Visual Overview

Objective: To explain how to account for the granting of shares and share options to executives,
employees and other parties.

Need for a Standard

Share plans and share option plans have become a common feature of remuneration packages for
directors, senior executives and other employees in many countries. Shares and share options also
may be used to pay suppliers (e.g. for professional services).

Share-based payments created a problem for comparability in financial statements. For example, if
one entity paid an employee in cash, the accounting entry (Cr Cash) would drive a corresponding
debit entry to staff costs. If, however, another entity agreed to award share options to an employee
in exchange for current service there would be no credit entry to drive the corresponding debit to
staff costs.
IFRS 2 Share-based Payment addresses this problem and provides guidance on the recognition and
measurement of such transactions.

1.2 Key Issues

There are two key issues when accounting for a share-based payment transaction:

1. When to recognise the charge for share-based payments. Recognition must reflect accrual
accounting in keeping with the Framework.

2. How to measure the transaction.

3. Objective of IFRS 2
4.
5. The objective of IFRS 2 is to specify the financial reporting of share-based
payment transactions and, in particular, to show the effects of such
transactions (including associated expenses) on profit or loss and financial
position.

Key Point

In summary, IFRS 2 requires the recognition of all share-based payment transactions

measured at fair value.
Definition

Definition

Share-based payment transaction – a transaction in a share-based payment arrangement in which the

entity:

 receives goods or services from a supplier (including an employee); or

 incurs an obligation (to the supplier) when another group entity receives those goods or services.

Types of Transactions

Key Point

There are three types of share-based payment transactions:

1. Equity-settled share-based payment transactions;

2. Cash-settled share-based payment transactions; and

3. Share-based payment transactions with cash alternatives.

2.2.1 Equity-settled
 Definition

Share option – a contract that gives the holder the right, but not the obligation, to subscribe to the entity's
shares at a fixed (or determinable) price for a specified period of time.

In an equity-settled share-based payment transaction, the entity receives goods or services from a
supplier or employee and in return it provides consideration in the form of its own equity
instruments, (e.g. shares or share options).

2.2.2 Cash-settled

In a cash-settled share-based payment transaction, the entity promises to pay a cash amount based
on the price (or value) of its equity instruments (or those of another group entity) in return for the
receipt of goods or services.

2.2.3 Cash Alternatives

In some arrangements either the counterparty or the entity may have a choice whether to settle a
share-based payment in equity instruments or cash (see s.5).

Recognition Principles

The basic principle is that an entity should recognise goods or services received when it obtains the
goods or when the services are provided:

Dr Expense (e.g. purchases, labour) or an asset

 If settlement is by equity-settled share-based payment, increase equity:

Cr Equity (IFRS 2 does not specify which account in equity should be used).

 If settlement is by cash-settled share-based payment, recognise a liability:

Cr Trade (or other) payables

The key issues are how to measure each type of transaction and when to recognise it.

Measurement

Key Point

A share-based payment transaction is measured at the fair value of goods/services received. Fair value differs depen
whether the counterparty is an employee or not.

3.1.1 Counterparty is Not an Employee

If the counterparty is not an employee, there is a rebuttable presumption that the fair value of
goods/services received can be measured reliably. This is the fair value used to measure the
transaction (the direct method).
Where the fair value of goods/ services received cannot be measured reliably the indirect method is
used (s.3.1.2).

Transactions with counterparties other than employees (e.g. suppliers) usually vest immediately (i.e.
the counterparty is entitled to the equity shares when the goods/services are provided). Therefore
the transaction is recognised immediately.

Example 1 Equity-settled Transaction with Supplier

Beamsley buys a new processing machine for use in its business from a supplier on 18 August 20X8. In return it

issues the supplier with 7,500 equity share in Beamsley. The machine has a cash price of $125,000.

Requried

Solution:

Show how the transaction is recognised

The transaction is recognised by Beamsley on 18 August 20X8 by:

Dr Property, plant and equipment $125,000

Cr Share capital/share premium $125,000

3.1.2 Transactions with Employees

Definition

Grant date – the date when the parties to the arrangement have a shared understanding of its terms and
conditions.

In a transaction with an employee, the fair value of services received cannot be measured reliably
(because services required in exchange for equity instruments cannot be distinguished from those
received in exchange for a cash salary or bonus).

