Accounting 2
Lecture no 6
Prepared by:
Jan Hájek
Share-based Payment
Related standards
 IFRS 2
 Current GAAP comparisons
 Looking ahead
 End-of-chapter practice

2
Related Standards

FAS 123 Share-based Payment
3
IFRS 2 – Overview
Objective and scope
 Recognition
 Equity-settled share-based payment
transactions
 Cash-settled share-based payment
transactions
 Share-based payment transactions with cash
alternatives
 Summary
 Disclosures

4
IFRS 2 – Objective and Scope

Deals with transactions where equity instruments are used as
consideration

Entities must recognize these types of transactions
 If they create liabilities, they must be remeasured after the transaction date

Examples of share-based payment transactions
 Remunerative option plans such as employee stock options plans
 Acquisitions where shares are used as consideration
 Situations where services are paid for with equity instruments

Accounting for employee remuneration plans can be complex
 These plans often span numerous reporting periods
 Cost to the entity may be difficult to measure depending on the terms of the plans
5
IFRS 2 – Objective and Scope
The standard puts all share-based transactions into three categories
 The definitions for the first two categories follow

6
IFRS 2 – Objective and Scope

The third category is where there is a choice to settle in cash or equity



Share-based payment transactions

Defined as transactions in which the entity receives goods or services as
consideration for equity instruments of the entity (including shares or share options),
or

Acquires goods or services by incurring liabilities to the supplier of those goods or
services for amounts that are based on the price of the entity’s shares or other equity
instruments of the entity
Situations where the employee is dealing with the entity as a shareholder


Either the entity has the option to determine whether to settle the transaction in cash
or equity, or the counterparty has this option
Not covered by IFRS 2
When the transaction in question is a business combination

Covered by IFRS 3
7
IFRS 2 – Objective and Scope
8
IFRS 2 – Recognition

In general, the standard requires that the
transaction be recognized when the goods
are received or services rendered

The credit is booked to equity in an equitysettled transaction and the liability in a cashsettled transaction

The debit is booked to expense or asset (if
the definition of an asset is met)
9
IFRS 2 – Equity-settled Share-based Payment
Transactions
Overview
 For equity-settled transactions
 Transaction is measured at the fair value of the goods or services received
 If the fair value cannot be reliably measured, then the fair value of the equity
instrument is used

There is a rebuttable presumption that the fair value of the goods and
services may be reliably measured
 In most cases, the fair value of the equity instruments would not be used

An exception to this is where the transaction involves employees rendering
services
 Transactions are measured by reference to the fair value of the equity instruments
 May be too difficult to measure the services if the equity instruments are given to
the employee as part of the compensation/remuneration package for services
normally rendered as an employee
10
IFRS 2 – Equity-settled Share-based Payment
Transactions
Transactions in which services are received

Accounting might be affected by the vesting provisions

Share-based transactions such as options have conditions attached to them
 Must be met before the counterparty has legal entitlement to them
 Legal entitlement is referred to as vesting

Vesting
 If the equity instruments vest upfront when the contract is entered into
○ The entity assumes that the services have already been provided and recognizes the
full amount of the transaction at that date
 If the equity instruments vest over time
○ The transaction is accrued and recognized over time
11
IFRS 2 – Equity-settled Share-based Payment
Transactions
Transactions in which services are received (continued)

Options granted conditional upon the employee achieving certain goals
 Vesting period must also be conditional upon achieving those goals
 Entity must estimate the vesting period in order to calculate the amount of expense
to recognize in each period
 Estimate may be revised in a subsequent period as a change in estimate
 If the condition is a market condition (such as the shares reaching a certain price)
no subsequent revision is allowed
○
Market would have already included expectations about the future share price into the
current share price
12
IFRS 2 – Equity-settled Share-based Payment
Transactions
Transactions measured by reference to the fair value of the equity
instruments granted
Determining the fair value of equity instruments granted

Estimated as at the measurement date based on market conditions and prices

Measurement date
 Generally the grant date for transactions with employees
 For other transactions, is the date that the goods are received or the services
rendered

Grant date
 Generally the date that the contract is agreed to by both parties
13
IFRS 2 – Equity-settled Share-based Payment
Transactions
14
IFRS 2 – Equity-settled Share-based Payment
Transactions
Determining the fair value of equity instruments granted (continued)

Market values
 If the equity instruments are publicly traded shares, they are available
 If they are stock options, they may or may not be available

Options pricing models
 Valuation techniques - often used
 E.g., Black-Scholes and binomial models

Model inputs
(a) Exercise price
(b) Life of the option
(c) Current price of the shares
(d) Expected volatility of the share price
(e) Dividends expected on the shares
(f) Risk-free interest rate.
15
IFRS 2 – Equity-settled Share-based Payment
Transactions
Treatment of vesting conditions
 There may be certain conditions attached to the transaction that must be met before
the counterparty or employee has legal entitlement (i.e., before the instruments vest)

