2010 equity balance required:

(600-20 - 25 - 15 - 20)= 520 employees eligible
Total expected equivalent value = 520 x 500 options x $1.48 = $384,800
$384,800 x 3/4 years = $288,600

Previously recognised to 30 September 2009:

(600 - 20 - 25 - 40) = 515 employees eligible
515 employees x 500 options x $1.48 = $381,100
$381,100 x 2/4 years = $190,550

Amount to be documented in the income statement in 2010 = $98,050 ($288,600 - $190,550)

Recorded in 2010 financial statements:

Dr Income statement - staff costs $98,050
Cr Equity - other reserves $98,050

(b)

The sales director is mistaken, regardless of no cash changing hands, the share alternative are issued in exchange for employees providing services to LBP. Perhaps the options have been given as a return for service provided or in lieu of a pay rise or bonus which would or else have been paid in cash. As there is no direct salary cost, we instead must calculate an equal cost of receiving staff services and match this with the income that the staffs helps to generate. We do this by estimating the value intrinsic in the options and assign that over the period in which employees must stay with LBP, in this case 4 years.

The amount paid-for by the office to the income statement is based on the fair value of the share options at the grant date. This is not consequently premeasured as these share options represent an equity-settled share-based payment. The equal cost will be updated each year for those employees that are still eligible or expected to be suitable at the year end to ensure that the amount charged reflects the amount that is expected to vest.