Therefore the transaction is measured at the fair value of equity instruments issued as at the grant
date (the indirect method). Fair value is based on:

 market prices, if available; or

 a valuation technique (an option-pricing model).

A valuation technique is usually required because employee share options have different terms and
conditions compared to share options for which market prices can be determined.

At the grant date, the right to cash, other assets or equity instruments is conferred (provided
any vesting conditions are met).
If an agreement is subject to approval (e.g. by shareholders), the grant date is when that approval is
obtained.

Vesting Conditions and Recognition of Transactions

3.2.1 Definitions

Definitions

Vest – to become an entitlement. A party's right to shares of an entity may be free or at a prearranged exercise price

Vesting conditions – the conditions that must be satisfied for a person to become entitled to receive cash, other asse
equity instruments under a share-based payment arrangement.

The counterparty in a share-based transaction becomes entitled to their award when it vests. This is
usually immediate in the case of a supplier but is usually at some time in the future in the case of
employees. In this case it is usual that the awards will only vest in the future if specified vesting
conditions are met.

Where there is a vesting period (between the grant date and the vesting date), the total share-based
payment, measured as in Section 3.1, is recognised in the financial statements over this period.

3.2.2 Service Conditions

Definition

Service condition – a vesting condition requiring the director or employee to complete a specified period of service.
director (or employee) ceases to provide service during the vesting period he fails to satisfy the condition.

Where there is a service vesting condition, any employees that leave a company before the vesting
date lose their entitlement to the equity instruments (or cash in a cashsettled transaction).

The measurement of the total share-based payment is therefore adjusted to reflect the best estimate
of the number of employees that will remain employed at the vesting date. This measurement is
updated at each year end within the vesting period to reflect the information available (i.e. actual
leavers to date and expected future leavers).

Example 2 Accounting for Expected Leavers

On 1 January 20X7 Wharfe granted 500 share options to each of its 10 senior managers on condition that

they remain employed by Wharfe for three years to 31 December 20X9. The fair value of an option on the grant

date was $4.20. The following information is relevant:

Expected leavers in remainder of vesting period Actual leavers to date

Example 2 Accounting for Expected Leavers

31.12.X7 1 0

31.12.X8 1 1

31.12.X9 0 1

Requried

Calculate amounts to be recognised in the financial statements of Wharfe in each of the years ended

31 December 20X7 – 20X9.

Solution:

31.12.X7

 There is expected to be one leaver.

 The transaction is measured at $18,900 (500 × (10 − 1) × $4.20).

 As Wharfe is 1 year of 3 years into the vesting period, 1/3 is recognised:

Dr Staff costs $6,300

Cr Equity $6,300

31.12.X8

 There has been one leaver and there is expected to be one further leaver.

 The transaction is measured at $16,800 (500 × (10 − 2) × $4.20).

 As Wharfe is 2 years into the 3 year vesting period, 2/3 should be recognised on a cumulative basis

(i.e. $11,200).

 As $6,300 has already been recognised:

Dr Staff costs $4,900

Cr Equity $4,900

31.12.X9

 There has been one leaver and there are expected to be no further leavers.

 The transaction is measured at $18,900 (500 × (10 – 1) × $4.20

 Example 2 Accounting for Expected Leavers

 Wharfe is now at the end of the vesting period and therefore the full amount should be recognised on

a cumulative basis.

 As $11,200 has already been recognised, a further $7,700 is recognised in 20X9:

Dr Staff costs $7,700

Cr Equity $7,700

The equity account now has a balance of $18,900.

 If the employees exercise their options this balance is transferred to share capital/share premium;

 If the employees do not exercise their options and allow them to lapse, this balance may be

 transferred to another account within equity.

3.2.3 Performance Conditions

Definitions

Performance condition – a vesting condition that requires:

 a service condition; and

 specified performance targets to be met in rendering that service.

Performance target – refers to the entity's operations or the price of its shares. It may relate to the

performance of

the entity as a whole or a component (e.g. a division).

A performance vesting condition also requires specified performance targets to be met during the
specified service period. Performance targets may be:

 market conditions; or

 non-market conditions.

Key Point

The distinction is important because they must be treated differently.

Non- Relate to the operating performance of the  Not reflected in the fair value of
market entity or the employee (e.g. achieving a certain equity instruments at the grant date.
conditions revenue growth).
  Considered when measuring the
transaction.

