen to e +ithin the control ofthe comany > esecially sinceit deends on an accountingolicy choice and also onmanagement decisions as toho+ much they +ould like to

gro+ 7ther

5ecommendation: 2et > more conser!ati!e

Issue: 0tock otions

5ecogniDe as salary e8ense 2o not recogniDe This reresents a cost of doing

usiness Management is ro!iding a

ser!ice to the comany +hich

must e catured so that theusiness model is moretransarent > other+ise rofitsare o!erstated

7ther

2ifficult to measure since this isa ri!ate comany and alsosince it is fairly ne+ > there isnot much history

2ifficult to measure the !alue ofthe contriution and-or the !alueof the comany

7ther

IC 16-1 (Continued)

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IC 16-; SALT"ORYS INC &SI)

O+er+ie7

3ulic comany looking to uy out, therefore I450 a constraint as uliccomany has asked for I450 to e!aluate and in case they uy it at +hichoint +ould e more useful for consolidationB. Will use the statements tomake a decision to uy or not

5ole > as accountant > +ill +ant to e transarent ut make the comanylook good so as to ma8imiDe !alue.


Issue: Mines 1 and " > costs incurred to uild mine

CaitaliDe costs E8ense Allo+ed to caitaliDe e8loration

and e!aluation costs under I450

&. Costs that can e caitaliDed

include studies, e8loratory

drilling, samling and those

related to estalishing technical

feasiility and commercial

!iaility.

nsure of future enefit

uncertainty as to !alue of

otential salt findB.

This is esecially the case for

mine # as not sure of uality of

salt > may not e a market.

7ther.

Continued

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IC 16-2 (Continued)

CaitaliDe costs E8ense 2e!eloment costs must e

analyDed under IA0 #(

intangile assetsB. 4or mine "costs > more likely

de!elomental costs and may

caitaliDe if technically feasile,

intent to comlete, aility to

mine, e8isting market for outut,

a!ailaility of resources and

aility to measure costs. In this

case, not much information

ho+e!er, the comany has

certainly dislayed intent to

comlete and assuming the salt

is the same uality as mine 1 >

a market e8ists for the mine "

salt. The comany aears to

ha!e the resources to carry on

+ith the de!eloment.

If caitaliDe > then must test for

imairment.

7ther.

5ecommendation:

3roaly est to e8ense the costs for mine # as there is too much uncertainty.Costs for mine " may e caitaliDed assuming criteria for caitaliDation is met.More data may need to e gathered.

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IC 16-2 (Continued)

Issue: 5e!enue recognition > logging rights

5ecogniDe re!enues 2efer

3aid u front for access to trees. 5e!enue not deendent uonho+ many trees cut do+n.

Access immediately granted >may log the +hole thingimmediately or o!er time.

May +ant to e8ense relantingcosts against any re!enuerecogniDed so that rofits arenot o!erstated.

7ther.

Access o!er three yearstherefore recogniDe o!er threeyears.

The other comany is aying forthe right to cut do+n a certainnumer of the trees o!er athreeyear eriod. Hust ecausethey aid ufront does not meanthat the entity can recogniDe there!enues ufront.

7ther.

5ecommendation:

?etter to defer re!enues as more reflecti!e of economic reality. As trees are cutdo+n, recogniDing oligation to relant as a constructi!e oligation e8ists.

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IC 16- GREAT CANA*IAN GAMING CORPORATION

7!er!ie+

As a ulic comany, GAA3 is a constraint.

As an analyst looking to see the imact of s+itching to I450. 9ote that the usiness has not changed > <ust the asis of accounting. Will e looking to see +hich accounting is more transarent to the

usiness model.

Analysis and recommendation

There are se!eral reconciling items as follo+s:1. Imairments

3rechangeo!er GAA3 I450

5eco!erale amount is anundiscounted amount and so

is higher. This is the same as A03E.

5eco!erale amount is thehigher of !alue in use a

discounted amountB and fair

!alue less costs of disosal. This is a more realistic

measure of the current +orth

of the asset and results in

earlier recognition of

imairments. It is more transarent.

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IC 16- &Co$#i$'e()

". Contingent consideration relating to usiness cominations note that this

toic is co!ered in ad!anced accounting classes ut is included here for

comletenessB.

3rechangeo!er GAA3 I450 Contingent consideration is

recogniDed only if estimale

and the outcome

determinale. 0useuent ad<ustments are

ooked through good+ill. A03E is currently aligned

+ith I450.

Contingent consideration is

measured at fair !alue at the

acuisition date. Any

suseuent changes are

ooked through income. It is etter to attemt to

measure and record the

contingent consideration as it

forms art of +hat theacuiring comany is gi!ing

u. 0useuent ad<ustments are

ooked through income and

are not uried in good+ill.

This hels reduce otential

maniulation of suseuent

net income. More transarent.