At the grant date


The transaction is recognized and measured but the vesting conditions are not factored
into the measurement
After the grant date

The transaction is remeasured for the change in the number of equity instruments due
to the conditions being met/not met, but not for the fair value of the equity instrument
itself

Subsequent remeasurements are treated as a change in estimate in subsequent
periods

Where the vesting condition is a market condition (such as a target share price) this
is taken into account at the measurement date and the transaction is not
subsequently remeasured
16
IFRS 2 – Equity-settled Share-based Payment
Transactions
Treatment of non-vesting conditions
 Uncertainty might also be introduced with non-vesting conditions


Number of equity instruments to be issued might vary depending on some future event
In these cases, the transaction is recognized and measured at the grant date and the
uncertainty is factored in at that point

No remeasurement after the vesting date
Treatment of a reload feature
 Contract may allow the entity to automatically issue new options when an old one is
exercised using shares to satisfy the exercise price

These are treated as new option grants and reload features are not taken into account
when estimating fair value
17
IFRS 2 – Equity-settled Share-based Payment
Transactions
After vesting date
 After initial recognition upon vesting

Equity-settled transactions are not remeasured even if the equity instruments are
forfeited
 Entity may transfer amounts from one category of equity to another
If the fair value of the equity instrument cannot be reliably estimated
 Where the entity is required to measure the transaction at fair value, it may use the
intrinsic value

Intrinsic value

Difference between the fair value of the shares to which the counterparty has the right to
subscribe or which it has the right to receive, and the price the counterparty is required to
pay for those shares

Transaction continues to be remeasured until the equity instrument is settled/exercised
(or forfeited or lapses/expires)

Costs related to forfeitures after the vesting date would be reversed
18
IFRS 2 – Equity-settled Share-based Payment
Transactions
Modifications to the terms and conditions

If the equity instrument is modified afterwards and the total fair value of the
transaction is increased, then this additional amount is recognized

If the entity cancels or settles the grant of the equity instrument during the vesting
period

Treats this as an acceleration of the vesting period
 Recognizes all remaining amounts

Any cash payments are treated as a repurchase of equity (deducted from equity)

Only exception is where the payment is greater than the fair value of the equity
instruments granted
 Excess is charged to expense

Additional guidance is provided where new or replacement equity instruments are
granted
19
IFRS 2 - Equity-settled Share-based Payment
Transactions - Example 1

On 1 July 2011, Supplier X provides Reporting Entity
Ltd with some inventory, which has a fair value of $140
000. In exchange for the inventory, Reporting Entity Ltd
provides Supplier X with 10 000 shares in Reporting
Entity Ltd

As it is considered that the fair value of the inventory
can be determined ‘reliably’, this is deemed to be the
value of the shares being issued. The accounting entry
would be:
Dr Inventory
Cr Share capital
140 000
140 000
IFRS 2 - Equity-settled Share-based Payment
Transactions – Example 2
Employee
X provides her services to Reporting Entity Ltd in
exchange for 10 000 options in the entity. All services have been
performed and the options have been granted to Employee X. The
options are considered to have a market value of $1.50 each
In
this case, which involves an employee, the reporting entity would
not determine the fair value of the services being provided but
instead would consider the fair value of the options
Dr
Cr

Employee benefits expense
Share capital
15 000
15 000
If the goods or services were received in an equity-settled sharebased payment transaction, an increase in equity is recognised. If
they were received as part of a cash-settled share-based
transaction, a liability is to be recognised
IFRS 2 – Cash-settled Share-based Payment
Transactions

Where the transaction will eventually be settled in cash

Liability is recognized
 Transaction is measured at the fair value of the liability at the measurement date
 Liability is subsequently remeasured at every reporting date
 Additional expenses/income due to the remeasurement are booked to profit and loss
Share appreciation rights (SARs)

For transactions involving options/share appreciation rights the fair value of the liability
is measured at the fair value of the options/SAR
 Under this type of contract, an employee is granted a certain number of rights as
remuneration for services
 Rights allow the employee to be paid the excess of the market value of a share
over a certain base price
 Excess may be paid in cash (which is most often the case) or in shares
22
IFRS 2 – Cash-settled Share-based Payment
Transactions
Share appreciation rights (SARs) continued

Accounting may be inconsistent with IAS 32


In cases where the SAR may be settled in shares (according to the terms of the SAR)
Under IFRS 2
 If the SAR is to be settled with shares (i.e., a variable number of shares) it is
accounted for as equity
• Measured at the fair value of the SAR at the grant date
• Credited to equity
• Not subsequently remeasured after vesting date