 Reflected in the fair value of equity

instruments at grant date

Market Relate to the share price of the entity (e.g.  Not considered when measuring the
conditions achieving a certain share price growth). transaction.

3.2.4 Expected Vesting Period

An employee may be granted share options conditional on the achievement of a performance

condition and remaining in service until that performance condition is satisfied (i.e. the length of
vesting period depends on achieving the performance condition).

In this case the expected vesting period should be estimated at grant date, based on the most likely
outcome of the performance condition:

 For a market condition, this estimate should be consistent with the assumptions used in
estimating the fair value of the instruments granted. This period is not subsequently revised.

 For a non-market condition, this estimate is revised if subsequent information indicates that
it is different from that estimated at grant date.

Activity 1 Changes in Expectations

Omega grants 120 share options to each of its 460 employees. Each grant is conditional on the
employee working for Omega over the next three years. Omega has estimated that the fair value of
each share option is $12.

Omega estimates that 25% of employees will leave during the three years and forfeit their rights to
the share options.

Year 1: 25 employees leave. Omega revises its estimate of total leavers from 25% (115 employees) to
20% (92 employees).

Year 2: Another 22 employees leave. Omega revises its estimate of total leavers from 20% to 15% (69
employees).

Year 3: A further 13 employees leave.

Requried

Discuss how Omega should apply IFRS 2 Share-based Payment to the share option scheme for
employees.

*Please use the notes feature in the toolbar to help formulate your answer.

The share option scheme is an equity - settled share - based payment transaction within the scope of
IFRS 2. Share options are granted to employees as part of their remuneration package and it is
therefore appropriate to recognise a staff cost expense in profit or loss in respect of the scheme. A
 service vesting condition is attached to the scheme whereby employees are only entitled to the
share options if they work for Omega for three years (the vesting period) and it therefore follows that
the options are reward for three years’ service. Therefore the total expense is spread over these
three years. The corresponding credit entry is made to an equity account; however, IFRS 2 does not
specify which one.

The transaction is measured based on the fair value of the options at the date on which they are
granted i.e. $12. The transaction is not remeasured for any subsequent changes in the fair value of
an option over the vesting period. The measurement of the transaction should take into account the
number of options that are expected to vest; it therefore reflects the number of employees expected
to leave Omega over the three years. This estimate is updated at each year end. In the final year of
the scheme the expense should reflect the actual number of leavers.

Yea Remuneration expense for Cumulative remuneration

r Calculation period expense

$ $

1 55,200 options × 80% × $12 × 1⁄3 years 176,640 176,640

(55,200 options × 85% × $12 × 2⁄3 years) −

2 $176,640 198,720 375,360

3 (48,000 options × $12) − 375,360 200,640 576,000

A total of 60 employees (25 + 22 + 13) forfeited their rights to the share options during the three-
year period. Therefore, a total of 48,000 share options (400 employees × 120 options per employee)
vested at the end of Year 3.

Example 3 Executive Share Options

On 1 January 20X7, Kappa granted 1,000 options to an executive, conditional on his remaining in Kappa's employment

for three years. The exercise price (i.e. the price at which he can buy the shares) is $35, but falls to $25 if earnings

increase by 12% on average over the three years.

On grant date, the estimated fair value of an option is:

 $12 for an exercise price of $25;

 $9 if the exercise price is $35.

20X7 earnings increase by 14%. This increase is expected over the next two years, giving an expected exercise price of $25.

20X8 earnings increase by 13%. The earnings target is still expected to be achieved.

20X9 earnings increase by only 7%. The earnings target is not achieved.

On 31 December 20X9, the executive completes three years' service. Rights to the 1,000 options are now vested at an
exercise price of $35.

Requried

Calculate the remuneration expense arising from the share options over the three years.

Note: The performance condition is not a market condition.

Solution

The condition whereby the exercise price is related to earnings increase is a vesting condition because it affects the
entitlement of the executive. It is a performance condition because it is related to the performance of Kappa and it

is a non-market condition because it does not relate to Kappa’s share price.

There is also a service condition, being the continued employment of the executive.

The non-market performance condition is considered when measuring the transaction at each year end i.e. the

measurement should be based on either a $9 fair value or a $12 fair value of an option at the grant date depending on
whether the earnings target is expected to be achieved.