#. AmortiDation > this ad<ustment is a result of the imairment e8ense eing

ooked under I450 the carrying !alue is lo+er and therefore amortiDation

must e recalculated.

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IC 16- &Co$#i$'e()

$. 0tockased comensation

3rechangeo!er GAA3 I450 The cost of certain share

ased a+ards is recogniDed

on a straightline asis o!er

the e8ected life of the stock

otion. In addition, forfeitures are

recogniDed as they occur. 4inally, indi!iduals are

determined to e emloyees

if certain conditions are met.Goods and ser!ices from

nonemloyees are initially

measured at the grant date

and suseuently ad<usted if

needed.

An attemt is made to

measure the fair !alue of

each additional grant of

otions and then this is

recogniDed through income

o!er the ser!ice eriod.

Assuming fair !alue is

measurale, this is more

transarent as the cost is

recogniDed as it is incurredand o!er the ser!ice life.

4or forfeitures, an attemt is

made to estimate the

forfeitures and reflect in the

cost of comensation. This is

suseuently ad<usted if

needed. This is more

transarent and it reflects the

est estimate of the costs.

Indi!iduals are considered toe emloyees under a

different definition. Goods

and ser!ices from non

emloyees are measured at

the date that the comany

recei!es the goods or

ser!ices. This is a difficult one

to assess and reuires

significant <udgement.

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TIME AN* PURPOSE OF "RITING ASSIGNMENTS&Co$#i$'e()

WA 1&$ Time "$>#/ minutesB

3uroseto ha!e the student distinguish et+een !arious treatments of deri!ati!es used as economic hedges for three different transactions. Thestudent must identify +hen hedge accounting +ould e aroriate and ho+ thisis accomlished under I450 and A03E.

WA 1&& Time "$>#/ minutesB3urose > to ha!e students e8lain +hy instruments settleale in the entity=s o+nshares cause accounting issues.

WA 1&' Time "$>#/ minutesB3uroseto ro!ide the student +ith an oortunity to understand thedifferences et+een A03E and I450 and the concetual reasons for anydifferences.

WA 1&( Time 1/>1$ minutesB3uroseto ro!ide students +ith an oortunity to e8lain the urose andaccounting for a ut otion.

WA 1&) Time 1$>"/ minutesB

3uroseto ha!e students comare seculating to hedging.

0olutions Manual 1&1/( Chater 1&

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"A 16-;

aB The ?lack0choles model is used to determine the fair !alue of otions.Conseuently, any financial instrument that is an otion or has an otionemedded in it, +ill reuire that some form of otion ricing model e used.

i. 2eri!ati!es that are otions used y comanies to manage risk hedging or seculationB +ill reuire the ?lack0choles model to determine the fair !alueFii. Con!ertile onds issued y the entity ha!e an otion to con!ert emedded inthe ond that must e searately measuredFiii. Comensatory stock otion lans C073B are lans +here emloyees aregi!en stock otions in the comany as ayment for emloyment ser!ices to ero!ided. The fair !alue of these lans must e determined using the ?lack0choles otion ricing model.

nder I450, the follo+ing standards aly:

i. 2eri!ati!es ha!e to e measured at fair !alue initially and at each suseuentreorting eriod.ii. Con!ertile onds contain oth a liaility and an euity comonent +hich areclassified searately on the initial issuance of the onds. nder I450, theresidual method is used +herey the fair !alue of the det comonent ismeasured first, and then any residual amount is allocated to the euitycomonent. The amount classified to euity is not changed during the life of theond, so does not need to e suseuently remeasured.iii. C073s are measured at fair !alue at the time of the grant of the otions tothe emloyees. The fair !alue of the otions must e determined using someotion ricing model generally the ?lack0choles otion ricing modelB. This!alue is used to measure the comensation e8ense at the time of the grant, anddoes not change throughout the life of the otions.

nder A03E, the follo+ing standards aly to each of the ao!e:

i. 2eri!ati!es generally ha!e to e measured at fair !alue initially and at eachsuseuent reorting eriod. *o+e!er, if the deri!ati!e is reuired to e settledin the comany=s shares and the fair !alue of these shares cannot e readilydetermined, then the deri!ati!e is measured at cost.ii. Con!ertile onds contain oth a liaility and an euity comonent +hichshould e classified searately. *o+e!er, under A03E, at the time of issuance,the comany has a choice to either recogniDe the euity ortion at Dero

allocating all the roceeds on issue to the liaility comonentB or determine the!alue of the comonent that is the more readily measurale first and any residualis allocated to the other comonent. The euity comonent does not change!alue throughout the life of the ond.iii. C073s are measured at fair !alue at the time of the grant. The fair !alue of the otions must e determined using some otion ricing model generally the?lack 0choles otion ricing modelB. This !alue is used to measure the


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"A 16-; &CONTINUE*)

comensation e8ense at the time of the grant, and does not change throughoutthe life of the otions.

