CHAPTER 34
SHARE-BASED PAYMENT
Connolly – International Financial Accounting and Reporting – 4th Edition
Introduction
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Salary, pension and other benefits often form part of an
executive’s employment package
A share-based payment is a transaction in which an entity
receives or acquires goods or services either as
consideration for its equity instruments or by incurring
liabilities for amounts based on the price of the entity’s
shares or other equity instruments of the entity
IFRS 2 Share-based Payment sets out measurement
principles and specific requirements for three types of
share-based payment transactions:
1. Equity-settled share-based payment transactions
2. Cash-settled share-based payment transactions
3. Share-based payment transactions with cash
alternatives
Connolly – International Financial Accounting and Reporting – 4th Edition
1. Equity-settled share-based payment transactions
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Measure goods or services received, and corresponding
increase in equity (recognised in OCI), at FV of goods and
services received
If FV cannot be estimated reliably, then measure their value
by reference to the FV of the equity instruments granted
Connolly – International Financial Accounting and Reporting – 4th Edition
Example 34.4: Share options for goods
A company issues share options in order to pay for the purchase of
inventory. The share options were issued on 1 June 2010. The inventory
was eventually sold on 31 December 2012. The value of the inventory on 1
June 2010 was €6 million and this value was unchanged up to the date of
sale. The sale proceeds were €8 million. The shares issued have a market
value of €6.3 million.
Requirement
How will this transaction be dealt with in the financial statements?
Solution
IFRS 2 states that the FV of the goods and services received should be
used to value the share options unless the FV of the goods cannot be
measured reliably. Thus equity would be increased by €6 million and
inventory increased by €6 million. The inventory value will be expensed on
sale (DR SPLOCI – P/L and CR Equity).
Connolly – International Financial Accounting and Reporting – 4th Edition
Transactions with employees and others providing similar
services
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FV of the services received are referred to the FV of the
equity granted, as it is not possible to estimate reliably the
FV of the services received
FV of equity should be measured at the grant date
Typically, share options are granted to employees as part of
their remuneration package
Usually, it is not possible to measure directly the services
received for particular components of the employee’s
remuneration package
It might also not be possible to measure the FV of the total
remuneration package independently without measuring
directly the FV of equity instruments granted
Connolly – International Financial Accounting and Reporting – 4th Edition
Example 34.5: Share options for employee services
A company granted a total of 100 share options to 10 members of its executive
management team (10 options each) on 1 January 2012. These options vest at the
end of a three-year period. The company has determined that each option has a FV
at the date of grant equal to €15. The company expects that all 100 options will vest
and therefore records the following entry at 30 June 2012 (the end of its first sixmonth interim reporting period).
DR
SPLOCI – P/L – salaries
CR
Equity
[(100 x €15) / 6 periods = €250 per period]
€250
€250
If all 100 shares vest, the above entry would be made at the end of each 6-month
reporting period. However, if one member of the executive management team
leaves during the second half of 2012, therefore forfeiting the entire amount of 10
options, the following entry at 31 December 2012 would be made:
DR
SPLOCI – P/L – salaries
CR
Equity
[(90 x €15) / 6 periods = €225 per period
(€225 x 4) – (€250 + €250 + €250) = €150]
€150
Connolly – International Financial Accounting and Reporting – 4th Edition
€150
Vesting conditions
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Equity instruments may contain conditions which must be
met before entitlement to the shares
Conditions related to the market price of shares are
ignored for the purposes of estimating the number of
equity shares that will vest (on the basis these have been
taken into account when fair-valuing the shares)
Because of the difficulty of measuring the FV of the
services received, this is done with reference to the FV of
the equity instrument granted
There is no reversal of amounts previously recognised if
options are forfeited or are not exercised
Connolly – International Financial Accounting and Reporting – 4th Edition
Example 34.6: Share options with vesting conditions
A company grants 2,000 share options to each of its three directors on 1 January
2012 subject to the directors being employed on 31 December 2014. The options
vest on 31 December 2014. The FV of each option on 1 January 2012 is €10 and it
is anticipated that all of the share options will vest on 31 December 2014.The
options will only vest if the company’s share price reaches €14 per share. The price
at 31 December 2012 was €8 and it is not anticipated that it will rise over the next
two years. It is anticipated that there will only be two directors employed on 31
December 2014.
Requirement How will the share options be treated in the financial statements for
the year ended 31 December 2012?
Solution
The market based condition i.e. the increase in the share price can be ignored for
the purpose of the calculation. However the employment condition must be taken
into account. The options will be treated as follows:
2,000 options x 2 directors x €10 x 1year/3 years = €13,333. Equity will be
increased by this amount and an expense shown in the SPLOCI – P/L for the year
ended 31 December 2012.
Connolly – International Financial Accounting and Reporting – 4th Edition
Modification of terms and conditions
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Terms of a share-based payment transaction may be
modified
For example, by altering the exercise price, the number of
shares granted or the vesting conditions
Must recognise at least the amount that would have been
recognised had the terms not changes, together with any
incremental cost over the remaining vesting period
Connolly – International Financial Accounting and Reporting – 4th Edition
Example 34.7: Modification of terms and conditions
On 1 January 2010, Twentitle Limited granted 100 share options to each of its 250 employees,
with each of the share options being conditional upon the employee working for Twentitle
Limited until 31 December 2012. At the grant date, the FV of each share option was €12.00.