At the end of year 1 the stated increase in earnings is expected to be achieved and so the transaction is measured

based on the fair value if the exercise price is $25. The same applied at the end of the second year. By the end of the

third year it is known that the increase in earnings has not been achieved and therefore the transaction is measured

on the grant date fair value if the exercise price is $35.

Year Calculation Remuneration expense

Period Cumulative

$ $

1 1,000 options × $12 × 1/3 years 4,000 4,000

2 (1,000 options × $12 × 2/3 years) − $4,000 4,000 8,000

3 (1,000 options × $9) − $8,000 1,000 9,000

Exam advice

In a business combination the acquirer may agree to take over existing share-based payment awards that
have been granted to employees of the acquiree. In this case the fair value of the awards relating to the pre-
acquisition vesting period is consideration for the business combination (Dr Goodwill) and the fair value of the
awards relating to the post-acquisition vesting period is a staff cost (Dr Profit or loss). Further detail is
 Exam advice

provided in chapter 15.

Definition

Definition

Cash-settled share-based payment transaction – one in which the entity acquires goods or services by
incurring a liability to transfer cash or other assets to the supplier of those goods or services for
amounts that are based on the price (or value) of equity instruments (including shares or share options)
of the entity or another group entity.

A common example of a cash-settled share-based payment transaction is share appreciation

rights (SARs).

These are granted to employees and give the employee an entitlement to a future cash payment
based on the increase in the entity's share price from a determined level and for a specific period of
time.

2 Measurement and Recognition

Key point

For cash-settled share-based payment transactions, the goods or services acquired and the liability
incurred are measured at the fair value of the liability (i.e. the amount that an entity expects to pay).

The liability is remeasured to fair value at each reporting date, with any changes in value recognised
in profit or loss, until it is settled.

When the SAR is exercised, the employee is paid its intrinsic value. This amount is
the difference between:

 the share price on the exercise date; and

 the exercise price (i.e. the pre-determined "starting point" against which share price increase
is measured).

The intrinsic value is recognised as an expense in profit or loss when it is paid to the employee.

Exam advice

Both fair value and intrinsic value of SARs will be provided in an exam question.

Vesting Conditions
 The treatment of vesting conditions is exactly the same as for equity-settled share-based payments:

 Service and non-market performance conditions are considered when estimating the
number of awards expected to vest; and

 Market performance conditions are reflected in the fair value of the cash-settled payment at
each reporting date.

Example 4 SARs

On 1 January 20X6, Pepco granted 60 share appreciation rights to each of its 200 employees, on condition that the

employees work for Pepco until 31 December 20X7.

During 20X6, 12 employees leave and Pepco estimates that a further 15 will leave during 20X7.

During 20X7, a further 14 employees leave.

On 31 December 20X7, 61 employees exercise their SARs, another 77 employees exercise their SARs on 31

December 20X8, and the remaining 36 employees exercise their SARs on 31 December 20X9.

The fair value of the SARs for the years in which Pepco has a liability and the intrinsic value of the SARs are shown below:

Fair value Intrinsic value

$ $

20X6 16.20 –

20X7 18.10 15.70

20X8 20.50 19.80

20X9 – 22.00

Requried

Calculate the liability to be included in the statement of financial position for each of the four years and calculate

the expense to be recognised in profit or loss for each of the four years.

Solution:

Year Calculation Liability Expense

Example 4 SARs

$ $

20X6 (200 – 27) × 60 × $16.20 × ½ years 84,078 84,0781

20X7 Not yet exercised ((200 − 26 − 61) × 60 × $18.10) 122,718 38,6402

Exercised (61 × 60 × $15.70) 57,462

96,102

20X8 Not yet exercised ((200 − 26 − 61 − 77) × 60 × $20.50) 44,280 (78,438)

Exercised (77 × 60 × $19.80) 91,476

13,038

20X9 Nil (44,280)

Exercised (36 × 60 × $22.00) 47,520

3,240

The liability is derecognised at 31 December 20X9, as the exercise period has now lapsed; all SARs in this
example were exercised.

Notes to accounting entries:

1 Dr Profit or loss 84,078

Cr Liability 84,078

2 Dr Profit or loss 96,102

Cr Liability (122,718 − 84,078) 38,640

Cr Cash 57,462
 Entity has Choice

Key Point

The accounting treatment depends on which party has the choice of settlement.