B The inuts into the ?lack0choles model include:i. the e8ercise riceii. the e8ected life of the otioniii. the current market rice of the underlying sharei!. the !olatility of the rice of the underlying shares!. e8ected di!idend during the life of the otion

!i. the riskfree rate of interest o!er the life of the otion.

The difficulty for ri!ate enterrises is in determining the !olatility of the shares,since the entity=s shares are not ulicly traded. *o+e!er, the ri!ate comanymust still make an attemt to estimate +hat this !olatility +ould e y looking atsimilar comany shares in the market. The other inut that is more difficult to

determine is the current market rice of the shares, since again, the shares arenot ulicly traded. 4or a ulic comany, this information +ould e readilya!ailale.

cB Assuming all other inuts remain unchanged:i. an increase in the riskfree rate +ill increase the fair !alue of the otions

granted since the time !alue of money has increasedFii. a decrease in the !olatility +ill decrease the fair !alue of the otions

granted since the likelihood of eing ale to e8ercise at higher rices isreducedF

iii. an increase in the e8ected life of the otions +ill increase the fair !alue of the otions since there is a longer time eriod efore they need to ee8ercised +hich increases the time !alue comonent of the rice.

dB The ma<or differences et+een e8changetraded otions and stock otionsgranted under emloyee enefit lans are the follo+ing:

i. emloyee stock otions ha!e a !esting eriod during +hich they cannot ee8ercised and during +hich the otions are forfeited if the emloyeelea!esF

ii. emloyee stock otions tend to ha!e much longer eriods to maturityoften u to 1/ years from the date of grantB +hich normal e8changetraded otions do notF

iii. ne+ shares are issued y the comany +hen the emloyee stock otions

are e8ercisedF this is not the case +ith e8changetraded otions +here theshares are already issued and outstanding y the comany.

As a result of these significant differences, some elie!e that the ?lack0cholesformula is not the correct model to use. *o+e!er, e!en gi!en these +eaknesses,it is still elie!ed to e the est alternati!e a!ailale to estimate the fair !alue of otions under emloyee stock otion lans.

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"A 16- &Co$#i$'e()

cB Comanies that are e8osed to financial risks might choose to reduce their e8osure to these risks. *edging is +hen deri!ati!es are used to mitigateor offset these risks. In a erfectly hedged transaction, there should e no

economic loss to the comany. In other +ords, the loss of the hedged itemis offset +ith any gain on the hedging item the deri!ati!eB. 4rom aneconomic ersecti!e, the hedge should reduce or limit the otential for loss. *edging adds !alue for a comany since it reduces the risk and!olatility of the cash flo+s for a comany.*edge accounting is an otion that is a!ailale under accounting standardsto reort and measure hedges. The key oint to note is that hedgeaccounting is otional. A comany can still e using hedging from aneconomic ersecti!e and decide not to use hedge accounting to reortand measure the hedged and hedging items. *o+e!er, hedge accountingcan only e used +hen the comany is engaged in actual hedgingractices. The comany can also aly hedge accounting to some of itshedging ractices and not to others.There is no need for hedge accounting if there is symmetry in the reortingof gains and losses on the asset or liaility that has a market risk and thederi!ati!e that is used to mitigate that risk. That is, in oth cases, the gainsand losses may oth e reorted to the earnings, and therefore areautomatically offset. Where hedge accounting is useful is +here theremight e a mismatch in the reorting of these gains and losses, or thederi!ati!e is for a future transaction that has not yet een recogniDed. Ane8amle of a mismatch in reorting of the gains and losses +ould e +herethe change in the fair !alue of an in!estment is recorded to other comrehensi!e income, and the change in the deri!ati!e used to hedge

that in!estment is reorted into current earnings. *edge accounting +ouldallo+ oth the changes in fair !alue of the asset and of the deri!ati!e to ereorted in current earnings, so the economic offset is roerly reflected inthe accounting records. 0imilarly, if a comany has hedged a futuretransaction, then the changes in the fair !alue of the deri!ati!e can erecorded into other comrehensi!e income until the transaction imacts theearnings. At this time, the cumulati!e gains and losses on the deri!ati!eused to hedge the transaction +ould also e reorted in current earnings.In this +ay the net economic gain or loss +hich should e minimalB +oulde roerly reorted in the accounting earnings for the comany. Ashedge accounting is an e8cetion to the usual rules for financialinstruments, there are strict criteria that must e met efore it can e used.