During 2010, 10 employees left Twentitle Limited and the company’s directors estimated that a
total of 10% of the 250 employees would leave during the three-year period 2010-12.
At the beginning of 2011, Twentitle Limited modified the terms and conditions of the share
option by reducing the exercise price. This had the effect of increasing the FV of a share
option at the beginning of 2011 by €7.00.
During 2011, a further six employees left the company and the directors revised their estimate
of the total number of the 250 employees to 8% that would leave the company during the
three-year period 2010-12.
During 2012, a further five employees left the company.
Requirement
Calculate the remuneration expense that should be recognised in Twentitle Limited’s financial
statements in respect of the share-based payment agreement for each of the three years
2010-12.
Connolly – International Financial Accounting and Reporting – 4th Edition
Example 34.7: Modification of terms and conditions
Solution
2010:
It is estimated that 25 employees would leave the company
(10% x 250). Therefore 225 employees will be eligible under
the scheme.
225 employees x €12 = €2,700 / 3 years = €900
DR
CR
SPLOCI – P/L
Equity – Share Options Reserve
Connolly – International Financial Accounting and Reporting – 4th Edition
€900
€900
Example 34.7: Modification of terms and conditions
Solution
2011:
It is estimated that 20 employees would leave the company
(8% x 250). Therefore 230 employees will be eligible under the
scheme.
€
230 employees x €12 = €2,760 / 3 x 2 years
1,840
230 employees x €7 = €1,610 / 2 years
805
Less charged in 2010 in SPLOCI – P/L
(900)
1,745
DR
CR
SPLOCI – P/L
€1,745
Equity – Share Options Reserve
Connolly – International Financial Accounting and Reporting – 4th Edition
€1,745
Example 34.7: Modification of terms and conditions
Solution
2012:
In total over the three years, 21 employees left the company
(10 + 6 + 5). Therefore 229 employees are eligible under the
scheme.
€
229 employees x €12
2,748
229 employees x €7
1,603
Less charged in 2010 and 2011 in SPLOCI – P/L
(€900 + €1,745)
(2,645)
1,706
DR
CR
SPLOCI – P/L
€1,706
Equity – Share Options Reserve
€1,706
Connolly – International Financial Accounting and Reporting – 4th Edition
Cancellation or settlement
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If equity-settled share-based transactions are cancelled or
settled, then the entity must immediately recognise any
amount that would otherwise have been recognised over a
vesting period
Any payments up to the FV of the equity instruments
granted at cancellation or at settlement is a repurchase of
an equity interest (i.e. DR Equity)
Any payment in excess of the FV of equity instrument
granted at cancellation or at settlement is recognised as
an expense in arriving at profit or loss in the SPLOCI – P/L
Connolly – International Financial Accounting and Reporting – 4th Edition
2. Cash-settled share-based payment transactions
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Where goods and services are paid for at amounts based
upon the price of a company’s equity instruments (e.g.
share appreciation rights)
The expense is the cash paid by the company
Goods and services acquired and liability incurred should be
measured at the FV of the liability
Until the liability is settled, the entity should re-measure the
fair value of the liability at each reporting date and at the
date of settlement, with any changes in fair value
recognised in SPLOCI – P/L
The services received, and the liability, should be
recognised as the services are rendered
Connolly – International Financial Accounting and Reporting – 4th Edition
Red plc granted 300 share appreciation rights to each of its
500 employees on 1 August 2012. Management believe that
as at 31 July 2013, Red plc’s year end, 80% of the awards will
vest on 31 July 2014. The fair value of each share appreciation
right on 31 July 2013 is €15.
Requirement
What is the fair value of the liability to be recorded in the
financial statements for the year ended 31 July 2013?
Solution
300 rights x 500 employees x 80% x €15 x 1year/2year =
€900,000 (DR SPLOCI – P/L and CR SFP – liability)
Connolly – International Financial Accounting and Reporting – 4th Edition
3. Share-based payment transactions with cash alternatives
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Where the terms of the arrangement provide either the
entity or the counterparty with the choice of whether the
entity settles the transaction in cash (or other assets) or by
issuing equity instruments, the entity should account for
that transaction, or the components of that transaction, as
a cash-settled share-based payment transaction if, and
to the extent that, the entity has incurred a liability to settle
in cash or other assets, or as an equity-settled sharebased payment transaction if, and to the extent that, no
such liability has been incurred.
Connolly – International Financial Accounting and Reporting – 4th Edition
Disclosures
IFRS 2 requires extensive disclosure requirements under three
main headings:
1. Information that enables users of financial statements to
understand the nature and extent of the share based
payment transactions that existed during the period
2. Information that allows users to understand how the FV of
the goods or services received or the FV of the equity
instruments which have been granted during the period
was determined
3. Information that allows users of financial statements to
understand the affect of expenses which have arisen from
share based payment transactions on the entities income
statement in the period
Connolly – International Financial Accounting and Reporting – 4th Edition