Where the reporting entity has the choice of settlement the whole transaction is treated either as
cash-settled or as equity-settled depending on whether the entity has an obligation to settle in cash.
An entity has an obligation to settle in cash if:

 it is not allowed to issue shares; or

 it has a stated policy or past practice of issuing cash rather than shares.

Counterparty has Choice

Where the counterparty has the choice of settlement, the transaction is deemed to result in the
issue of a compound instrument (i.e. both liability and equity components are recognised).
Subsequently:

 the liability component is accounted for in the same way as a cash-settled share-based
payment; and

 the equity component is accounted for in the same way as an equity-settled share-based
payment.

Example 5 Choice of Settlement

On 1 July 20X1 Smeaton grants an employee a right that allows them to choose to receive either 20,000 shares on 30 June 20X
value (on that date) of 18,000 shares. The employee must remain employed by Smeaton on 30 June

20X4.

The market price of Smeaton’s shares is $5 at 1 July 20X1, $5.35 at 30 June 20X2, $5.80 at 30 June 20X3 and $6.10

at 30 June 20X4. The fair value of the share route is estimated to be $4.90.

The employee chooses to take the shares at the vesting date.

Requried

Explain the accounting treatment applicable to the awards.

Solution:

This is an arrangement in which the counterparty has the choice of settlement. At the grant date:

 The fair value of the cash route is 18,000 × $5 = $90,000

Example 5 Choice of Settlement

 The fair value of the share route is 20,000 × $4.90 = $98,000

 The fair value of the equity component is therefore $8,000 (98 − 90)

The share based payment is therefore recognised as:

Liability ($) Equity ($) Expense ($)

18,000 × 5.35 × 1/3 32,100

30 June 20X2 8000 × 1/3 32,100 2,667 2,667

18,000 × 5.80 × 2/3 37,500

30 June 20X3 8000 × 2/3 69,600 5,333 2,667

18,000 × 6.10 × 3/3 40,200

30 June 20X4 8000 × 3/3 109,800 8,000 2,667

The employee elects to receive shares rather than cash and therefore the balance on the liability account is transferred to equ
date.

Deductible Temporary Difference

IFRS 2 requires that an expense is recognised in profit or loss over the vesting period in relation to share options. Tax relief

is not normally given until the options are exercised.

The accounting expense is based on the fair value of the options at the grant date whereas tax relief is usually given on the int
option.

As the intrinsic value of a share option is the difference between the exercise price of the option and the market price of the sh
as the market price of the share moves.

Key Point

The timing difference and difference in measurement give rise to a deductible temporary difference, which will
result in the recognition of a deferred tax asset in the statement of financial position (if the recognition
requirements of IAS 12 Income Taxes are met).

Measurement
Example 5 Choice of Settlement

The temporary difference is calculated as the difference between:

 the carrying amount of the share-based payment (normally zero); and

 its tax base (i.e. the estimated amount that will be given as a tax deduction in the future, known as the intrinsic

value).

Therefore the deductible temporary difference is usually equal to the tax base. The deferred tax asset is calculated by

applying the tax rate.

Recognition

The deferred tax asset is recognised if the company has sufficient future taxable profits against which it can be offset.

Regardless of this, the amount of deferred tax income recognised in profit or loss in relation to share options is restricted.

If the intrinsic value exceeds the amount of the cumulative IFRS 2 expense, this indicates that the tax deduction also

relates to an equity item.

Therefore the cumulative amount that can be credited to profit or loss is set at a maximum:

Cumulative share option expense × tax rate.

Any additional benefit will be credited direct to equity.

Example 6 Deferred Tax Implications of Share-based Payment

On 1 January 20X8, Robinson granted 10,000 share options to an employee vesting two years later on 31 Decembe

r 20X9. The fair value of each option measured at the grant date was $4.

Tax legislation in the country in which the entity operates allows a tax deduction of the intrinsic value of the options

when they are exercised. The intrinsic value of the share options was $2.20 at December 20X8 and $4.40 at 31

December 20X9, at which point the options were exercised.

Assume a tax rate of 30%.

Requried

Calculate deferred tax amounts to be recognised in respect of the share options in the financial statements for

the years ending 31 December 20X8 and 31 December 20X9.

Show the deferred tax accounting treatment of the share options in the financial statements for the years ending
Example 5 Choice of Settlement

Example 6 Deferred Tax Implications of Share-based Payment

31 December 20X8 and 31 December 20X9.

Solution:

1. Calculate cumulative accounting expense

20X8: ($4 × 10,000)/2years $20,000

20X9: $4 × 10,000 $40,000

1. Deferred tax in year ended 31 December 20X8

2.