Management must identify, document, and test the effecti!eness of thosetransactions for +hich it +ishes to use hedge accounting. The criteria toachie!e hedge accounting are onerous and +ill ha!e systems imlicationsfor all entities. Therefore, management should al+ays consider the costsand enefits +hen deciding +hether to use it. Esecially for small or medium siDed comanies, the costs can e significantly higher than theenefits. Also, management should think aout the needs of its financialinformation users +hen it makes the decision aout using hedge

0olutions Manual 1&11% Chater 1&

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"A 16?

aB The first contract for the 3aula Mine is a sales contract to deli!er coer ata fi8ed rice and a fi8ed !olume fi8ed y the annual roduction of the

mineB. This sale commitment is not traded on an e8change and is ane8ecutory contract. 9o money has changed hands at the eginning of thecontract and cash +ill e recei!ed as deli!ery is made. This contractcannot e net settled in cash since deli!ery of the coer must e made. Inthis case, the contract is treated as an une8ecuted contract, meaning thatit does not need to e measured at fair !alue at each reorting eriod.Instead, the sale is recorded at the fi8ed committed rice +hen deli!ery of the coer is made. This is true under I450 and A03E.The e8changetraded otions for the Minera Mine are nonfinancialderi!ati!es. The remium aid for the otions is the fair !alue aid at thetime the otions are urchased. nder A03E, e!en though the otions aree8change traded, they are not futures contracts and are therefore initially

recorded at fair !alue amount aidB ut not remeasured.nder I450, these otions are a nonfinancial deri!ati!e +hich can esettled on a net asis. If the intent of the comany is to make hysicaldeli!ery of the coer, then the otion can e designated as Je8ected useand the comany need not account for the otions as a deri!ati!einstrument 4;9IB. They +ould initially record the otion at fair !alueamount aidB ut not remeasured. Alternati!ely, if the comany=s intent isto settle on a net cash asis at some time during the term of the otions,then the otion is treated as a deri!ati!e. As such, the otions +ould emeasured and reorted at fair !alue at each reorting eriod.

B If the sale commitment contract +as ale to e settled net in cash, rather than making deli!ery of the coer, it +ould still e recorded +hene8ecuted under A03E since it is not an e8changetraded futures contract.*o+e!er, under I450, the comany +ould ha!e to assess the likelihood of making deli!ery of the coer or settling on a net asis. If the comanyintends to deli!er the coer, then the contract is designated as Je8ecteduse and can e recorded +hen the deli!ery is made as a sale. If thecomany intended to settle on a net asis, then the contract +ould etreated as a deri!ati!e and +ould e measured and reorted at fair !alue ate!ery reorting eriod.

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"A 16-3

1. The in!estment in the ulicly traded shares is recorded at fair !alue under oth I450 and A03E. nder A03E, the gain or loss on the change in fair !alue is directly reorted to current earnings. The otion is a deri!ati!e,

and since it is e8change traded, it is also measured at fair !alue at eachreorting eriod +ith the changes reorted in the current earnings. Thisresults in symmetric reorting and a netting of the gains and losses on thehedged item and the hedging item in the rofit or loss for the eriod. Thereis no need to use hedge accounting under A03E in this case.

nder I450, the comany has a choice to classify the in!estment as 4;9I,or 4;7CI. The deri!ati!e must e recorded at fair !alue through rofit or loss. If the comany chooses to reort the in!estment at fair !alue throughrofit or loss, then this +ould match the treatment of the otion deri!ati!e.0imilar to A03E ao!e, there +ould e no need for hedge accounting sincethe gains and losses on the hedged item and hedging item +ould e offset

in the current earnings. *o+e!er, if the comany chooses to reort thein!estment at fair !alue through 7CI, then there is a mismatch ecausechanges in the deri!ati!e +ill e reorted in the rofit or loss for the eriod,+hereas changes in the in!estment are reorted in 7CI. Conseuently, thecomany could adot fair !alue hedge accounting and designate thein!estment as the hedged item and the otion as the hedging item. Thegains and losses on the in!estment +ould e recorded in the rofit or lossfor the eriod and +ould e offset against the gains and losses on theotion deri!ati!e. In this case, the comany might as +ell <ust use 4;9Iaccounting for the in!estment in the first lace to a!oid the comle8ities of hedge accounting.

". nder I450 and A03E, the 0 dollar recei!ale must e translated into theeui!alent Canadian dollars at each reorting eriod. Any foreigne8change gain or loss is recogniDed in the rofit or loss for the eriod. Thefor+ard contract, +hich is a deri!ati!e, also must e reorted at fair !alue+ith the gains and losses reorted to net earnings. This accountingtreatment results in symmetric reorting of the gains and losses, sho+ing anet imact in the current earnings. Therefore, no hedge accounting isreuired and any gains and losses +ill offset.