Under IAS 32
 If the number of shares is variable, the instrument would be accounted for as a
liability
23
IFRS 2 - Cash-settled Share-based Payment
Transactions - Example
 On
1 July 2012 Coogee Ltd provides its managing director with a sharebased incentive according to which she is offered a bonus that is
calculated as 200 000 times the increase in the fair value of the entity’s
share price above $2.50
 When the bonus was offered the share price was $2.25
 If the managing director does not leave the organisation the accrued
entitlement will be paid after three years. However, if she leaves the
organisation the accrued entitlement will be paid out upon departure—that
is, the benefit will not be forfeited
Other information
 The share price at 30 June 2013 is $3.00
 The share price at 30 June 2014 is $2.90
 The share price at 30 June 2015 is $4.10
 The managing director stays for three years and is paid the bonus on 1
July 2015
REQUIRED
Prepare the journal entries that would appear in the accounting records of
Coogee Ltd to account for the issue of the share appreciation rights
IFRS 2 - Cash-settled Share-based Payment
Transactions - Example
Year end
30 June 2013
30 June 2014
30 June 2015
Remuneration
expense for period
$100 000
($20 000)
$240 000
Calculation
200 000 × ($3.00 – $2.50)
200 000 × ($2.90 – $2.50) – $100 000
200 000 × ($4.10 – $2.50) – $80 000
30 June 2013
Dr Employee benefits expense
Cr Accrued salaries payable
30 June 2014
Dr Accrued salaries payable
Cr Employee benefits expense recouped (revenue)
100 000
100 000
20 000
20 000
30 June 2015
Dr Employee benefits expense
Cr Accrued salaries payable
240 000
1 July 2016
Dr Accrued salaries payable
Cr Bank
320 000
240 000
320 000
IFRS 2 – Share-based Payment Transactions
with Cash Alternatives
Share-based payment transactions in which the terms of the arrangement
provide the counterparty with a choice of settlement

Where the counterparty has the option to dictate settlement, it is beyond the
control of the entity and a liability may exist

In reality, this is a compound instrument
 Part debt (the right to demand payment in cash)
 Part equity (the right to demand payment in shares)

For transactions other than with employees and where the entire transaction
is measured at fair value of the goods/services
 The equity component is the difference between the total transaction value and fair
value of the debt component
26
IFRS 2 – Share-based Payment Transactions
with Cash Alternatives
Share-based payment transactions in which the terms of the arrangement
provide the counterparty with a choice of settlement (continued)

For other transactions, where the equity instrument is used to value the
transaction
• Measure fair value of debt component
• Measure the equity component (considering that the entity must forfeit the right to
the shares if the counterparty exercises the option to be paid in cash)

As an added complexity, the entity must split the transaction into two parts
 the debt part
 the equity part

The debit side of the journal entry (the expense) is also split into two parts
 The debt part is accounted for as a cash-settled transaction
 The equity part as an equity-settled transaction
27
IFRS 2 – Share-based Payment Transactions
with Cash Alternatives
Share-based payment transactions in which the terms of the arrangement
provide the entity with a choice of settlement

Where the entity has the choice of settlement options, the entity determines
whether it has a liability (a present obligation to settle in cash)

Where the choice has no commercial substance
 A liability exists
 The transaction is accounted for as a cash-settled transaction
 Otherwise, it is accounted for as an equity-settled transaction

If the entity assumes equity settlement and subsequently settles in cash
 This is treated as a share buyback or repurchase of an equity interest (debit equity)
 Unless the settlement alternative is the one with the higher fair value, in which case
the excess is booked as expense
28
IFRS 2 – Disclosures

The entity must disclose sufficient information for the users

To understand the nature and extent of these transactions
 To understand the impact on the profit or loss statement

Specific disclosures
(a) A description of each type of share-based payment arrangement that existed at any
time during the period
(b) The number and weighted average exercise prices of share options for each of the
following groups of options
(i) Outstanding at the beginning of the period
(ii) Granted during the period
(iii) Forfeited during the period
(iv) Exercised during the period
(v) Expired during the period
(vi) Outstanding at the end of the period
(vii) Exercisable at the end of the period
29
IFRS 2 – Disclosures
(c) For share options exercised during the period, the weighted average share price at
the date of exercise.
(d) For share options outstanding at the end of the period, the range of exercise prices
and weighted average remaining contractual life.

Additional disclosures relating to fair value measurements and the impact
on the profit or loss statement are required
30
Current GAAP Comparisons



If fair value of received goods/services not reliably
measurable, IFRS uses fair value of non-tradable
equity instruments
Measurement dates for share-based payments
differ
Treatment of vesting conditions differs
Current GAAP Comparisons
Differences in dealing with modifications of
awards
 Cash-settled share-based payments
measured at fair value of liability under
IFRS (intrinsic value under Canadian
GAAP)
 Where counterparty has choice of
settlement, IFRS requires treatment as
cash settled transaction if entity has
incurred a liability – compound instrument