Carrying amount

Tax base (intrinsic value) ($2.20 × 10,000)/2 years

Temporary difference

Deferred tax asset (x 30%)

3. The intrinsic value is less than the cumulative expense of $20,000 and therefore the deferred tax asset is

recognised in full as part of the tax charge in profit or loss.

Dr Deferred tax asset $3,300

Cr Tax charge (profit or loss) $3,300

i. Deferred tax in year ended 31 December 20X9

ii. $

Carrying amount 0

Tax base (intrinsic value) ($4.40 × 10,000) years 44,000

Temporary difference 44,000

Example 5 Choice of Settlement

Example 6 Deferred Tax Implications of Share-based Payment

Deferred tax asset (x 30%) 13,200

iii. The intrinsic value of $44,000 is more than the cumulative expense of $40,000 and therefore the
cumulative amount of deferred tax recognised in profit or loss is restricted to $12,000 ($40,000 ×
30%). $3,300 was recognised in profit or loss in 20X8 and therefore a further $8,700 is recognised th
year.

iv. The balance of the $9,900 (13,200 − 3,300) increase to the deferred tax asset is recognised in equity.

Dr Deferred tax asset $9,900

Cr Tax charge (profit or loss) $8,700

Cr Equity $1,200

v. Note: On exercise, the deferred tax asset is replaced by a current tax one. The double entry is:

Dr Current tax asset $13,200

Cr Profit or loss $12,000

Cr Equity $1,200

vi.

Nature and Extent of Schemes in Place

 A description of each type of scheme which existed at any time during the period.

 The number and weighted average exercise prices of share options.

 For share options exercised during the period, the weighted average share price at the date
of exercise.
 For share options outstanding, the range of exercise prices

Fair Value Disclosures

Where fair value has been determined indirectly, the weighted average fair value of share
options granted and the equity instruments, and how these fair values were measured.

Where the fair value of goods or services received has been measured directly, how that fair
value was determined (e.g. a market price).

In rare cases, if the direct measurement presumption is rebutted, that fact is disclosed and
explained.

Example 7 Remuneration Package

On 6 May 20X1, in anticipation of an initial public offering (IPO), Meadow employed a Chief
Sustainability Officer (CSO). In order to attract a candidate of the required calibre it offered a
package of salary, private healthcare benefits, joining bonus and pension. The joining bonus
is payable immediately but contingent on the CSO remaining employed by Meadow for at
least a year. It also immediately granted the new CSO 5,000 share-based awards. If there is
an IPO before 31 December 20X4 and the CSO remains employed, Meadow will settle the
award in equity; if there is no IPO before 31 December 20X4 and the CSO remains employed,
Meadow will settle the award in cash. At 31 December 20X1 Meadow did not believe it
probable that the IPO would occur before 31 December 20X4; however, a variety of factors
meant that it reassessed this at 31 December 20X2 and considered it probable that an IPO
would take place in the next two years.

Requried

Discuss how the remuneration package should be accounted for.

How to approach the question:

Identify each accounting issue in the scenario and brainstorm the relevant IFRS Accounting
Standards:

Salary & healthcare benefits (IAS 19 short-term benefit)

Joining bonus (IAS 19)

Pension (IAS 19 defined contribution or defined benefit)

Share-based awards (IFRS 2, but the specific scenario (settlement contingent on future
event) is not identified in IFRS 2, therefore IAS 8, IAS 37, Conceptual Framework)

Consider how each of these is applied to the scenario.

Write a solution, covering all issues and remembering to refer to the requirements of the
standard and then apply them to the scenario.
Solution:

The remuneration package provided for the new CSO includes five elements. Although IAS 19
Employee Benefits applies to the majority of these, IFRS 2 Share-based Payment applies to
the awards that may be settled in equity or cash.

The salary and healthcare benefits are short-term employee benefits that are expected to be
settled before 12 months after the end of the reporting period in which the CSO renders
service. Therefore the salary paid and cost of providing the healthcare benefits are
recognised as an expense in the accounting period in which related service is provided.