#. The for+ard contracts to uy Australian dollars are to hedge anticiatedfuture transactions. In this case, the hedged item has not yet occurred, ut

the urchase of the deri!ati!e has. The deri!ati!e +ould ha!e to ereorted at fair !alue at each reorting eriod, +ith gains and lossesreflected in the current earnings. *o+e!er, this results in a mismatch, sincethe anticiated future transaction has not yet taken lace. The comanyshould then consider hedge accounting.

nder A03E CICA #($&.A&# 3art IIB, a foreign currency for+ard contractthat meets the criteria to ualify for hedge accounting +ill e accounted for as follo+s:

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"A 16-3 &Co$#i$'e()

The for+ard contract can e designated as a hedge only if:

• the for+ard contract is for the same amount and same currency asthe anticiated future transactionF

• the for+ard contract matures +ithin t+o +eeks of the anticiatedhedged transactionF• it is roale that the future transaction +ill occurF• the fair !alue of the for+ard contract is Dero at the time it is enteredinto.

If so, the deri!ati!e is not recogniDed until it actually matures > in si8months, and the loss on e8change is reorted in the financial statements inthe same eriod as the future transactions. @eon 3rice +ould emhasiDe tothe CE7 the strict reuirements enaling hedge accounting to e used in

this situation, and e8lain that only a true hedging arrangement can erecorded +ith hedge accounting. When the anticiated transaction actuallyoccurs, the gain or loss on the for+ard contract +ill e ad<usted to thecarrying amount of the anticiated future transaction.

nder I450, the same mismatch as descried ao!e +ould result if thefor+ard contracts +ere reorted at fair !alue at each reorting eriod.nder I450, the for+ard contract may ualify as a cash flo+ hedgeassuming all the criteria are met. The for+ard contracts are still reorted atfair !alue at each reorting eriod e8cet that the gains and losses are no+reorted in 7CI until the future transaction imacts the earnings. When thishaens, the accumulated gains and losses in 7CI related to the for+ardcontract are transferred to rofit or loss and reorted in the same accountas the anticiated transaction. In designating the deri!ati!e as a cash flo+hedge, the comany must document the hedging relationshi, the hedgeditem, and the hedging item, and test for effecti!eness at each reortingeriod. If the hedge ecomes ineffecti!e, then gains and losses on thefor+ard contract must e immediately transferred out of 7CI into rofit andloss. Again, care must e taken to ensure that the hedge accounting criteriaare met efore using hedge accounting.

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"A 16-6

The main issue that arises for instruments that reuire settlement in the entity=so+n shares is +hether the instrument should e resented as euity, a financialliaility, or a financial asset. Generally, going ack to asic rinciles is reuired

to determine the aroriate resentation. *o+e!er, there is some guidance thatI450 has noted in the standard:

• Jfi8ed for fi8ed rincile > +here the numer of shares and theconsideration reuired to settle the instrument are oth fi8ed, this +ill eresented as euity. An e8amle of this is a +ritten call otion gi!ing theholder the right to uy a fi8ed numer of shares for a fi8ed amount of consideration +ith no choice for cash settlement. 3urchased ut or callotions that gi!e the entity to right to sell or uy a fi8ed numer of sharesfor a fi8ed amount of consideration is euity, since there is no contractualoligation on the comany=s art to ay cash.

• An oligation to ay cash or other assetsB is reuired to e resented as

a liaility. A +ritten ut otion +here the holder has the right to sell a fi8ednumer of shares to the comany, or a for+ard contract to uy a fi8ednumer of shares for a fi8ed amount of cash may oligate the entity toay out cash. These +ill e recorded as financial liailities.

• A choice in settlement > Anytime there is a choice for cash settlement or other assetsB y either arty, the instrument is a financial liaility. 7nly incases +here all the ossile choices resulted in shares eing issued+ould the instrument e recorded as euity.B nder A03E, if thecomany can make a choice and a!oid settling in cash or other assets,then this instrument +ould e recorded as euity. Contracts that +ill enet settled in cash or shares are financial assets or liailities since either cash or a !ariale numer of shares +ill e used for settlement.

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"A 16- &Co$#i$'e()

fB Where the ri!ate enterrise has historically ought ack the sharesafter the emloyee has e8ercised, the C073 can e reorted as aliaility rather than euity. ?ecause there is no ready market for these

shares, the uying ack of the shares y ri!ate enterrises haensmore often so that emloyees can realiDe the !alue of these otions.nder I450, C073s are reorted as euity. In determining the fair !alue of the C073, a ri!ate enterrise +ill ha!e to estimate ameasurement of !olatility, +hereas this can e readily measured for ulicly traded entities.

gB 0A5s are reorted at fair !alue under I450 and at intrinsic !alueunder A03E. The main reason for this is the difficulty in determining thefair !alue of a 0A5 on shares that are not ulicly traded.

hB *edging under I450 is a lot more comle8, +ith a choice et+eendesignating a cash flo+ hedge or a fair !alue hedge. 2eri!ati!es arestill fair !alued, ut hedge designation +ill result in different reorting

reuirements for the gains and losses on the deri!ati!e and the hedgeditem. 4or cash flo+ hedges, the gains and losses on the hedging itemcan e reorted in 7CI. nder A03E, if the comany ualifies for hedge accounting for anticiated transactions, the deri!ati!e does notneed to e recorded until settled. This is done for t+o reasons > first of all A03E has no 7CI, so there is no mismatch for fair !alue tyehedges. And since there is no 7CI, there is no other alternati!es for reorting the income on the deri!ati!es, and so the comany does notha!e to reort them at all until settled, eliminating any mismatch.

iB 4inally, the disclosure under A03E is greatly reduced in comarisonto I450. The reason for this is the nature of the limited users for ri!atecomany reorts.