The joining bonus is contingent on the CSO remaining employed for a year. This is a short-
term benefit and again should be recognised over the period in which the related services
are provided by the CSO. This is the employment period of a year on which the bonus is
contingent. Therefore the initial payment of the bonus is recognised as a current asset salary
prepayment and this is released to profit or loss as an expense on a straight-line basis over
the year to 5 May 20X2.

The accounting treatment applied to the pension depends on whether the pension scheme
is defined benefit or defined contribution. Most schemes for new joiners are defined
contribution and therefore Meadow would recognise an expense each year equal to the
defined amount for the year. If the pension scheme is defined benefit, the scheme as a
whole will be reflected in Meadow’s statement of financial position as either a net surplus or
net deficit, representing the difference between the fair value of the plan assets (surplus)
and the present value of the obligation to pay pensions in the future (liability). Changes in
this amount each year are recognised in profit or loss and OCI depending on their nature.

The equity awards are to be cash settled on the occurrence or non-occurrence of a

contingent event; the IPO occurring. IFRS 2 provides guidance on classifying share-based
payments with a cash alternative that can be chosen by the entity or employee, but does not
provide specific guidance that applies to a scenario where cash settlement is contingent on a
future event.

In general, the standard requires that a liability is recognised where equity-based awards are
to be settled in cash and an equity balance is recognised when they are to be settled in
equity instruments. Here the issue is whether a liability to the employee or equity should be
recognised.

As no accounting policy is provided in an IFRS Accounting Standard, IAS 8 Accounting Policies,

Changes in Accounting Estimates and Errors requires that similar standards are considered
 and the requirements of the Conceptual Framework in developing a policy. IAS 37 Provisions,
Contingent Liabilities and Contingent Assets addresses the issue of contingent liabilities and
requires that a liability is recognised if there is a present obligation as a result of a past event
and an outflow of economic resources is probable. The Conceptual Framework defines a
liability as a present obligation to transfer an economic resources as a result of past events.
Application of the IAS 37 guidance and Conceptual Framework definition would suggest that
a liability should be recognised for cash settlement if the IPO is not expected to take place
before 31 December 20X4 at a given year end.

At 31 December 20X1 Meadow did not believe that the IPO would occur before 31
December 20X4 and so the award is classified as cash-settled and a liability is recognised,
measured at the fair value of the expected cash payment, apportioned for the vesting
period. At 31 December 20X2 the likelihood of the IPO occurring is reassessed and the award
should be reclassified as equity-settled.

Summary and Quiz

 IFRS 2 identifies three types of share-based payment transactions: equity-settled, cash-

settled and share-based with cash alternatives.

 They are recognised by:

Dr Expense (e.g. purchases, labour) or Asset

Cr Equity (if equity-settled); or

Cr Liability (if cash-settled)

 The fair value of goods and services received is measured either directly or indirectly (i.e. at
the fair value of the equity instruments granted).

 Where there are vesting conditions, the transaction is recognised over the vesting period.

 Market performance conditions are reflected in the fair value of awards granted; non-market
performance conditions and service conditions are reflected when estimating the number of
awards expected to vest.

 Where similar traded options do not exist, the fair value of options granted is estimated
using an option-pricing model.

 For cash-settled transactions, the goods or services acquired and the liability incurred are
measured at the fair value of the liability.

 Any changes in the terms of the original share-based payment contract will still require the
recognition of the full amount of the expense originally calculated; this must be recognised
over a shorter period.

 Differences between the accounting and tax treatments give rise to a deductible temporary
difference, which may lead to the recognition of a deferred tax asset.

LIMA
IFRS 2 Share-based Payment was issued to provide financial reporting requirements for share-based
payments which had become widely used in many countries. Share-based payments can be equity
settled or cash settled.

Required:

(a) Define cash and equity settled share-based payments. (3 marks)

(b) Explain the basis of measurement of equity settled share-based payments. (3 marks)

(c) Explain the accounting treatment of both equity and cash settled share-based payment
transactions with employees. (8 marks)

(d)

Lima prepares financial statements to 30 September each year. Lima has a number of highly skilled
employees that it wishes to retain and has put two schemes in place to discourage employees from
leaving:

Scheme A

On 1 October 20X6 Lima granted share options to 200 employees. Each employee was entitled to
500 options to purchase equity shares at $10 per share. The options vest on 30 September 20X9 if
the employees continue to work for Lima throughout the three-year period. Relevant data is as
follows:

Date Share

price ($)

Fair value of

option ($)

Expected number of employees for

whom 500 options will vest

1 October 20X6 10 2.40 190

30 September 20X7 11 2.60 185

30 September 20X8 12 2.80 188

Scheme B

On 1 October 20X5 Lima granted two share appreciation rights to 250 employees. Each right gave the
holder a cash payment of $100 for every $0.50 increase in the share price from the 1 October 20X5
value to the date the rights vest. The rights vest on 30 September 20X8 for those employees who
continue to work for Lima throughout the three-year period. Payment is due on 31 January 20X9.