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"A 16-D

aB The ut otion contract is entered into to rotect from a otential loss onan in!estment. ?y urchasing the ut otion for 0IT @td. shares, 5IT Co.

can rotect itself against the risk of a decrease in the share rice. 5IT Co.is effecti!ely locking in the share rice at L1// er share and therefore itsin!estment cannot fall elo+ L$//,///. This is a hedge.

B 5IT Co. +ould record an asset of L1/,/// on the alance sheet for theut otion. The otion is a deri!ati!e that +ill e recorded at 4;9I.When the share rice falls to L)/ er share, 5IT Co. +ould re!alue the utotion and recogniDe a gain through net incomeB.

cB The accounting is transarent since the risk of loss in the !alue of thein!estment is offset y the otential for gain on the otion. There is a

hedge. The gains and losses on the in!estment +ill e offset ycorresonding ut oosite gains and losses on the ut through netincome if A03E is follo+edB.

nder I450, the result +ould e the same if the comany +ere to use 4;9I accounting for the in!estment. The comany has the otion of using4;7CI for the in!estment ut then might +ant to use hedge accounting toreflect the hedge. The hedge accounting +ould allo+ the gains-losses onthe in!estment to e ooked through income. *o+e!er, hedge accountingis costly and therefore if ossile, the comany +ould use 4;9Iaccounting for the in!estment right from acuisition.

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"A 16-

*edging and seculation oth in!ol!e taking a osition in a deri!ati!e +hich +illresult in fluctuating !alues deendent on future e!ents or results. *edgers +illusually undertake the deri!ati!e as an oosite osition to another deri!ate they

are trying to hedge against. The urose of hedging is to try to eliminate thefuture !olatility caused y rice fluctuation in the hedged item. In an idealscenario, any rice changes in the deri!ati!e +ill fully offset the changes in theunderlying hedged item, thus rotecting the hedger from any future ricefluctuations.

0eculation undertakes a deri!ati!e in order to gain from future marketfluctuations. The seculator +ill in!est in an asset +ith the anticiation of marketchanges and +ill rofit +hen the market mo!es in the desired direction.0eculators +ill e at risk if market conditions mo!e in the oosite direction.This is ecause the deri!ati!es they in!est in are not matched or hedged= y anoffsetting deri!ati!e in their ortfolio.

7!erall, the actions of seculators and hedgers are the same, in!esting inderi!ati!es deendent on future market conditions, ho+e!er the intent of theactions are different, seculators etting on future economic fluctuations andhedgers eliminating the risk of future fluctuations.

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RESEARCH AND FINANCIAL ANALYSIS

RA16-1 POTASH CORPORATION OFSASKATCHEWAN Inc.

aB0tock 7tion 3lans

aB Who is eligile 2esignated senior e8ecuti!es,

emloyees, and designated directors

B 5euired to uy shares to

access enefits Yes for stock ased settled lans >

comany issues ne+ shares to settle

the otions

cB What is the enefit or

comensation ased on 0hare rice

dB ;esting eriod 3erformance 7tion 3lans !est, if at

all, on the threeyear a!erage e8cess

of the comany=s consolidated cash

flo+ return on in!estment o!er the

+eighted a!erage cost of caital

2irectors, 7fficers and Emloyee

3lans one half !ested one year from

date of grant, and the other half

!esting in the follo+ing year eB E8iry eriod Term is 1/ years

fB *o+ is comensation e8ense

determined

ses ?lack0choles formula to

determine the fair !alue of the otions

gB 7ffsetting amount To contriuted surlus

hB When is comensation e8ense

recorded

7!er the !esting eriod

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RA16-1 &Co$#i$'e()

2eferred 0hare nit 3lans

aB Who is eligile 9onemloyee directorsB 5euired to uy shares to

access enefits 9o settled in cash ased on the

common share rice at the time


comensation ased on

0hare rice of the units, and

erformance of shares relati!e to

market eers

dB ;esting eriod 4ully !est uon a+ard, ut not

distriuted until directors lea!e

eB E8iry eriod Cash ayale +hen directors lea!e

the ?oard


determined

ses market !alue of the share units

i.e., share rice N numer of 20sB

gB 7ffsetting amount To liailities


recorded

Immediately +hen issued and

ad<usted until cash is settled

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RA16-1 &Co$#i$'e()