Relevant data is as follows:

Date Share price ($) Fair value of right ($)

Expected number of employees for whom two rights will vest

1 October 20X5

9 500 240

30 September 20X6 10 520 235

30 September 20X7 11 540 240

30 September 20X8 12 600 238

(the actual number

in whom two rights vested)

Required:

For each of the schemes:

(i) calculated the expense to profit or loss for the year ended 30 September 20X8; (8 marks)

(ii) calculate the amount that will appear in the statement of financial position of Lima at 30
September 20X8 and state where in the statement the relevant amount will appear. (3 marks)

(25 marks)

Your Answer:

hi
(a) Cash and equity settled share-based payments

A share-based payment arises out of a transaction where a third party:

Receives equity instruments of the entity (including share options) in exchange for goods or services
− equity-settled share-based payment; or

Receives cash or other assets of the entity of a value that is based on the value of the equity shares
of the entity − cash-settled share-based payment.

(b) Basis of measurement of fair value of equity-settled share-based payments

In all cases, except for transactions with employees, equity-settled share-based payments should be
measured by reference to the value of the goods or services provided by the third party. For
transactions with employees payments should be measured by reference to the value of the equity
instruments granted.

(c) Accounting treatment of share-based payment transactions with employees

Equity-settled share-based payments

The transaction is measured at the fair value of the instruments awarded as at the grant date, with
no adjustments for subsequent changes for fair value. The total amount is recognised over the
vesting period (the period between the grant date and the date the third party is unconditionally
entitled to the relevant equity instruments). The expense to profit or loss each year is the difference
between the cumulative amount recognised at the beginning and end of the year. The cumulative
balance at the end of the year is a separate reserve in equity.

Where vesting is subject to service and non-market performance conditions, the cumulative cost
should be based on the number of awards expected to vest, based on information available at the
date the financial statements are authorised for issue. After the vesting date there will be no further
increase or decrease in equity. However, there may be a transfer from one component of equity to
another relating to the exercising or lapsing of equity options.

Cash-settled share-based payments

The transaction is measured at the fair value of the liability at each reporting date. The total amount
should be recognised over the vesting period. The liability is remeasured at each period end taking
into account changes to its fair value and any service and non-market performance vesting
conditions. After the vesting date the liability will continue to be re-measured at fair value until
settled.
(d) (i) Expense to profit or loss

Scheme A

In the year to 30 September 20X7, the expense to profit or loss to and credit to equity was $74,000
($2.40 × 500 × 185 × one third years).

At 30 September 20X8, the cumulative balance in equity is based on the updated assumptions
regarding leavers. It is $150,400 ($2.4 × 500 × 188 × two thirds years).

Therefore, the expense to profit or loss for the year is $76,400 ($150,400 − $74,000)

Tutorial note: The movement in fair value of the share options is irrelevant as the expense to profit
or loss is based on the grant date fair value, $2.40.

Scheme B

The final cost of the scheme at vesting date (30 September 20X8) was $285,600 (2 × 238 × $600).

The total expected cost of the scheme at 30 September 20X7 was $259,200 (2 × 240 × $540). So the
cumulative expensed to profit or loss up to that date was $172,800 ($259,200 × two thirds).

Therefore, the expense to profit or loss for the year is $112,800 ($285,600 − $172,800).

Tutorial note: The fair value of share appreciation rights will reflect all variables that affect the
amount of cash bonus. Any change in fair value must be reflected in the year-end liability.

(ii) Statement of financial position

Scheme A: The amount recognised in the statement of financial position is the cumulative amount
recognised in profit or loss to date – $150,400 (see (d)(i) above). This amount will be recognised in a
separate reserve in equity.

Scheme B: Again the cumulative amount is recognised − in this case $285,600 (see (d)(i) above). This
amount will be recognised as a current liability.