3erformance nit Incenti!e lan

aB Who is eligile 0enior e8ecuti!es and other keyemloyees

B 5euired to uy shares to

access enefits 9o settled in cash ased on the

common share rice at the time


comensation ased on

0hare rice of the units, and some

incenti!e a+ard ased on meeting

targets

dB ;esting eriod 7ne half of the !esting of a+ards is

ased on increases in the total returnto shareholders o!er the threeyearerformance eriod ending 2ecemer#1, "/11The other half !ests to the e8tent thattotal shareholder return matches ore8ceeds that of a eer grou0hareholders= return is the caitalareciation of the share rice lusdi!idends aid.

eB E8iry eriod 3ayale in cash +hen erformance

eriod ends


determined

ses market !alue of the share units

gB 7ffsetting amount To liailities


recorded

7!er the threeyear erformance

eriod and is ad<usted as reuired

ased on meeting erformance

targets

B As e8lained in 9ote "# of the financial statements, the stockased

comensation lans are reorted at fair !alues. The comensation

e8ense is charged to earnings, and the offsetting entry is either to

contriuted surlus for euity settled lans or liailities for cash settled

lans. Any consideration recei!ed on the e8ercise of otions is recorded

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to share caital, along +ith the contriuted surlus related to the otions.

As er note "#,

RA16-1 &Co$#i$'e()

L"% million +as charged to comensation e8ense for the year for all thelans. As er the Consolidated 0tatements of Changes in Euity,

contriuted surlus +as decreased y L) million due to stockased

lans. The remaining amount of L## million +ould e included in

liailities.

cB The fair !alue of stock otion lans is determined using the ?lack0choles

otion ricing model. Inuts to this otion ricing model are su<ect to

estimates and include: the e8ected di!idend, e8ected !olatility, risk

free rate, and the e8ected life of the otions. The tale elo+ outlines

ho+ these inuts ha!e changed o!er time:

"/11 "/1/ "//) "//(

E8ected

di!idend

L."( L.1# L.1# L.1#

E8ected

!olatility

$"O $/O %(O #%O

5iskfree

rate

".")O ".&1O ".$#O #.#/O

E8ected

life of the

otions

$.$ $.) $.) $.(

In 9ote "#, the comany comments that the e8ected di!idend is ased

on the annualiDed di!idend at the grant dateF the e8ected !olatility is

ased on historical data o!er the e8ected life of the otionsF the riskfreerate is ased on the imlied yield on Derocouon go!ernment onds

issued +ith a remaining term eual to the e8ected life of the otionsF and

ased on ast e8erience, the e8ected life of the otions is estimated.

*olding all other inuts constant, the follo+ing +ould e the imact on the

comensation e8ense for changes in each inut:

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RA16-; &Co$#i$'e()

dB As er note #, the deri!ati!e instruments used y the comany to hedge

its risks are interest rate s+a contracts, foreign e8change contracts,

and euity contracts.

As further e8lained in 9ote #, the comany has oth fair !alue hedges

and cash flo+ hedges. 4air !alue hedges are used for certain interest

rate s+as. Cash flo+ hedges are used for foreign currency contracts

for future urchases of in!entoryrelated items. When the in!entory is

recogniDed, the !alue of the merchandise in!entory is ad<usted y the

accumulated gains and losses on these foreign currency contracts.

Euity deri!ati!e contracts are also cash flo+ hedges used to hedge

!arious future stockased comensation. As the stockased lans

!est, the amount of accumulated gains and losses on these euity

deri!ati!es is transferred to income.

eB As e8lained in 9ote #), the comany measures the fair !alue of the

deri!ati!es using @e!el " inuts. Total deri!ati!es reresented as assets +ere

L"/." million and as liailities +ere L&.' million. These !alues are designated

as cash flo+ hedges and fair !alue hedges as follo+s:

L millions Cash flo+

hedges

4air !alue

hedges

9ot designated Total

Assets 1%.& $.& /./ "/."

@iailities 1.( %.) /./ &.'

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RA16- LOBLA" COMPANIES LIMITE*

aB 9ote 1) descries the 0econd 3referred shares as follo+s:

•

) million shares issued• 4ace !alue of L""$ million, and originally issued at L"1( million

• 9on!otingF

• $.)$O di!idend > fi8ed cumulati!e di!idend of L1.%('$ er share er

annum if declaredB ayale uarterlyF

• After Huly #1, "/1#, the comany may, at its otion, redeem the shares for

cash at the rice of L"$.'$ er share on or after Huly #1, "/1#F L"$.$/ on

or after Huly #1, "/1%F and L"$.// on or after Huly #1, "/1$.

• After Huly #1, "/1#, the comany may also con!ert, at its otion, the

referred shares into the numer of common shares determined y taking

the reuired redemtion rice di!ided y the greater of L".// and )$O of the then current market rice of the common share rice.

• The second referred shares rank after the first referred shares and rank

in riority to the common shares +ith resect to di!idends and dissolution

of the comany.

The comany has recorded these shares as a liaility since they may e

redeemed for cash. The comany has used the effecti!e interest rate

method to measure these securities.

B The shares +ere originally issued for L"1( million as er note 1). At2ecemer #1, "/11, the shares +ere measured at L""" million and are classified

as Caital 0ecurities on the statement of financial osition. Effecti!ely, the

discount is eing amortiDed until the face !alue is reached in "/1#.

cB As er note #, the di!idends aid on these caital securities +ere included

in JInterest and other financing charges. The total amount aid during the year

for the di!idends as er note 1) +as L1#.#('$ million L1.%('$ N ) million

sharesB. L1% million +as recorded in interest e8ense, +hich +ould reresent

the actual amount aid lus the amortiDation of the discount to reflect the

effecti!e interest on the referred shares.

dB As er note "/, the comany includes these referred shares as euity in its

determination of caital. As a result, in calculating its 2et to Euity, Interest

Co!erage and 9et 2et to E?IT2A ratios, the Caital 0ecurities are e8cluded

from det, and included in euity.

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RA16-? LUFTHANSA AG

aB @ufthansa AG is an international airline, headuartered in Germany. It flies

assengers and freight around the +orld. 2uring "/11, the comany fle+ 1//.&million assengers and ".1 million tonnes of freight on 1,/$/ thousand flights.

B The comany is e8osed to fuel rice risk, interest rate risk, and foreign

currency risk. The comany monitors and manages these risks in a conser!ati!e

and systematic manner. @ufthansa uses deri!ati!es to manage these risks +ith

the rimary aim to reduce earnings !olatility due to fuel rice and foreign

e8change rate fluctuations. Interest rate hedging is used to reduce and minimiDe

fluctuations in the comany=s interest e8ense. 4uel costs reresent "/.&O of

total costs. Therefore the comany hedges fuel costs for u to the ne8t "%

months, +ith ($O of the ne8t & months hedged and '/O of the "/1"=sforecasted usage eing hedged. The comany uses rimarily otion

cominations for these fuel rice hedges.

4oreign currency risk arises from international tickets sales and urchases of

fuel, aircraft, and sare arts. The comany deals in (/ different currencies of

+hich "/ are managed, rimarily eing the 0 dollar, the Haanese yen, and

?ritish sterling.

Interest rate risk is managed using s+as to ensure that ($O of the det rates

are floating.

cB 4rom 9ote %&, the follo+ing ercentages of the risks are hedged:

• Currency e8osure for oerating e8enses: 0 dollar > %/OF yen %$O and

sterling '$OF

• Currency e8osure for ne+ caital e8enditures !aries from ($O to as high

as )"O during the forecasted years for "/1" to "/1&F

• Interest rate risks are hedged to 1$OF

• 4uel rice risk is hedged '/.#O for "/1" and "%.)O for "/1#.

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RA16-? &Co$#i$'e()

dB The follo+ing tale identifies the tye of deri!ati!e and its designation as

either a cash flo+ hedge or a fair !alue hedge.

In millions of Euros 4air ;alue

hedge

Cash flo+ hedge

Interest rate s+as 11)

0read otions for fuel

hedging

1

*edging cominations for fuel

hedging

1#)

4utures contracts for foreign

currency hedging

" 1"/

0read otions for fuel

hedging

%$

The fuel hedges and foreign currency hedges are all designated as cash flo+

hedges since they relate to anticiated future transactions related to urchases

of fuel, oerating costs, oerating income and aircraft costs. The interest rate

s+as are fair !alue hedges since the s+a is on e8isting det that is

outstanding at the reort date.

eB As e8lained in the 5isks and 7ortunities 5eort, the follo+inge8lanations are ro!ided as to ho+ the market !alues of the deri!ati!es ha!e

een determined:

• All deri!ati!es are !alued at the rice an indeendent arty +ould ay or

recei!eB to take on the rights and -or oligations of the deri!ati!es.

• Interest rate s+as are measured using a discounted cash flo+.

• Currency deri!ati!es are discounted ased on their future rates and the

corresonding interest rate yield cur!es.

• 4uel rice otions are !alued using otion ricing models.

fB As er the 5isks and 7ortunities 5eort, during the year:

• E5 (// million +as mo!ed from euity to fuel costs,

• 4or the foreign currency deri!ati!es E5 %1% million +as mo!ed

from euity to other oerating income, E5 $1& million to other

oerating e8enses, and E5 &# to caital e8enditures for aircraft.

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